Financial systems are influenced by a number of threats. Some of the known threats include insider trading, fraud, tax evasion, interest rates and currency manipulation, tax evasion, corruption, financial insecurity and government decisions. This essay explains the significant of these threats to financial systems.
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Insider trading refers to “transactions in a company’s securities, such as stocks or options, by corporate insiders or their associates based on information originating within the firm that would, once publicly disclosed, affect the prices of such securities” (Dolgopolov, n.d., para. 1). Individuals who are able to access valuable information from such firms are called corporate insiders (Dolgopolov, n.d.).
According to the U.S. Securities and Exchange Commission (n.d.), a Ponzi scheme is a fraudulent investment that promises existing investors high returns. Pyramid schemes are examples of Ponzi schemes. In these schemes, investors are supposed to be paid using money received from new investors.
Managers of Ponzi schemes convince investors by offering them a chance to invest in areas that offer high returns within a short period. Murray (n.d.) states that tax evasion is an illegal practice in which businesses fail to report incomes and expenses or tax owed to the government. On the other hand, tax evasion is a legal way of minimizing taxes. For instance, a business can minimize taxes by setting up a retirement scheme for its employees. Nonetheless, tax evasion and avoidance reduce the amount of tax collected by the government.
Financial security involves attracting investment of immense magnitude (Fujing, 2007). For instance, some countries enhance their financial security by attracting international investors. These countries use this capital to offset deficits and counter unfavorable trade imbalances. On the other hand, transparency is the key to preventing or reducing corruption in public and private sectors (Transparency International, 2011). At the same time, transparency creates and maintains integrity in financial systems.
This ensures that all stake holders get a fair share of their sweet in financial matters. Interest rate and currency manipulation have diverse effects on local and international trade. The rate at which banks pay to raise capital determines the interest rates charged on mortgages and loans and interest paid to those who save with the banks (Oxlade, 2012). Therefore, banks manipulate interest rates to acquire abnormal profits at the expense of other stake holders in the sector.
Currency manipulation takes place when a country manipulates the foreign exchange market in a bid to strengthen or weaken its currency. For instance, China was accused of buying more foreign currency and selling the local currency to lower Yuan’s value (Censky, 2010). Additionally, currency manipulation is considered undesirable to international trade as it gives some countries a competitive advantage over others unfairly.
Greece, Cyprus and Irelands are examples of what can happen when governments mismanage financial systems. Large public expenditures and heavy debt burdens are some of the factors associated with financial problems in these countries. For instance, between 2007 and 2009, Greece’s public sector wage increased by 50% (European Federation of Public Service Unions, n.d.).
Certain threats can make or break a country’s financial system. For instance, government decisions in Cyprus and Greece had adverse effects on their economies. Likewise, other threats such as currency manipulation have greatly affected international trade. For that reason, it is important to regulate these risks.
Censky, A. (2010). What is currency manipulation, anyhow? CNN. Web.
Dolgopolov, S. Insider trading. Web.
European Federation of Public Service Unions. European central bank targets public sector pay. Web.
Fujing, Y. (2007). Financial opening and financial. Chinese Journal of International Politics, 1(4), 559-587. doi: 10.1093/cjip/pom013
Murray, J. What is the difference between tax avoidance and tax evasion? Web.
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Oxlade, A. (2012). Q&A: Libor, how it was manipulated and how it affects mortgages and savings. This is Money. Web.
Transparency International. (2011). The role of transparency in financial services reform: Presentation to group of experts on banking issues (GEBI). Web.
U.S. Securities and Exchange Commission. Ponzi schemes: Frequently asked questions. Web.