international banking

INTERNATIONAL BANKING

International Banking

International banks can be characterised by the type of services they provide that distinguish them from domestic banks


Major Functions:1. Facilitate imports and exports of their

clients – trade financing2. Arrange for foreign exchange – cross-

border transactions and foreign investments

3. Assist in hedging exchange rate risk4. Trade foreign exchange products for their

own account


Major Functions:5. Borrow and lend in the Eurocurrency

market6. Participate in international loan

syndicate – lending to MNCs- project financing and to sovereign governments – economic development

7. Participate in underwriting of Eurobonds and foreign bonds issues


Major Functions:8. Provide consultancy and advice on

hedging strategies, interest rate and currency swap financing and international cash management services

Banks providing all the above are commonly known as universal banks or full service

banks

1 Royal Bank of Scotland UK2 Deutsche Bank Germany3 Barclays Bank UK4 BNP Paribas France5 HSBC Holdings UK6 Credit Agricole Group France7 JP Morgan Chase & Co US8 Mitsubishi UFJ Financial Group Japan9 Citigroup US10 UBS Switzerland

Top 10 Global Banks in 2009

Types of International Banking Offices

1. Correspondent Bank :

Two banks maintain a correspondent bank account with one another

Helps MNCs clients to conduct business worldwide through his local bank or its contacts


2. Representative Offices:

A small service facility staffed by parent bank personnel to assist MNC clients –

They assist MNC clients with

information about local business practices, economic information, credit evaluation of customers etc.


3. Foreign Branches:

Operates like a local bank but legally is a part of the parent bank

Subject to both the banking regulations of its home country and the country in which it operates


4. Subsidiary and Affiliated Banks: A subsidiary is a locally incorporated bank

that is either wholly owned or owned in major part by a foreign parent

An affiliate bank is one that is only partially owned but not controlled by its parent

Both operate under the banking laws of the country in which they are incorporated

Types of International Banking Offices5. Offshore Banking Centers:

An offshore banking centre is a country whose banking system is organised to permit external accounts beyond the normal economic activity of the country

IMF recognises the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama and Singapore as major offshore banking centers


5. Offshore Banking Centers:

Offshore banks operate as branches or subsidiaries of the parent bank

The primary activity of offshore banks are to seek deposits and grant loans in currencies other than the currency of the host government


The offshore banks function with lower spreads:

They are unregulated institutions ( low reserve requirements and no deposit insurance)

They are not subject to interest rate ceilings



They can take advantage of low tax location

High degree of competitiveness- low margins, low overheads

No pressure from domestic government


Euro-Money

As per definition of money, the components of domestic money are : Currency and demand deposits ( narrow definition)

In the same way, Euro-money comprises of Euro-deposits and Euro-currency money mobilised by banks and financial institutions in a currency other than of a country in which they are located

Euro-Money

The market which consists of such banks and financial institutions is called Euro-money market or Euro-currency market

Such institutions have grown worldwide, such as London, New York, Luxembourg, Hong Kong, Singapore etc.

They are also called as offshore markets

How is Euro-money Created?...

A national currency becomes part of offshore currency market when it is transferred to a bank outside its own monetary system

Which also means the deposit is made in that segment of banking structure which is not regulated by the central bank of the country which has issued the currency


International banking relates to financial intermediaries that bid for time deposits and make loans in the offshore market

It is an unregulated market involving greater risk

It is a wholesale segment of lending and deposit activity


International banking brings together borrowers and lenders from same country or different countries

They are substitutes for the domestic banking system

Growth of Euro-money Market

The rapid growth of these markets is due to:

Depositors receive better interest rate on deposits

Borrowers can borrow more, possibly at lower interest rate than they can at home

Euro-Deposits The deposits denominated in currencies made outside the domestic banking system’s operation are called Euro-deposits They are more risky They are conventional short term non- negotiable-deposits ( 30 days or 90 days) A large part is of CDs ( certificate of deposits) – negotiable – traded in secondary market

Thank you

international banking

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