Learning Objectives What is International Banking??? Services offered by International Banks Types of International Banks Reasons / Importance of Int. Banks How it Works – Practical Example Euro Currency Market Major Risks Faced by International Banks2
What is International Banking The industry was transformed in the 1970s. Untilthen most banks concentrated on their home markets,considering themselves as domestic institutions thathandled foreign business. With the rapid expansion of international networks,the banking sector occupies a pivotal position in theglobal economy as it has access to the capital, thetechnological capabilities, and the internationalnetwork to facilitate these activities.3
Contd… Banks monitor the business sector through theevaluation, pricing, and credit-granting functions.In this context, the operations of an internationaltrade of services, that have as a consequence eitherthe creation and management of financial means, orthe transport of capital from surplus units ofcountry in an other, or the mediation in the frame ofnational financier system are called “InternationalBanking activity”.4
Contd… Banking transactions crossing national boundaries Undertake International Lending –- All claims of domestic banks offices on foreignresidents- Claims of foreign bank offices on local residents- Claims of domestic bank offices on domesticresidents in foreign currency5
6IBs – Services Offered International Banks do everything domestic banks doand: Arrange trade financing. Arrange foreign exchange. Offer hedging services for foreign currency receivables andpayables through forward and option contracts Offer investment banking services (where allowed). Borrow or lend in Eurocurrency market Underwrite Eurobonds and foreign bonds.
Contd… International banks provide services to thoseengaged in international trade and investment: risk-sharing, liquidity, information. Like domestic banks, international banks acceptdeposits and lend. International banks lower transactions costs andlower information costs. International financial regulation can lead toinnovation in banking7
8Types of International BankingOffices1. Correspondent bank Banks located in different countries establish accountsin other bank Provides a means for a bank’s MNC clients to conductbusiness worldwide through his local bank or itscontacts. Provides income for large banks Smaller foreign banks that want to do business ,say in theU.S., will enter into a correspondent relationship with alarge U.S. bank for a fee
9Contd….2. Representative office A small service facility staffed by parent bank personnel thatis designed to assist MNC clients of the parent bank indealings with the bank’s correspondents. No traditional credit services provided Looks for foreign market opportunities and serves as a liaisonbetween parent and clients Useful in newly emerging markets Representative offices also assist with information about localbusiness customs, and credit evaluation of the MNC’s localcustomers. It is useful when the bank has many MNC clients in a country
103. Foreign Branch A foreign branch bank operates like a local bank, but is legallypart of the parent, not a separate entity. Subject to both the banking regulations of home country andforeign country. Reasons for establishing a foreign branch More extensive range of services (faster check clearing, larger loans) Foreign branches are not subject to Canadian reserve requirements ordeposit insurance Compete with host country banks at the local level Most popular means of internationalizing bank operationsContd….
114. Subsidiary and Affiliate Bank A subsidiary bank is a locally incorporated bank that iseither wholly owned or owned in major part by a foreignparents. An affiliate bank is one that is only partially owned, but notcontrolled by its foreign parent. Both subsidiary and affiliate banks operate under thebanking laws of the country in which they are incorporated. They are allowed to underwrite securities.Contd….
125. Offshore Banking Center A country whose banking system is organized to permit externalaccounts beyond the normal scope of local economic activity. The host country usually grants complete freedom from host-country governmental banking regulations. Banks operate as branches or subsidiaries of the parent bank Primary credit services provided in currency other than host countrycurrency Reasons for offshore banks Low or no taxes, services provided for nonresident clients, few or no FXcontrols, legal regime that upholds bank secrecy The IMF recognizes the Bahamas, Bahrain, the Cayman Islands,Hong Kong, the Netherlands Antilles, Panama, Singapore asmajor offshore banking centersContd….
Reasons for InternationalBanking Low Marginal Costs Managerial and marketing knowledge developedat home can be used abroad with low marginalcosts.11-13
Contd… Low Marginal Costs Knowledge Advantage The foreign bank subsidiary can draw on theparent bank’s knowledge of personal contactsand credit investigations for use in that foreignmarket.11-14
Low Marginal Costs Knowledge Advantage Home Nation Information Services Local firms in a foreign market may be able toobtain more complete information on trade andfinancial markets in the multinational bank’shome nation than is obtainable from foreigndomestic banks.11-15Contd…
Contd… Low Marginal Costs Knowledge Advantage Home Nation Information Services Prestige Very large multinational banks have highperceived prestige, which can be attractive tonew clients.11-16
Contd… Low Marginal Costs Knowledge Advantage Home Nation Information Services Prestige Regulatory Advantage Multinational banks are often not subject to thesame regulations as domestic banks.11-17
Contd… Low Marginal Costs Knowledge Advantage Home Nation Information Services Prestige Regulatory Advantage Wholesale Defensive Strategy Banks follow their multinational customers abroadto avoid losing their business at home and abroad.11-18
Contd… Low Marginal Costs Knowledge Advantage Home Nation Information Services Prestige Regulatory Advantage Wholesale Defensive Strategy Retail Defensive Strategy Multinational banks also compete for retail servicessuch as travelers checks, tourist and foreign businessmarket.11-19
Contd… Knowledge Advantage Home Nation Information Services Prestige Regulatory Advantage Wholesale Defensive Strategy Retail Defensive Strategy Transactions Costs Multinational banks may be able to circumventgovernment currency controls.11-20
Contd… Home Nation Information Services Prestige Regulatory Advantage Wholesale Defensive Strategy Retail Defensive Strategy Transactions Costs Growth Foreign markets may offer opportunities togrowth not found domestically11-21
Contd… Prestige Regulatory Advantage Wholesale Defensive Strategy Retail Defensive Strategy Transactions Costs Growth Risk Reduction Greater stability of earnings due to diversification11-22
Euro Currency Market Before World War II, the pound served as theinternational transaction currency. A Eurodollar is a dollar-denominated deposit in abank outside of the U.S. British banks, trying to avoid rules on the use ofpounds, created the Eurodollar market…LIBOR Much of international banking is done in bankingcenters called Euromarkets.25
26Contd… Eurocurrency is a time deposit in an international banklocated in a country different than the country that issued thecurrency. Eurodollars are U.S. dollar-denominated time deposits in bankslocated outside the United States. Euroyen are yen-denominated time deposits in banks located outsideof Japan. The foreign bank doesn’t have to be located in Europe. Lower cost structure: Reserve requirement - NO Deposit insurance - NORapid growth, especially in the Eurodollar market.
27Contd… This is an external banking system that runs parallel to thedomestic banking system.Most Eurocurrency transactions are interbank transactions inthe amount of $1,000,000 and up.Banks seek deposits and make loans to other Eurobanks.- loan interest rate is the interbank offered rate.- interbank deposit interest rate is the interbank bid rate.Common reference rates includeLIBOR = London Interbank Offered RatePIBOR = Paris Interbank Offered RateSIBOR = Singapore Interbank Offered RateNew reference rate for the euroEURIBOR = rate at which interbank time deposits of € are offered by oneprime bank to another.
28Contd…Euro Credit Short- to medium-term loans of Eurocurrency tocorporations, governments, nonprime banks orinternational organizations. Loans are often too large for one bank tounderwrite; a syndicate of banks share the risk ofthe loan. Adjustable rate - Rollover 3-6 month. On Eurocredits originating in London, the base rateis LIBOR + X% based on the creditworthiness ofthe borrower.
29Contd…Euronotes Short-term notes underwritten by a group ofinternational investment banks or internationalcommercial banks (facility). 3-6 months They are sold at a discount from face value and payback the full face value at maturity. Interest rate usually less than syndicated Eurobankloans. (i.e. LIBOR + 1/8%) Bank receives a small fee for underwriting.
Contd…Euro Commercial Papers Unsecured short-term promissory notes issued bycorporations and banks. 1-6 months. Placed directly with the public through a dealer. Eurocommercial paper, while typically U.S. dollardenominated, is often of lower quality than U.S.commercial paper—as a result yields are higher. Eurocommercial paper market size - 2006 = $635billion30
International Banks – Key Risks International lending risk Country risk Credit Risk Currency Risk Foreign Exchange Risk31
33World’s Largest Intel. BanksCitigroup U.S.Mizuho Bank/ Mizuho Corp Bank JapanHSBC Holdings U.K.Bank of America U.S.JP Morgan Chase U.S.Deutsche Bank GermanyRoyal Bank of Scotland Group U.K.Sumitomo Mitsui Banking Group JapanHypoVereinsbank GermanyUFJ Bank Ltd. Japan