International BankingInternational Banking

GlobalizationGlobalization Since 1970, there has Since 1970, there has

been tremendous been tremendous growth in international growth in international tradetrade

0

1

2

3

4

5

6

1979 1986 1989 1992 1995 1998

GlobalizationGlobalization Even more Even more

impressive is the impressive is the growth in foreign growth in foreign exchangeexchange

050

100150200250300350400

1979 1989 1995

International BankingInternational Banking Citigroup has over 50% of its assets ($600B) Citigroup has over 50% of its assets ($600B)

located outside the US. Citigroup provides located outside the US. Citigroup provides banking and investment services in over 100 banking and investment services in over 100 countries around the world!countries around the world!

International BankingInternational Banking Citigroup has over 50% of its assets ($600B) Citigroup has over 50% of its assets ($600B)

located outside the US. Citigroup provides located outside the US. Citigroup provides banking and investment services in over 100 banking and investment services in over 100 countries around the world!countries around the world! General Motors has an established relationship to buy General Motors has an established relationship to buy

auto parts from a Mexican supplier. GM may find it auto parts from a Mexican supplier. GM may find it convenient to have an account with Citibank in convenient to have an account with Citibank in Mexico (Banamex)Mexico (Banamex)

International BankingInternational Banking Citigroup has over 50% of its assets ($600B) Citigroup has over 50% of its assets ($600B)

located outside the US. Citigroup provides located outside the US. Citigroup provides banking and investment services in over 100 banking and investment services in over 100 countries around the world!countries around the world! Honda has a manufacturing plant outside of Honda has a manufacturing plant outside of

Columbus, Ohio. It might be convenient for Honda to Columbus, Ohio. It might be convenient for Honda to open an account with Deutschebank in the US to open an account with Deutschebank in the US to finance its US operations.finance its US operations.

International BankingInternational Banking Citigroup has over 50% of its assets ($600B) Citigroup has over 50% of its assets ($600B)

located outside the US. Citigroup provides located outside the US. Citigroup provides banking and investment services in over 100 banking and investment services in over 100 countries around the world!countries around the world! Fidelity operates a global bond fund. It may be Fidelity operates a global bond fund. It may be

convenient for the to have several accounts around convenient for the to have several accounts around the world to manage the flow of interest payments. the world to manage the flow of interest payments.

International BankingInternational BankingFacilitation of international transactionsFacilitation of international transactionsManaging exchange riskManaging exchange riskAvoiding Regulation (Eurodollars)Avoiding Regulation (Eurodollars)Avoiding Taxes (Offshore Banking)Avoiding Taxes (Offshore Banking)

Types of BanksTypes of BanksUS Banks AbroadUS Banks Abroad

BranchesBranches Edge Act Edge Act

CorporationsCorporations Foreign SubsidiaryForeign Subsidiary International Banking International Banking

FacilityFacility

Foreign Banks in the USForeign Banks in the US BranchesBranches Agency OfficesAgency Offices US Subsidiary US Subsidiary

EurodollarsEurodollars Since WWII, the dollar has become the premier Since WWII, the dollar has become the premier

international currency. Therefore, many foreign international currency. Therefore, many foreign companies and governments hold dollars rather than companies and governments hold dollars rather than their own currency.their own currency.

Further, to avoid interest rate restrictions, US banks Further, to avoid interest rate restrictions, US banks began offering dollar denominated accounts at their began offering dollar denominated accounts at their foreign branches. These accounts became known as foreign branches. These accounts became known as Eurodollar accounts.Eurodollar accounts.

Euromarkets have expanded into Eurobonds, Euroloans, Euromarkets have expanded into Eurobonds, Euroloans, Euro Commercial paper. There is currently over $30 Euro Commercial paper. There is currently over $30 Trillion in Eurodeposits around the world.Trillion in Eurodeposits around the world.

Exchange Rate RiskExchange Rate Risk In addition to information, liquidity, and In addition to information, liquidity, and

interest rate risk, international banks must interest rate risk, international banks must also deal with exchange rate risk.also deal with exchange rate risk.

An ExampleAn Example

AssetsAssetsCash Reserves: Cash Reserves: $2M$2M

E2ME2MSecurities (3%): Securities (3%): $15M$15MLoans Loans

Consumer:Consumer:Commercial (7%): Commercial (7%): $5M$5M

E20E20Real Estate (8%): Real Estate (8%): E3ME3M

Other:Other:

LiabilitiesLiabilitiesTransaction DepositsTransaction Deposits

Checking (0%): Checking (0%): E10ME10MSavings (2%): Savings (2%): E10ME10M

Eurodollar Accounts: Eurodollar Accounts: $10M$10MLoans:Loans:Equity: Equity: $8.25M$8.25M

An ExampleAn ExampleDollar Assets: $22MDollar Assets: $22MEuro Assets: E25M * $1.25/E = $31.25MEuro Assets: E25M * $1.25/E = $31.25MTotal: $53.25MTotal: $53.25M

Dollar Liabilities: $20MDollar Liabilities: $20MEuro Liabilities: E20M * $1.25/E = $25MEuro Liabilities: E20M * $1.25/E = $25MTotal: $45MTotal: $45M

Equity = $53.25M - $45M = $8.25MEquity = $53.25M - $45M = $8.25M

Exchange Rate RiskExchange Rate Risk In addition to information, liquidity, and In addition to information, liquidity, and

interest rate risk, international banks must interest rate risk, international banks must also deal with exchange rate risk.also deal with exchange rate risk.

Suppose that the dollar depreciates to Suppose that the dollar depreciates to $1.30$1.30

An ExampleAn ExampleDollar Assets: $22MDollar Assets: $22MEuro Assets: E25M * $1.30/E = $32.5MEuro Assets: E25M * $1.30/E = $32.5MTotal: $54.5MTotal: $54.5M

Dollar Liabilities: $20MDollar Liabilities: $20MEuro Liabilities: E20M * $1.30/E = $26MEuro Liabilities: E20M * $1.30/E = $26MTotal: $46MTotal: $46M

Equity = $54.5M - $46M = $8.5MEquity = $54.5M - $46M = $8.5M

Regulating International Regulating International BankingBanking

In the US, monitoring/regulating of US In the US, monitoring/regulating of US banks is done by either the Fed, OCC or banks is done by either the Fed, OCC or FDIC. FDIC.

British Banks in England are regulated by British Banks in England are regulated by the Bank of England.the Bank of England.

Who regulates British banks in the US or Who regulates British banks in the US or US Banks in Britain?US Banks in Britain?

Regulating International Regulating International BankingBanking

After 1978 (International Banking Act), After 1978 (International Banking Act), foreign banks were subject to basically the foreign banks were subject to basically the same laws as US Banks, but were not same laws as US Banks, but were not subject to as much oversight.subject to as much oversight.

Prompted by the BCCI scandal in 1991, Prompted by the BCCI scandal in 1991, the US passed the Foreign Bank the US passed the Foreign Bank Supervision Act giving the Fed and OCC Supervision Act giving the Fed and OCC greater control over foreign banks.greater control over foreign banks.

Bank For International Bank For International SettlementsSettlements

Established in 1930 to handle German Established in 1930 to handle German WWI reparations, the BIS has become a WWI reparations, the BIS has become a center for international cooperation.center for international cooperation.Played a central role in the Bretton Woods Played a central role in the Bretton Woods

Exchange Rate SystemExchange Rate System Integral in the Establishment of the EuroIntegral in the Establishment of the Euro

The BIS is like a central bank for central The BIS is like a central bank for central banks.banks.

Basle AccordsBasle Accords In 1988, the G-10 countries established In 1988, the G-10 countries established

uniform worldwide standards for:uniform worldwide standards for:Capital RequirementsCapital RequirementsOff Balance Sheet AssessmentsOff Balance Sheet AssessmentsRisk WeightingRisk Weighting Interest rate sensitivityInterest rate sensitivity

Problems with International Problems with International RegulationRegulation

The key issue is that the banking industry The key issue is that the banking industry in Japan and Europe is Fundamentally in Japan and Europe is Fundamentally different.different.

Top Ten World BanksTop Ten World Banks

BankBank Assets Assets (Billions)(Billions)

Citigroup (US)Citigroup (US) 1,4971,497

JP Morgan + Bank One (US)JP Morgan + Bank One (US) 1,0971,097

Mizuho Financial Group (Japan)Mizuho Financial Group (Japan) 1,0801,080

Bank of America + First Union (US)Bank of America + First Union (US) 851851

UBS (Switzerland)UBS (Switzerland) 851851

Sumitomo Mitsui (Japan)Sumitomo Mitsui (Japan) 844844

DeutscheBank (Germany)DeutscheBank (Germany) 795795

Mitsubishi Tokyo (Japan)Mitsubishi Tokyo (Japan) 781781

HSBC (UK)HSBC (UK) 759759

BNP Paribas (France)BNP Paribas (France) 744744

European BankingEuropean BankingUnlike the US, European Banks are Unlike the US, European Banks are

allowed to engage in securities markets allowed to engage in securities markets (universal banking)(universal banking)

In fact, in Europe, banks are generally In fact, in Europe, banks are generally significant shareholders in European significant shareholders in European companies. companies.

Banks rely much more on equity than Banks rely much more on equity than deposits.deposits.

Japanese BankingJapanese Banking Japanese industry is organized into industrial Japanese industry is organized into industrial

groups (keiretsu)groups (keiretsu) MitsubishiMitsubishi MitsuiMitsui SumitomoSumitomo FuyoFuyo DaiichiiDaiichii KangyoKangyo SanwaSanwa

Japanese BankingJapanese BankingThese “groups” are both vertically and These “groups” are both vertically and

horizontally integrated and are comprised horizontally integrated and are comprised of a very large number of companies:of a very large number of companies:Sumitomo has 15 divisions ranging from Sumitomo has 15 divisions ranging from

electronics to mining to consumer goods.electronics to mining to consumer goods.Sumitomo controls assets equal to $50T.Sumitomo controls assets equal to $50T.

Japanese BankingJapanese BankingEach “group” has its own bank which Each “group” has its own bank which

handles its finances. This “main” bankhandles its finances. This “main” bankOwns equity in member firmsOwns equity in member firmsMonitors member firmsMonitors member firmsProvides credit for member firms.Provides credit for member firms.