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International banking MFI

  1. International banking By : Vijaya Meghana C
  2.  Definition of international banking  Banking transactions crossing national boundaries  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  Deposits similarly classified (by  residence of bank or depositor, or currency)  Eurocurrency deposits – placed with  banks outside the country whose currency the deposits are denominated in (not necessarily in euros!)
  3. What is an International Bank?  An international bank is a banking institution that operates overseas and actively manages foreign accounts. Although the roles and basic functions of an international bank are similar to other banking institutions, the ability to deliver typical functions to customer and business accounts in different countries is the fundamental difference of international banks and smaller regionalized banking systems.  The typical regional bank in the United States possesses the ability to process checking accounts, savings accounts, or lending practices in limited jurisdictions. These banks do not handle accounts that are opened overseas nor do they lend funds to international businesses or customers.  An international bank is a financial entity that offers international companies and individual clients financial services, such as payment accounts and lending opportunities. Although the term ‘foreign clients’ encompasses both international businesses and individuals, every international bank will operate under its own policies that outline how they conduct their particular business.  According to OCRA Worldwide—an international organization that connects individual customers and companies to various international banking systems—an international bank will tend to offer their varied services to companies those wealthy individuals (typically individual clients with $100,000 accounts). That being said, some international banks, specifically banks in Switzerland, will offer their services to customers of any income bracket.
  4.  Historical evolution:  Origin in Renaissance (lending to kings) Active international lending and bond market in the 19th century (also trade financing)  Decline in 20s and 30s as governments  restricted international trade and financing  Growth of trade and multinationals (MNEs) postwar  Development of euromarkets in the  1960s (owing to regulatory differences) Abolition of capital controls after breakdown of Bretton Woods  Waves of lending to EMEs (such as Latin  America in 1970s, Asia in 1990s)
  5. Features of international banking  Key aspects: currency risk and complexity of credit risk besides typical banking risks  Competition for market share among banks (typically spreads very narrow) Cyclical nature, with periodic crises  Competition for bank loans from the international bond market (close substitutes for loans)  Importance of international interbank market (IIBM) as source of liquidity and funding for banks, and risks arising  Role of risk management activities (swaps, options, futures)
  6. FEATURES AND BENEFITS OF INTERNATIONAL BANKING  FLEXIBILITY  International banking facility provides flexibility to the multinational companies to deal in multiple currencies. The major currencies that multinational companies or individuals can deal with include euro, dollar, pounds, sterling, and rupee. The companies having headquarters in other countries can manage their bank accounts and avail financial services in other countries through international banking without any hassle.  ACCESSIBILITY  International banking provides accessibility and ease of doing business to the companies from different countries. An individual or MNC can use their money anywhere around the world. This gives them a freedom to transact and use their money to meet any requirement of funds in any part of the world.  INTERNATIONAL TRANSACTIONS  International banking allows the business to make international bill payments. The currency conversion facility allows the companies to pay and receive money easily. Also, the benefits likeoverdraft facility, loans, deposits, etc. are available every time for overseas transaction  ACCOUNTS MAINTENANCE  A multinational company can maintain the records of global accounts in a fair manner with the help of international banking. All the transactions of the company are recorded in the books of the banks across the globe. By compiling the data and figures, the accounts of the company can be maintained.
  7. Reasons for international banking  Migration of domestic customers, notably MNEs growing foreign activities Effects of regulatory differences (structural and prudential)  Input cost differences (e.g. in cost of  domestic funding) - Japanese in the past Comparative advantages in retail banking (Citibank)  Development of major financial centres  offering benefits to banks:  Business contacts  Location of customers  Pool of skilled labour  Trades and professions  Liquidity and efficiency of markets (thick market externalities)  Interrelation of markets (e.g. derivatives and underlying)  Potential for increasing returns to scale  and self sustaining growth of centres
  8. Main financing activities:  Key feature is nationality of issuer and investor differs (1) Syndicated lending – credit facility offered simultaneously by a number of banks from more than one country who  sign same loan agreement and stand equally in right of repayment. Lead manager does credit assessment and  (delegated) monitoring. Unsecured but extensive covenants Use in finance of projects and mergers. (2) Eurobond issuance and trading – bearer bonds issued in markets other than the country of issue. Unsecured and few covenants except negative pledge (no  future borrowing at higher seniority), and  usually call provisions (3) Euronotes, international equity, international interbank market – see below
  9. Components of International Banking System 1 4 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
  10. Contd… . 1 5 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
  11. 3. Foreign Branch  A foreign branch bank operates like a local bank, but is legally part of the parent, not a separate entity. 16    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… .
  12. 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. 17 Contd… .
  13. 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. 18    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… .
  14. How It Works??? 19
  15. Contd … 20
  16.  Regulation of international banking  Issues arising include:  cross border supervision of banks  regulation of foreign banks (by home or host supervisor)  need for international agreements to ensure stability (safety net) without generating moral hazard (also  prudential regulation)  need to keep a “level playing field”  e.g. via capital adequacy agreements  regulation of offshore financial centres  regulation of hedge funds and other  offshore vehicles
  17. Role of Exim Bank(International Financial Institution), Reserve Bank of India, Exchange Control in India — FEMA and FEDAI and Others  The functions and role of EXIM Bank, Reserve Bank of India, FEMA and its important provisions, FEDAI and other related agencies in the development and control of international banking business in India. International banking and trade involves transactions between two countries, currencies and as such are controlled, supervised, regulated and supported by the central bank of the country, while assisted and supported by various other agencies like EXIM bank, insurance companies, ECGC, FEDAI, etc.  The control and support functions make the trade and markets grow in a manner, which best suits the country, as also is in line with the broad policy framework of the nation — monetary and fiscal, which include value of currency, balance of payment and trade, the needs and capabilities of the country.
  18. World’s Largest Intel. Banks 23 Citigroup Mizuho Bank/ Mizuho Corp Bank HSBC Holdings Bank of America JP Morgan Chase Deutsche Bank Royal Bank of Scotland Group Sumitomo Mitsui Banking Group HypoVereinsbank UFJ Bank Ltd. U.S. Japan U.K. U.S. U.S. Germany U.K. Japan Germany Japan
  19. References  management/international-banking  banking.htm  