International Banking and the International Money Markets

International Banks

• Can be distinguished from domestic banks by the:

• Services they offer

• The deposits they attract

• The loans they make

International Banks: Services

• Financing cross border trade (exports)– Letters of credit; bankers’ acceptances

• Offering foreign exchange services– Buying and selling foreign exchange for clients– Offering hedging contracts

• Offering interest rate and currency swap financing.

• Consulting services to global firms– Hedging strategies; international cash management.

• Underwriting eurobonds, foreign bonds, equity issues for global firms.

International Banking: Deposits

• May or may not be involved in accepting domestic deposits.– China will currently not allow foreign banks to

engage in this activity.

• Participate in eurocurrency deposit market.– Accepting “offshore” deposits

International Banking: Loans

• Lenders of “eurocurrency” deposits

• Participation in syndicated loans to large multinational firms and sovereign entities.– Allows for the pooling of resources and the

sharing of risk!

Why do Banks Establish International Operations?

• Low Marginal Costs in doing so– Apply home knowledge to foreign market

• Knowledge Advantage– Overseas operations can utilize the parent’s

knowledge to compete in foreign market

• Home Information Source– Providing local (foreign) firms with information about

parent’s home market

• Prestige– Global banks can attract clients abroad

Why do Banks Establish International Operations?

• Regulation Advantage– Global banks may not face the same

regulations as domestic banks (e.g., reserve requirements on eurocurrency deposits).

• Wholesale and Retail Defensive Strategy– Following corporate clients overseas– Providing retail customer overseas services

• Circumventing Government Restrictions– Wanting to do business in RMB

Why do Banks Establish International Operations?

• Growth– Home market may be saturated

• Risk Reduction– Greater stability of consolidated earnings.

Services Offered by International Banks

• The services offered by global banks are a function of:– The regulatory environment.

• What will governments allow?• Developing countries still somewhat restrictive

regarding foreign banks.

– The type of banking office established.

Types of International Banking Offices

• Correspondent Bank– No physical presence overseas– Correspondent relationships with banks in

foreign markets– Allows bank to service core clients with little

cost.• Reciprocal deposit accounts• Facilities foreign exchange conversion• Facilities trade financing (clearing bankers

acceptances)

Types of International Banking Offices

• Representative Office– Small service facility staffed by parent bank

personnel– Cannot make loans or accept deposits– Useful strategy if bank has many important

clients in foreign country– There to assist core clients with

• Country and economic information• Credit evaluations on local firms

Types of International Banking Offices

• Foreign Branch Office– Most popular form of U.S. bank expansion abroad.– Legally part of the parent bank– Subject to regulations at home and in foreign market.– Branch lending limits are based on parent capital (not

branch office)• Can provide larger loans

– Allows for fast clearing of checks within the bank

Types of International Banking Offices

• Subsidiary Bank– Locally incorporated (in foreign country) bank.

• Either wholly owned by parent, or joint venture• Non-controlling subsidiary is referred to as an

“affiliate bank.”

– Operate under the banking laws of the country in which they are incorporated.

– Desirable before the abolition of Glass Steagell Act!

Types of International Banking Offices

• Offshore Banking Centers– Organized branches or subsidiaries in recognized

offshore countries.– A country whose banking system allows for “external”

banking activity.• Accepting deposits and making loans in currencies other

than the home currency of the offshore country.– IMF recognizes the following as offshore countries:

• Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, and Singapore.

– Minimal host country regulations, low taxes, favorable time zone, banking secrecy laws all promoting external banking transactions!