1 International Banking and Money Market Chapter Objective: • Differentiate between international bank and domestic bank operations and examine the differences of various international banking offices. Chapter Outline International Banking Services Types of International Banking Offices Capital Adequacy Standards International Money Market
1. 1 International Banking and Money Market Chapter Objective:
Differentiate between international bank and domestic bank
operations and examine the differences of various international
banking offices. Chapter Outline International Banking Services
Types of International Banking Offices Capital Adequacy Standards
International Money Market
2. 2 International Banking Services International Banks do
everything domestic banks do and: Arrange trade financing. Arrange
foreign exchange. Offer hedging services for foreign currency
receivables and payables through forward and option contracts.
Offer investment banking services (where allowed).
3. 3 Worlds 10 Largest Banks Citigroup U.S. Mizuho Bank/ Mizuho
Corp Bank Japan HSBC Holdings U.K. Bank of America U.S. JP Morgan
Chase U.S. Deutsche Bank Germany Royal Bank of Scotland Group U.K.
Sumitomo Mitsui Banking Group Japan HypoVereinsbank Germany UFJ
Bank Ltd. Japan
4. 4 Types of International Banking Offices 1. Correspondent
bank Banks located in different countries establish accounts in
other bank Provides a means for a banks MNC clients to conduct
business worldwide through his local bank or its contacts. Provides
income for large banks Smaller foreign banks that want to do
business ,say in the U.S., will enter into a correspondent
relationship with a large U.S. bank for a fee
5. 5 Types of International Banking Offices 2. Representative
office A small service facility staffed by parent bank personnel
that is designed to assist MNC clients of the parent bank in
dealings with the banks correspondents. No traditional credit
services provided Reps looks for foreign market opportunities and
serves as a liaison between parent and clients Useful in newly
emerging markets Representative offices also assist with
information about local business customs, and credit evaluation of
the MNCs local customers.
6. 6 Types of International Banking Offices 3. Foreign Branch A
foreign branch bank operates like a local bank, but is legally part
of the parent. Subject to both the banking regulations of home
country and foreign country. Reasons for establishing a foreign
branch More extensive range of services Foreign branches are not
subject to Canadian reserve requirements or deposit insurance
Compete with host country banks at the local level Most popular
means of internationalizing bank operations
7. 7 Types of International Banking Offices 4. Subsidiary and
Affiliate Bank A subsidiary bank is a locally incorporated bank
that is either wholly owned or owned in major part by a foreign
parents. An affiliate bank is one that is only partially owned, but
not controlled by its foreign parent. Both subsidiary and affiliate
banks operate under the banking laws of the country in which they
are incorporated. They are allowed to underwrite securities.
8. 8 Types of International Banking Offices 5. Offshore Banking
Center A country whose banking system is organized to permit
external accounts 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 country currency Reasons for
offshore banks Low or no taxes, services provided for nonresident
clients, few or no FX controls, legal regime that upholds bank
secrecy The IMF recognizes the Bahamas, Bahrain, the Cayman
Islands, Hong Kong, the Netherlands Antilles, Panama, Singapore as
major offshore banking centers
9. 9 Capital Adequacy Standards Bank capital adequacy = equity
capital and other securities a bank holds as reserves. How much
bank capital is enough to ensure the safety and soundness of the
banking system? Basle Accord 1 (1988): Rules-based approach + VAR
Basle Accord 2 (2003 - ?) - 3 pillars -min. cap. Requirements
-supervisory review process -market discipline
10. 10 Basle Accord I: minimum bank capital adequacy ratio
(rules-based) Banks involved in cross-border transactions. Min.
Cap. Adequacy = 8% [risk weighted assets] Tier I Core capital =
shareholder equity + retained earnings Tier II Supplemental capital
= internationally recognized non-equity items Tier II < 50%
total bank capital Asset Weights: Government obligations = 0%;
short-term interbank assets = 20% Residential mortgages = 50%;
other assets = 100%
11. 11 Basle Accord I: Risk-focused Cap. adequacy 1996
amendment allows banks to use modern portfolio models to specify
adequate Cap. Adequacy. VAR(value-at-risk) = loss exceeded with a
specified probability over a specified time period. 1% chance:
maximum loss over 10 days > banks capital VAR =
(PV)()(Z.01)(D1/2 ) PV = portfolio value; = standard deviation of
return(daily); Z.01 = standard normal value for 1-tail confidence
interval; D = days
12. 12 International Money Market Eurocurrency is a time
deposit in an international bank located in a country different
than the country that issued the currency. Eurodollars are U.S.
dollar-denominated time deposits in banks located outside the
United States. Euroyen are yen-denominated time deposits in banks
located outside of Japan. The foreign bank doesnt have to be
located in Europe. Lower cost structure: Reserve requirement - NO
Deposit insurance - NO Rapid growth, especially in the Eurodollar
market.
13. 13 Eurocurrency Market This is an external banking system
that runs parallel to the domestic banking system. Most
Eurocurrency transactions are interbank transactions in the 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 include LIBOR = London Interbank Offered Rate PIBOR
= Paris Interbank Offered Rate SIBOR = Singapore Interbank Offered
Rate New reference rate for the euro EURIBOR = rate at which
interbank time deposits of are offered by one prime bank to
another.
14. 14 Eurocredits Short- to medium-term loans of Eurocurrency
to corporations, governments, nonprime banks or international
organizations. Loans are often too large for one bank to
underwrite; a syndicate of banks share the risk of the loan.
Adjustable rate - Rollover 3-6 mo. Example 6.1 On Eurocredits
originating in London, the base rate is LIBOR + X% based on the
creditworthiness of the borrower.
15. 15 Forward Rate Agreements An interbank contract that
involves two parties, a buyer and a seller. The buyer agrees to pay
the seller the increased interest cost on a notional amount if
interest rates fall below an agreed rate. The seller agrees to pay
the buyer the increased interest cost if interest rates increase
above the agreed rate. Forward Rate Agreements can be used to:
Hedge assets that a bank currently owns against interest rate risk.
Speculate on the future course of interest rates. )360/*(1 360/*)(*
daysSR daysARSRamountNotional FRApayment + =
16. 16 Euronotes Short-term notes underwritten by a group of
international investment banks or international commercial banks
(facility). 3-6 months They are sold at a discount from face value
and pay back the full face value at maturity. Interest rate usually
less than syndicated Eurobank loans. LIBOR + 1/8%, for example.
Bank receives a small fee for underwriting.
17. 17 Eurocommercial Paper Unsecured short-term promissory
notes issued by corporations and banks. 1-6 months. Placed directly
with the public through a dealer. Eurocommercial paper, while
typically U.S. dollar denominated, is often of lower quality than
U.S. commercial paperas a result yields are higher. Eurocommercial
paper 2001 = $243.1billion
18. 18 International Debt Crisis Some of the largest banks in
the world were endangered when loans to sovereign governments of
some less-developed countries. At the height of the crisis, third
world countries owed $1.2 trillion. Like a great many calamities,
it is easy to see in retrospect that: Its a bad idea to put too
many eggs in one basket, especially if: You dont know much about
that basket.
19. 19 Debt-for-Equity Swaps As part of debt rescheduling
agreements among the bank lending syndicates and the debtor
nations, creditor banks would sell their loans for U.S. dollars at
discounts from face value to MNCs desiring to make equity
investment in subsidiaries or local firms in the LDCs. A LDC
central bank would buy the bank debt from a MNC at a smaller
discount than the MNC paid, but in local currency. The MNC would
use the local currency to make pre- approved new investment in the
LDC that was economically or socially beneficial to the LDC.
20. 20 Debt-for-Equity Swap Illustration International Bank
Equity Investor or MNC LDC Central Bank LDC firm or MNC subsidiary
$60m Sell $100m LDC debt at 60% of face Redeem LDC debt at 80% of
face in local currency $80m in local currency $80m in local
currency
21. 21 Japanese Banking Crisis The history of the Japanese
banking crisis is a result of a complex combination of events and
the structure of the Japanese financial system. Japanese commercial
banks have historically served as the financing arm and center of a
collaborative group know as keiretsu. Keiretsu members have
cross-holdings of an anothers equity and ties of trade and credit.
The collapse of the Japanese stock market set in motion a downward
spiral for the entire Japanese economy and in particular Japanese
banks. This put in jeopardy massive amounts of bank loans to
corporations. It is unlikely that the Japanese banking crisis will
be rectified anytime soon. The Japanese financial system does not
have a legal infrastructure that allows for restructuring of bad
bank loans. Japanese bank managers have little incentive to change
because of the Keiretsu structure.
22. 22 The Asian Crisis This crisis followed a period of
economic expansion in the region financed by record private capital
inflows. Bankers from the G-10 countries actively sought to finance
the growth opportunities in Asia by providing businesses with a
full range of products and services. This led to domestic price
bubbles in East Asia, particularly in real estate. Additionally,
the close interrelationships common among commercial firms and
financial institutions in Asia resulted in poor investment decision
making. The Asian crisis is only the latest example of banks making
a multitude of poor loansspurred on no doubt by competition from
other banks to make loans in the hot region.