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Global capital market and international lending
The document discusses the evolution of the global capital market, focusing on international bond and lending markets, as well as relevant statistical data from 2012 to 2002. It highlights various aspects such as types of international bond markets, economic implications of capital flow, and reasons for international lending, alongside the rise of the eurocurrency market. The information presented aims to illustrate the complexities and dynamics of the international financial system.
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Global capital market and international lending
- 1. Global Capital Market DBA722 International Economics Professor Ruben M. Nayve Jr., Ph.D. Presented by Ferdinand C. Importado April 2013
- 2. Evolution of theGlobal Capital Market
- 3.
- 4. Points in InternationalTrading Risk aversion Portfolio diversification
- 5.
- 6. Factors of internationalcapital market Commercial banks Corporations Non-bank financial institutions CB and other gov’t agencies
- 7. International bond market Internationalbond market refers to the issuance of bonds by governments and corporations representing borrowing by issuing entities with a time period of generally longer than one year
- 8. Underwriters • Banks andother financial institutions • Purchase the bonds • Assume the risks • Loan syndicate
- 9. Types of internationalbond market Foreign bond market Eurobond market The borrower in one country issues bonds in the markets of many countries, with the help of multinational loan syndicate, to residents of many countries. The bonds can be denominated in any of several different currencies The borrower in one country issues bonds in the market of another country The sale is mainly to residents of the host country, and the bonds are denominated in the currency of the host country
- 10. Data on internationalbond issue Dec. 2012 Dec. 2011 Dec. 2010 Dec. 2002 Money market instruments 844.0 895.0 914.0 438.0 Bonds and notes 21,135.0 27,820.0 26,751.0 8,780.8 21,979.0 28,715.0 27,665.0 9,218.8
- 11. Data on internationalbond issue Dec. 2012 Dec. 2011 Dec. 2010 Dec. 2002 Euro area 9,364.0 11,713.0 11,584.0 3,591.2 United States 2,043.0 6,821.0 6,599.0 2,749.3 Japan 182.0 181.0 184.0 258.2 Others 5,811.0 5,846.0 5,711.0 1,525.7 17,400.0 24,561.0 24,078.0 8,124.4 Dec. 2012 Dec. 2011 Dec. 2010 Dec. 2002 Developed countries 17,400.0 24,561.0 24,078.0 8,124.4 Offshore centers 1,718.0 1,593.0 1,545.0 106.9 Other countries 1,503.0 1,287.0 1,149.0 549.0 International institutions 1,358.0 1,274.0 893.0 438.5 21,979.0 28,715.0 27,665.0 9,218.8
- 12. Data on internationalbond issue Dec. 2012 Dec. 2011 Dec. 2010 Dec. 2002 Commercial banks 16,507.0 20,860.0 20,849.0 6,630.2 Governments 1,629.0 2,535.0 2,423.0 879.5 Corporations 2,483.0 4,045.0 3,570.0 1,270.6 Other issuers 1,360.0 1,275.0 823.0 438.5 21,979.0 28,715.0 27,665.0 9,218.8
- 13. Economic implications Financial capitalis increasingly able to flow across international borders More efficient allocation of financial capital Foreign exchange markets themselves will be more active
- 14. End of GlobalCapital Market
- 15. International Lending DBA 722International Economics Professor Ruben M. Nayve Jr., Ph.D. Presented by Ferdinand C. Importado April 2013
- 16.
- 17. International Lending Defined InternationalLending International lending is defined as cross-border lending in all foreign and domestic currencies and lending to residents in foreign currencies.
- 18. Reasons for InternationalLending Favorable interest rates Higher rates of return Working capital requirements
- 19. Net international banklending Sept. 2012 Dec. 2011 Dec. 2010 Dec. 2002 Total cross-border bank claims 29,420.8 29,824.2 29,757.8 13,425.60 Local claims in foreign currency 3,987.3 3,905.4 3,839.5 1,732.80 Unallocated claims 505.4 489.3 439.0 0.0 Gross international bank lending 33,913.5 34,218.9 34,036.3 15,158.4 Less: Interbank deposits 18,032.1 18,709.5 18,474.6 9,567.40 Net international bank lending 15,881.4 15,509.4 15,561.7 5,591.0
- 20. Eurocurrency / EurodollarMarket • The concept of extending loans in foreign currency to residents and non- residents • Deposit in a financial institution that is denominated in a currency other than the currency of the country in which the financial institution is located. • Originally, this market was called Eurodollar.
- 21. Rise of eurocurrency market • Cold War between the U.S. and the former U.S.S.R • Restricted use of the pound to finance capital outflow transactions • Legal ceilings in interest rates for time and savings deposits in the U.S. • Difficulty to obtain U.S.$ in the U.S. mainland. • The first oil-shock between 1973-1974
- 22. Consequences Interest rates are notequalized No effective control of money in existence
- 23. End of InternationalLending
Editor's Notes
- #3 The banking industry has evolved in both the nature and scale of international financing activity. About two to three decades ago, most banking services were purely domestic, involving currency and customers of the bank’s home country. Decades later, many banks were deriving a large share of their profits from international activities.
- #8 International bond market refers to the issuance of bonds by governments and corporations representing borrowing by issuing entities with a time period of generally longer than one year. A distinction is often made between notes, which have a maturity of less than one ten years and bonds which have maturity of ten years or longer.
- #9 The issuance of a bond generally involves bond underwriters, which are banks and other financial institutions that conduct the sale of the bonds for a fee for the issuing entity. These underwriters purchase the bonds from firms or the government and the underwriters thus assume the risks that the bonds might not be sold. Further, in international bond markets, banks often join together to form a loan syndicate for marketing the bonds.
- #10 Foreign bond markets is a type of bond market wherein the borrower in one country issues bonds in the market of another country (the host country) through a syndicate in the host country. The sale is mainly to residents of the host country, and the bonds are denominated in the currency of the host country.Eurobond markets is a type of bond market wherein the borrower in one country issues bonds in the markets of many countries, with the help of multinational loan syndicate, to residents of many countries. The bonds can be denominated in any of several different currencies (including the currency of the country of the issuer but also other currencies that are not necessarily of the countries in which the bonds are sold). The two types of markets – the foreign bond markets and the Eurobond markets together constitute the aggregate international bond market.
- #14 The economic implications of the Eurobond markets are much the same as those of the Eurocurrency markets. Financial capital is increasingly able to flow across international borders and thus to intensify the tendency for interest rates on similar assets to equalize. From an economic perspective, the growth of these markets therefore results in a more efficient allocation of financial capital. Interest rates will not become exactly equal even on two identical assets (a domestic bond and a Eurobond) and not just because of transaction costs and other factor previously mentioned. An additional factor preventing equality is exchange rate risk. Another implication of the international bond market is that foreign exchange markets themselves will be more active that would be the case if these markets did not exist. Bondholders may choose to purchase bonds of a particular currency denomination because they envision that interest rates differ more than is justified by exchange rate expectations and an exchange market transaction may thus be necessary to obtain the particular currency in order to make the purchase.
- #17 Agency – an office located abroad which arranges loans and transfers funds but does not accept deposits Subsidiary – is an office located abroad that are subject to the same regulations as local banks and not the regulations of the parent bankForeign branch – is simple an office of the home bank in another country that carries out the same business as the local banks and are usually subject to local and home baking regulations
- #19 Domestic banks may lend funds to private firms abroad that wish to undertake real investment projects and that find the domestic bank’s lending terms to be more favourable than banks’ lending terms in the firm’s own countries. Domestic banks may purchase foreign financial instruments (such as certificates of deposits offered by foreign banks) with excess reserves in order to earn a higher rate than is available domestically on comparable instruments.Foreign banks may borrow funds from domestic banks to obtain domestic currency working balances to meet various needs of their (the foreign banks’) customers.
- #21 Total cross-border bank claims refers to claims of banks in a broad of 36 countries, including all major countries that represent loans made by banks to borrowers (receivable of the bank) in other countries and they are obviously part of international lending.Local claims in foreign currency indicate loans by banks to domestic borrowers but these loans have been made in foreign currency. Gross international bank lending is the sum of the total cross-border banks claims and local claims in foreign currency. Interbank deposits are adjustment to gross international bank lending representing loans extended by the banks to other banks whose sources where part or obtained either from the total cross-border bank claims or local claims in foreign currency. Net international bank lending refers to the balance after deducting interbank deposits from gross international bank lending.
- #23 The mobility or transfer of financial capital across country borders has been greatly increased. This means than interest rates and general credit conditions are increasingly linked across countries but such interest rates are not equalized. The surge in international bank lending and in euro market activity in particular has fostered potential economic instability since the central bank of a country does not have jurisdiction over deposits abroad, there is no effective control of the amount of money in existence that is denominated in the country’s currency.