CHAPTER 17 INTERNATIONAL BANKING TRENDS AND STRATEGIES

CHAPTER 17CHAPTER 17

INTERNATIONAL INTERNATIONAL BANKING TRENDS BANKING TRENDS AND STRATEGIESAND STRATEGIES

CHAPTER OVERVIEW:CHAPTER OVERVIEW:

I.I. RECENT PATTERNSRECENT PATTERNS

II.II. ORGANIZATIONAL FORMS AND ORGANIZATIONAL FORMS AND STRATEGIES IN BANK EXPANSION STRATEGIES IN BANK EXPANSION OVERSEASOVERSEAS

III.III. VALUE CREATION IN INTERNAIONAL VALUE CREATION IN INTERNAIONAL BANKINGBANKING

IV.IV. COUNTRY RISK ANALYSISCOUNTRY RISK ANALYSIS



rapid growth in risk and complexity over rapid growth in risk and complexity over

the last 2 decadesthe last 2 decades

A.A. The Era of Growth (Causes)The Era of Growth (Causes)

1.1. Growth in international businessGrowth in international business

2.2. Energy Crisis of 1973Energy Crisis of 1973

3.3. Loans to developing economiesLoans to developing economies

RECENT PATTERNSRECENT PATTERNS

2.2. International Banking International Banking Crisis(1982)Crisis(1982)

a.a. Energy Crisis (1973)Energy Crisis (1973)

OPEC nations accumulatedOPEC nations accumulated

huge (petro) dollar balanceshuge (petro) dollar balances

b.b. Loans went to developingLoans went to developing

nations.nations.

c.c. OPEC funds dried up (1982)OPEC funds dried up (1982)


d.d. Interest rates began to riseInterest rates began to rise

e.e. Mexico: August, 1982Mexico: August, 1982

announced its inability to announced its inability to

make loan paymentsmake loan payments

f.f. By spring, 1983By spring, 1983

25 developing nations also25 developing nations also

defaulted - banking crisis!defaulted - banking crisis!


3.3. Baker Plan (1985)Baker Plan (1985)

Goal: to support 15 developingGoal: to support 15 developing

nations through economic nations through economic growthgrowth

failed.failed.

4.4. Brady Plan (1989)Brady Plan (1989)

Goal: debt relief through Goal: debt relief through forgiveness forgiveness


4.4. Brady Plan options:Brady Plan options:

a.a. Banks given twoBanks given two

1.)1.) Make new loansMake new loans

2.) 2.) Write off portions ofWrite off portions of

existing loans in exchange existing loans in exchange for “Brady”bonds.for “Brady”bonds.

3.)3.) “Brady” bonds IMF backed“Brady” bonds IMF backed

b.b. Bank crisis ends by July 1992.Bank crisis ends by July 1992.


B.B. International Bank RegulationsInternational Bank Regulations

1.1. Needed:Needed:

well-defined supervisory structurewell-defined supervisory structure

2.2. Basle Agreement (1992)Basle Agreement (1992)

set risk-based banking standardsset risk-based banking standards

a.a. Banks must have minimum Banks must have minimum 8% ratio capital to assets8% ratio capital to assets


b.b. Capital adequacy standards Capital adequacy standards revised to incorporate revised to incorporate market riskmarket risk

c.c. Banks must focus more onBanks must focus more on

profit growthprofit growth

C.C. Japanese International Bank ExpansionJapanese International Bank Expansion

1.1. Recent expansion overseasRecent expansion overseas

2.2. Lately, retrenchment due to newLately, retrenchment due to new

Basle standards.Basle standards.

II.II. ORGANIZATIONAL FORMS AND ORGANIZATIONAL FORMS AND STRATEGIES IN BANK EXPANSION STRATEGIES IN BANK EXPANSION OVERSEASOVERSEAS

II.II.ORGANIZATIONAL FORMS AND ORGANIZATIONAL FORMS AND STRATEGIES IN BANK EXPANSION STRATEGIES IN BANK EXPANSION OVERSEASOVERSEAS

A.A. Bank’s Foreign Market ApproachBank’s Foreign Market Approach

depends ondepends on

1.1. Overall financial resourcesOverall financial resources

2.2. Level of market experienceLevel of market experience

3.3. Int’l business volumeInt’l business volume

4.4. Bank’s strategic plansBank’s strategic plans

ORGANIZATIONAL FORMS AND ORGANIZATIONAL FORMS AND STRATEGIES IN BANK EXPANSION STRATEGIES IN BANK EXPANSION OVERSEASOVERSEAS

B.B. Correspondent BankingCorrespondent Banking

1.1. Definition:Definition:

a bank located elsewhere thata bank located elsewhere that

provides a service for another provides a service for another bank.bank.

2.2. Main function:Main function:

to provide financing for affiliatesto provide financing for affiliates

of MNCs.of MNCs.


3.3. Advantages of Correspondent Advantages of Correspondent BankingBanking

a.a. Low cost market entryLow cost market entry

b.b. Minimal staffing expenseMinimal staffing expense

c.c. Multiple business sourcesMultiple business sources

d.d. Local banking opportunitiesLocal banking opportunities

e.e. Network of local contactsNetwork of local contacts


4.4. Disadvantages of CorrespondentsDisadvantages of Correspondents

a.a. U.S. customers may be givenU.S. customers may be given

lower prioritylower priority

b.b. Some credit forms prohibitedSome credit forms prohibited

c.c. Irregular, not extensive Irregular, not extensive credit resultscredit results


C.C. Representative OfficesRepresentative Offices

1.1. Functions:Functions:

a.a. to provide advisor servicesto provide advisor services

b.b. to speed up servicesto speed up services

c.c. to help loan generationto help loan generation

*d.*d. not authorized to directlynot authorized to directly

accept deposits/make loansaccept deposits/make loans


2.2. Advantages of Representative Advantages of Representative OfficesOffices

a.a. Low-cost market entryLow-cost market entry

b.b. Efficient deliveryEfficient delivery

c.c. Attracts additional businessAttracts additional business

d.d. Maintains existing businessMaintains existing business


3.3. Disadvantages of RepresentativeDisadvantages of Representative

OfficesOffices

a.a. Inability to more effectivelyInability to more effectively

penetrate marketspenetrate markets

b.b. ExpensiveExpensive

c.c. Qualified personnel difficultQualified personnel difficult

to attractto attract


D.D. Foreign BranchesForeign Branches

-true international presence-true international presence

1.1. Functions:Functions:

a.a. Same as rep. officeSame as rep. office

*b.*b. Authorized to accept Authorized to accept deposits/make loansdeposits/make loans


2.2. Advantages of Foreign BranchesAdvantages of Foreign Branches

a.a. Greater control over foreignGreater control over foreign

operationsoperations

b.b. Greater ability to offer Greater ability to offer direct,direct,

integrated customer integrated customer servicesservices

c.c. Better customer relationsBetter customer relations


3.3. Disadvantages of Foreign BranchDisadvantages of Foreign Branch

a. a. High-costHigh-cost

b.b. Difficult and expensive to Difficult and expensive to

train managers.train managers.

E.E. Edge Act and Agreement Edge Act and Agreement Corporations:Corporations:

U.S. bank subsidiaries that may carryU.S. bank subsidiaries that may carry

on international banking activitieson international banking activities


1.1. Edge Act BanksEdge Act Banks

a.a. Physically located in U.S.Physically located in U.S.

b.b. Authorized to handle onlyAuthorized to handle only

international businessinternational business

c.c. Customers: foreign or U.S.Customers: foreign or U.S.

d.d. Authorized to accept foreignAuthorized to accept foreign

currency deposits/make loans.currency deposits/make loans.


G.G. International Banking Facilities (IBFs)International Banking Facilities (IBFs)

can conduct international banking duecan conduct international banking due

to U.S. government exemption.to U.S. government exemption.IBFs:IBFs:a.a. Bookkeeping entriesBookkeeping entriesb.b. Major Activities:Major Activities:

accept deposits/make loansaccept deposits/make loansc.c. Exempt from Fed’s Regulation QExempt from Fed’s Regulation Qd.d. Closely linked to eurocurrency Closely linked to eurocurrency markets.markets.

III.III. VALUE CREATION IN VALUE CREATION IN INTERNATIONAL BANKINGINTERNATIONAL BANKING

A.A. Capital AdequacyCapital Adequacy

1.1. If well-capitalized, competitive If well-capitalized, competitive advantage inadvantage in

a.a. underwriting securitiesunderwriting securities

b.b. reducing cost of fundingreducing cost of funding

VALUE CREATION IN VALUE CREATION IN INTERNATIONAL BANKINGINTERNATIONAL BANKING

B.B. Human Resources and Banking Human Resources and Banking OrganizationOrganization

1.1. Competitive advantage:Competitive advantage:

have an organization to exploithave an organization to exploit

information to learn and to information to learn and to

innovate quicklyinnovate quickly

2.2. Prepare/enable employees toPrepare/enable employees to

recognize/respond to problemsrecognize/respond to problems


C.C. Information SystemsInformation Systems

1.1. To create competitive advantageTo create competitive advantage

a.a. requires large investmentrequires large investment

in information technologyin information technology


D.D. Transaction-Processing ServicesTransaction-Processing Services

1.1. Demand for seamless services inDemand for seamless services in

a.a. funds movementfunds movement

b.b. foreign exchangeforeign exchange

c.c. cash managementcash management



-country-risk assessment predicts-country-risk assessment predicts

potential debt-repayment problemspotential debt-repayment problems

A.A. Country Risk analysisCountry Risk analysis

1.1. Involves an examination ofInvolves an examination of

a.a. Economic factorsEconomic factors

b.b. Political factorsPolitical factors

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CHAPTER 17 INTERNATIONAL BANKING TRENDS AND STRATEGIES