International banking

1. International Banking
1
Chapter 7

2. 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 Banks
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3. What is International Banking
The industry was transformed in the 1970s. Until
then most banks concentrated on their home markets,
considering themselves as domestic institutions that
handled foreign business.
With the rapid expansion of international networks,
the banking sector occupies a pivotal position in the
global economy as it has access to the capital, the
technological capabilities, and the international
network to facilitate these activities.
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4. Contd…
Banks monitor the business sector through the
evaluation, pricing, and credit-granting functions.
In this context, the operations of an international
trade of services, that have as a consequence either
the creation and management of financial means, or
the transport of capital from surplus units of
country in an other, or the mediation in the frame of
national financier system are called “International
Banking activity”.
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5. Contd…
Banking transactions crossing national boundaries
Undertake International Lending –
- All claims of domestic banks offices on foreign
residents
- Claims of foreign bank offices on local residents
- Claims of domestic bank offices on domestic
residents in foreign currency

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6. 6
IBs – Services Offered
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).
Borrow or lend in Eurocurrency market
Underwrite Eurobonds and foreign bonds.

7. Contd…
International banks provide services to those
engaged in international trade and investment: risk-
sharing, liquidity, information.
Like domestic banks, international banks accept
deposits and lend.
International banks lower transactions costs and
lower information costs.
International financial regulation can lead to
innovation in banking
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8. 8
Types of International Banking
Offices
1.Correspondent bank
Banks located in different countries establish accounts
in other bank
Provides a means for a bank’s 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

9. 9
Contd….
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 bank’s correspondents.
No traditional credit services provided
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 MNC’s local
customers.
It is useful when the bank has many MNC clients in a country

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3. Foreign Branch
A foreign branch bank operates like a local bank, but is legally
part of the parent, not a separate entity.
Subject to both the banking regulations of home country and
foreign 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 or
deposit insurance
Compete with host country banks at the local level
Most popular means of internationalizing bank operations
Contd….

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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.
Contd….

12. 12
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
Contd….

13. Reasons for International
Banking
Low Marginal Costs
Managerial and marketing knowledge developed
at home can be used abroad with low marginal
costs.
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14. Contd…
Low Marginal Costs
Knowledge Advantage
The foreign bank subsidiary can draw on the
parent bank’s knowledge of personal contacts
and credit investigations for use in that foreign
market.
11-14

15. Low Marginal Costs
Knowledge Advantage
Home Nation Information Services
Local firms in a foreign market may be able to
obtain more complete information on trade and
financial markets in the multinational bank’s
home nation than is obtainable from foreign
domestic banks.
11-15
Contd…

16. Contd…
Low Marginal Costs
Knowledge Advantage
Home Nation Information Services
Prestige
Very large multinational banks have high
perceived prestige, which can be attractive to
new clients.
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17. Contd…
Low Marginal Costs
Knowledge Advantage
Home Nation Information Services
Prestige
Regulatory Advantage
Multinational banks are often not subject to the
same regulations as domestic banks.
11-17

18. Contd…
Low Marginal Costs
Knowledge Advantage
Home Nation Information Services
Prestige
Regulatory Advantage
Wholesale Defensive Strategy
Banks follow their multinational customers abroad
to avoid losing their business at home and abroad.
11-18

19. 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 services
such as travelers checks, tourist and foreign business
market.
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20. Contd…
Knowledge Advantage
Home Nation Information Services
Prestige
Regulatory Advantage
Wholesale Defensive Strategy
Retail Defensive Strategy
Transactions Costs
Multinational banks may be able to circumvent
government currency controls.
11-20

21. Contd…
Home Nation Information Services
Prestige
Regulatory Advantage
Wholesale Defensive Strategy
Retail Defensive Strategy
Transactions Costs
Growth
Foreign markets may offer opportunities to
growth not found domestically
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22. Contd…
Prestige
Regulatory Advantage
Wholesale Defensive Strategy
Retail Defensive Strategy
Transactions Costs
Growth
Risk Reduction
Greater stability of earnings due to diversification
11-22

23. How It Works???
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24. Contd…
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25. Euro Currency Market
Before World War II, the pound served as the
international transaction currency.
A Eurodollar is a dollar-denominated deposit in a
bank outside of the U.S.
British banks, trying to avoid rules on the use of
pounds, created the Eurodollar market…LIBOR
Much of international banking is done in banking
centers called Euromarkets.
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26. 26
Contd…
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 doesn’t have to be located in Europe.
Lower cost structure:
Reserve requirement - NO
Deposit insurance - NO

Rapid growth, especially in the Eurodollar market.

27. 27
Contd…
 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.

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Contd…
Euro Credit
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 month.
On Eurocredits originating in London, the base rate
is LIBOR + X% based on the creditworthiness of
the borrower.

29. 29
Contd…
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. (i.e. LIBOR + 1/8%)
Bank receives a small fee for underwriting.

30. Contd…
Euro Commercial Papers
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 paper—as a result yields are higher.
Eurocommercial paper market size - 2006 = $635
billion
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31. International Banks – Key Risks
International lending risk
Country risk
Credit Risk
Currency Risk
Foreign Exchange Risk
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32. World’s Leading Interl. Banks
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33. 33
World’s Largest Intel. 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