Lecture - 2

Discussion Points:
Uniqueness of a bank
Risk dimensions of a banking business
Role of Central Banks in International Banking
International Funds Transfer,
SWIFT Considerations,
Role of NOSTRO and VOSTRO in International Funds
Transfer
Uniqueness of a Bank
Interactions between banks and nonbank financial intermediaries affect economic development,
stability, and efficiency
wealth creation and money generation
banks have had a comparative advantage in certain functions-such as providing liquidity
payment services and supplying credit
information-which competition, technological change, and institutional development have
increasingly eroded
banking asset allocation,
the deposit market affect the economy's tradeoff between risk and efficiency and the cost of
generating resources to finance production.
global communications, trust - banks and other financial intermediaries in a better position to
bridge gaps in trust when it comes to creating money and intermediating funds
Monetary theory is less abstract than most economic theory; it cannot avoid a relation to reality,
which in other economic theory is sometimes missing. It belongs to monetary history, in a way that
economic theory does not always belong to economic history. This is for two reasons. First, the best
work in monetary theory is often topical, aimed at understanding a monetary problem of the times.
Second, monetary institutions are continually evolving, and with them the appropriate theoretical
apparatus John Hicks


Role of Central Bank in International Banking
Treasurer Ex-Checker of the country, custodizing money /funds
Interest rates
Statutory Liquidity Ratio - SLR
Capital Adequacy & Margin requirements
Regulating banking activities
Monitoring On/Offshore banking activities
Auditing
Controlling Foreign Exchange Reserves
Bank of the banks
Controlling Money supply & stability of indigenous currency using
Open Market Operations
Fixed Rate Floating Rate
Protecting National interest and ensuring that banks maintains
Nostro/Vostro Balances in adequate ratio
Barricading unhealthy flight of capital and Market Exploitation
International Settlements retail, whole sale payments collateral
management


International Funds Transfer &
SWIFT
Why international funds transfer is needed:

1. Post office bank services
2. Retail payments, business payments, guarantees, collaterals
3. Sovereign payments, loans, FDIs

Different Methods of Funds Transfer:
Foreign Currency demand draft, Cheques/Bill of Exchange, D/P Notes,
Telegraphic/Mail transfers
Traveler Cheques
Debit/Credit Cards
Secondary/parallel Market system - Moneygram, Western Union, Money
changers & Exchange companies, Hawala
Modern Days efficient interbank clearing systems - SWIFT, ABA A/c BIC etc

S. W. I. F. T
SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATION has its headquarters
in Belgium and offices in the world's major financial centers and developing markets:

SWIFT is a member-owned cooperative through which the financial world conducts its business
operations
Having member of more than 10,500 financial institutions and corporations in 215 countries
exchanging millions of standardised financial messages. This activity involves the secure exchange of
proprietary data while ensuring its confidentiality and integrity.
They have two-fold role:
Providing proprietary communications platform, products and services that allow members to
connect and exchange financial information securely and reliably.
Brings the financial community together to work collaboratively to shape market practice,
define standards and consider solutions to issues of mutual interest.
SWIFT enables its customers to automate and standardise financial transactions, thereby lowering
costs, reducing operational risk and eliminating inefficiencies from their operations.
SWIFT customers can also create new business opportunities and revenue streams.
SWIFT does not hold funds nor does it manage accounts on behalf of customers, nor does it store
financial information on an on-going basis.
SWIFT in an interbank communication systems through which financial & nonfinancial messages are
communicated under various codes
SWIFT messages are identified by an MT or MX prefix and a three-digit number. The prefix identifies
the specific implementation of the message either, text (MT) or XML (MX). The first digit defines the
message category, indicating the general use of the message, the second digit defines the message
group and the third digit defines particular message function.



NOSTRO/ VOSTRO
Nostro: A bank account held in a foreign country by a
domestic bank, denominated in the currency of that
country. The term is derived from the Latin word for
"ours."
Vostro: A bank account held by the domestic bank in its
home country for foreign banks are called vostro
accounts, derived from the Latin word for "yours."


QUIZ 1