1 international banking. i.the structure of the international capital market –the most important...

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INTERNATIONAL BANKING

INTERNATIONAL BANKING

I. The Structure of the International Capital Market– The most important players are:

• Commercial banks• Corporations• Nonbank financial institutions• Central banks and other government agencies

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INTERNATIONAL BANKING

II. Offshore Banking• The business that banks’ foreign offices conduct

outside of their home countries• Banks operate offshore through any of three types

of institution:– Agency office– Subsidiary bank– Foreign branch

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EUROBANKING

– Eurodollars• Dollar deposits located outside the U.S.

– Eurobanks• Banks that accept deposits denominated in

Eurocurrencies

– Eurocurrency trading has grown for three reasons:

• Growth in world trade

• Evasion of financial regulations like reserve requirements

• Political concerns4

EUROBANKING

• The Growth of Eurocurrency Trading– London is the leading center of Eurocurrency

trading.

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EUROBANKING

– The early growth in the Eurodollar market was due to:

• Growing volume of international trade• Cold War• Federal Reserve regulations on U.S. banks (e.g.,

the Fed’s Regulation Q)• Move to floating exchange rates in 1973• Reluctance of Arab OPEC members

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INTERNATIONAL BANKING SERVICES

A. Working Capital - LCs

B. Letters of Credit

C. Local Currency Financing

D. Financial Services

E. Creation of U.S. International Banking

IBF Facilities

IBFs

– International banking facilities (IBFs)• Banks that accept time deposits and make loans to

foreign customers.• They are not subject to reserve requirements or

interest rate ceilings.• They are exempt from state and local taxes.

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INTERNATIONAL BANKING

II. BANKING STRUCTURE

A. Expansion Overseas

1. Original Motivation

2. Foreign Branches

a. Advantagesb. Disadvantages

3. Associations4. Representative Offices

INTERNATIONAL BANKING

B. Edge Act and Agreement Corporations

1. 1919 Amendment

2. Use of Edge Act Banks

C. Multinational Services

D. Multinational Banking Groups

INTERNATIONAL BANKING

III. FINANCING VEHICLESto meet demand for short- and

medium-term financing.

A. Financing Innovations

B. Parent Guarantees

C. Syndication

D. Cash Management: Centralization

COMMERCIAL BANKS

I. BASIC BANKING FUNCTIONS ABROAD

A. Functions

II. LENDING

A. Organization

B. Analyzing and Making Loans

COMMMERCIAL BANKS

C. Types of Credit

1. Unsecured Line

2. Lines for Opening L/C’s

3. Refinancing sight payments

4. Financing foreign receivables

5. Purchasing foreign currency drafts

COMMERCIAL BANKING

III. INTERNATIONAL OPERATIONS

A. International Payments

1. Nostro Accounts

2. Vostro Accounts

3. Dollar payments

4. Foreign exchange futures contract

5. Term Loan

COMMERCIAL BANKS

6. Revolving credit

7. Importer/exporter information

8. Introductions

IV. BRANCH BANKING

A. Major U.S. Restrictions1. McFadden Act, 19272. Glass-Steagall Act, 19333. Bank Holding Act, 1956

COMMERCIAL BANKING

V. CORRESPONDENT BANKING

A. The Importance of InternationalBusiness to Small Banks

1. Definition2. Letters of Credit3. Disadvantages

COMMERCIAL BANKING

1. Small banks

Slide 21-18 Copyright © 2003 Pearson Education, Inc.

• Difficulties in Regulating International Banking– Deposit insurance is essentially absent in

international banking.– The absence of reserve requirements reduces

the stability of the banking system.

Regulating International Banking

Difficulties in Regulating International Banking

– Bank examination to enforce capital requirements and asset restrictions becomes more difficult in an international setting.

– There is uncertainty over which central bank is responsible for providing LLR assistance in international banking.

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Slide 21-20 Copyright © 2003 Pearson Education, Inc.

• International Regulatory Cooperation– Offshore banking is largely unprotected by the

safeguards national governments have imposed to prevent domestic bank failures.

Regulating International Banking

BASEL

– Basel Committee• It is a group of central bank heads from 11

industrialized countries.• It enhances regulatory cooperation in the

international area.• Its 1975 Concordat allocated national responsibility

for monitoring banking institutions and provided for information exchange.

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