chapter 14 pt. 2 the banking industry (international)
TRANSCRIPT
Chapter 14 pt. 2
The Banking Industry(International)
Objectives
To become familiar with trends and current situations in important non-Hong Kong banking markets.
To understand the role of banks in facilitating international trade and finance.
Largest International Banks: 2001
Mishkin and Eakins
Banking System Framework
In the post-war era, there were three basic systems of banking regulation.
1. Universal Banking (prevalent in Continental Europe: France, Germany, Switzerland).
2. Bank Holding Companies (prevalent in UK & Commonwealth countries).
3. Strict Commercial Banking (once prevalent in US & Japan)
Universal Banking
Universal banks do all sorts of financial activities in one company.
1. Banks are free to engage in banking, securities, real estate, insurance….
2. All businesses done under 1 legal entity. Banking business fully shares risks.
3. Banks Own Securities and may have representatives on board of major borrowers.
Advantages: Banks ownership of securities enables close monitoring/ One stop shopping allows banks to build strong relationships with borrowers.
Bank Holding Companies Bank holding companies have a corporate structure in
which a parent company owns many subsidiaries in different financial industries.
1. Subsidiaries engage in banking, securities, real estate and insurance business.
2. Subsidiaries are separate legal entities so the bankruptcy of one does not mean losses for the other.
3. Losses at one subsidiary do result in losses for shareholders of the holding company.
4. Banks mostly protected from risk of sister companies. Advantages: Protects depositors & bank capital from
market risk. One stop shopping can help build relationships.
Strict Commercial Banking
In this regime, banks are engage in only commercial banking (taking deposits and making loans).
1. Banks are completely independent companies.2. Banks may not be part of a corporation that also
runs investment banks, insurance etc. 3. In USA, banks could not own equities. In Japan,
banks did own equities.Advantages: Banks protected from stock market risk. In both Japan and USA, system has switched to
bank holding companies.
A Look at Banking Systems Around the World
In this section, we examine changes in large banking markets around the world.
1. USA2. Japan3. People’s Republic of China
U.S. Banking System: Past Prior to 1980, U.S. banking system was heavily
regulated along a number of dimensions. Banks were strictly commercial banks and
could not participate in investment banking, insurance, mutual funds, other financial industries.
Banks were restricted to operation in 1 state (California, New York, etc.). As a result, USA has many small banks.
Evolution of the US Banking System
US Banking system becoming closer to UK style commercial banking.
Banks have used holding companies to consolidate across state lines. Number of banks is shrinking through Mergers.
Banks are now able to set up brokerages and sell mutual funds.
In 1999, banks were allowed to be a part of holding companies that own insurance and investment banks.
Japanese Main Banking Japanese banking characterized by long term
relationship described as Main Banking. A company’s main bank will be the sole provider of
the bulk of its external finance. Virtually all companies had a main bank which
closely monitored borrowers for long periods. Many banks are at the center of industrial groups
called Keiretsu. Keiretsu bank is the main bank of the companies
in the group. Bank owns shares of the stock of Keiretsu
companies. Keiretsu companies own shares in the bank.
Japanese Banking System: Past
Japan banks were restricted to commercial banking, but could own equity securities.
Japanese central bank had an official policy of not allowing bank failures. Prior to 1990’s, not much need for a lender of last resort.
In 1990’s, Japanese banking system suffered large losses due to collapse of equity prices and, most importantly, default on many loans to property speculators. Many banks closed or nationalized.
The Big Bang and Beyond As in the US, liberalization of financial markets has
produced new competition for banks and a declining market share of external finance for banks.
Banks searching for new clients financed real estate speculation during 1980’s.
Over the course of the 1990’s, many loans went bad jeopardizing bank balance sheets.
In 1998, announced a further financial liberalization nicknamed the Big Bang. Part of this allowed for bank holding companies and direct sales of mutual funds and insurance by banks.
Rising problem of non-performing loans
NPL's as a share of Loans: Japan
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Mar
-98
Jul-9
8
Nov-98
Mar
-99
Jul-9
9
Nov-99
Mar
-00
Jul-0
0
Nov-00
Mar
-01
Jul-0
1
Nov-01
Mar
-02
Jul-0
2
Nov-02
Mar
-03
Jul-0
3
Nov-03
Mar
-04
Characteristics of Japanese Financial Intermediation
Consolidation of City Banks: Banking industry had been dominated by 8 nation-wide “city” banks. (Dai-Ichi, Fuji, and IBJ combine to for
Mizuho) (Bank of Tokyo-Mitsubishi combine) (Sumitomo-Mitsui combine) Sanwa and Toyo bank combine to form UFJ
Characteristics of Japanese Financial Intermediation Banking firms ignore consumer credit.
Stand-alone consumer credit firms are major players in financial intermediation.
JapanPost takes bank deposits. These deposits can often be superior to deposits at banks in terms of liquidity and interest rates and are perceived as safer.
Distribution of Assets: Japan
% of Assets
0
5
10
15
20
25
30
35
40
Local Ordinary Bank Small Business Credit Public Financial Corp. Consumer Credit
Source: McKinsey Global Institute
Chinese Banking System
Dominated by Four State Owned Deposit Money Taking Banks (Industrial and Commercial, Construction Bank, Agricultural Bank, Bank of China) (Deposit Money Bank)
Other types of banks:1. Joint-Stock Commercial Bank (CITIC Industrial
Bank, Bank of Communications, Everbright)2. City Commercial Bank (Bank of Shanghai, Bank of
Beijing, Bank of Tianjian)3. Credit Cooperatives (Collective Banks – Urban
and Rural)4. Policy Banks (Export Import Bank, China
Development Bank)
Distribution of Assets: PRCShare of Assets: China
0
10
20
30
40
50
60
70
SOE CommericalBank
State Policy Bank Joint StockCommercial Bank
Credit Cooperative City CommercialBank
Source: Mckinsey Global Institute
Characteristics of China’s financial market.
Bank lending (especially by big 4) has traditionally been channeled to State Owned Enterprises (SOE’s) for policy reasons rather than traditional profit.
SOE sector is declining. As a result, many of the loans made by
Chinese banks go bad. Some argue that credit analysis is
improving rapidly in China.
Banking System in 2002: (Source: Asian Wall Street Journal)
Big Four Banks Official NPL Ratio
Industrial & Commercial Bank of China
21.56%
Bank of China 18.07%
China Construction Bank 11.92%
Agricultural Bank of China 30.07%
Importance as a Store of Wealth
Chinese savers have limited options for storing their wealth. Bond markets are limited and mutual funds
rare. Stock markets not transparent and volatile. Capital account closed. No legal foreign
assets. As a result, huge share of savings
channeled to the banking sector.
Deposits are major channel for saving in PRC
Bank Deposits as Share of GDP
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
200.0%
China USA
Banks on the Eve of Reform
Problem Banks have limited competition for deposits of
Chinese savers. Many loans are made on a non-commercial basis. A
large share of loans are non-performing. Policy Response
Recapitalization. Asset Management Banks have purchased Yuan 1.4 Trillion worth of bad loans from banks.
Transparency. Banks are required to make information about NPL’s public.
Foreign Ownership & Competition WTO will allow greater access to Chinese market to foreign financial services companies presenting competition for deposits.
Chapter 16
Banking in the International Economy
Loans by International Banks to the Non-bank Sector by Nationality of Lender, 2004 Germany . . . . . . . . . . . . . . . . . . . . 20.3% Japan . . . . . . . . . . . . . . . . . . . . . 13.0% France . . . . . . . . . . . . . . . . . . . . . . 11.1% United Kingdom . . . . . . . . . . . . . . . . . .10.2% Switzerland . . . . . . . . . . . . . . . . . . 8.4% United States . . . . . . . . . . . . . . . . . 6.9% Netherlands . . . . . . . . . . . . . . . . . . 6.5% Belgium . . . . . . . . . . . . . . . . . . . . 5.2%
BIS International Banking Statistics
Multinational Banks.
Foreign Share of Bank Assets
0
2
4
6
8
10
12
USA Japan Korea China Taiwan
Credit Risk and Exchange Risk in International Trade International Trade will require some
credit risk. Importers promise to pay for goods shipped, but exporters may have little information about the credit-worthiness of importers.
Importers often will pay for goods in their home country currencies. Exporters face costs of producing goods in their home country currencies..
Facilitating International Trade
Trade Instruments Bankers Acceptances: Time drafts that
establish credit between parties who do not know each other, facilitating international trade. Banks promise to pay exporters at a specific
time. Banks collect some fee for making this payment
(about .5% of transaction) from importer. Banks can hold or sell bankers acceptance
which will require exporter to repay value of the time draft.
Exchange Rate Risk Exchange Rate Forwards: Promise to sell
foreign currency at a pre-arranged currency
Exporters facing currency risk might seek a forward transaction from bank. They will promise to pay the foreign proceeds from their international trade transaction and bank will promise a certain fixed amount of domestic currency.
International Banking: LendingPrior to 1960’s:
international lending was small and mostly sovereign borrowing
The UK and Switzerland were the main centers of international banking.
During 1970’s: Oil exporting countries achieved large dollar
surplus due to high oil prices. U.S. banks recycled loans to developing countries.
During the 1980’s and 1990’s: Japanese trade surplus encouraged the entry of
Japanese banks into international markets. Over the next 20 years, international lending has
risen 10 fold.
Syndicated Euroloans A Euroloan is a loan not made in the
currency of the borrower. International bank loans to developing economies
are Euroloans. The typical Euroloan is a floating-rate
obligation of relatively long maturity with LIBOR as the benchmark rate.
Euroloans are usually handled by loan syndication, with each participating bank holding a fraction of a loan.
Why Syndicate? Loan syndication is a way to share risks
and take advantage of scale economies on information costs.
Lead managers: Some large, international banks specialize in evaluating and monitoring international borrowers. Lead managers find borrowers and share
loans with participating banks. Smaller banks might be willing to absorb
risks of international lending but not have advantage in evaluating loans.
Syndicated Loans to Emerging Markets
Borrowing from international banks can be an important source of funding for emerging markets
International lending markets can also be unstable with sudden changes in bank lending.
International financial markets can be an important source of macroeconomic instability in emerging markets
Example: East Asian Crisis of 1997-1998.
International Bank Lending to
0
20000
40000
60000
80000
100000
120000
Q2 1
990
Q4 1
991
Q2 1
993
Q4 1
994
Q2 1
996
Q4 1
997
Q2 1
999
Q2 2
000
Q1 2
001
Q4 2
001
Q3 2
002
Q2 2
003
Q1 2
004
Indonesia
Malaysia
South Korea
Thailand
East Asian Crisis
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Indonesia
Malaysia
Korea
Thailand
International Lending: Deposits
A Eurocurrency deposit is a time deposit or negotiable CD denominated in a currency other than the currency of the location of the bank.
Eurocurrency markets were pioneered by British banks that were trying to avoid rules on the use of pounds in international loans. London still the main Euromarket center.
Eurocurrency deposits catered to US depositors trying to escape Regulation Q. First Eurocurrency is the Eurodollar.