International Banking and the

International Money Markets

International Banks
Can be distinguished from domestic banks
by the:
Services they offer
The deposits they attract
The loans they make

International Banks: Services

Financing cross border trade (exports)
Letters of credit; bankers acceptances

Offering foreign exchange services

Buying and selling foreign exchange for clients
Offering hedging contracts

Offering interest rate and currency swap

financing.
Consulting services to global firms
Hedging strategies; international cash management.

Underwriting eurobonds, foreign bonds, equity

issues for global firms.

International Banking: Deposits

May or may not be involved in accepting
domestic deposits.
China will currently not allow foreign banks to
engage in this activity.

Participate in eurocurrency deposit

market.
Accepting offshore deposits

International Banking: Loans

Lenders of eurocurrency deposits
Participation in syndicated loans to large
multinational firms and sovereign entities.
Allows for the pooling of resources and the
sharing of risk!

Why do Banks Establish

International Operations?
Low Marginal Costs in doing so
Apply home knowledge to foreign market

Knowledge Advantage
Overseas operations can utilize the parents
knowledge to compete in foreign market

Home Information Source

Providing local (foreign) firms with information about
parents home market

Prestige
Global banks can attract clients abroad

Why do Banks Establish

International Operations?
Regulation Advantage
Global banks may not face the same
regulations as domestic banks (e.g., reserve
requirements on eurocurrency deposits).

Wholesale and Retail Defensive Strategy

Following corporate clients overseas
Providing retail customer overseas services

Circumventing Government Restrictions

Wanting to do business in RMB

Why do Banks Establish

International Operations?
Growth
Home market may be saturated

Risk Reduction
Greater stability of consolidated earnings.

Services Offered by International

Banks
The services offered by global banks are a
function of:
The regulatory environment.
What will governments allow?
Developing countries still somewhat restrictive
regarding foreign banks.

The type of banking office established.

Types of International Banking

Offices
Correspondent Bank
No physical presence overseas
Correspondent relationships with banks in
foreign markets
Allows bank to service core clients with little
cost.
Reciprocal deposit accounts
Facilities foreign exchange conversion
Facilities trade financing (clearing bankers
acceptances)

Types of International Banking

Offices
Representative Office
Small service facility staffed by parent bank
personnel
Cannot make loans or accept deposits
Useful strategy if bank has many important
clients in foreign country
There to assist core clients with
Country and economic information
Credit evaluations on local firms

Types of International Banking

Offices
Foreign Branch Office

Most popular form of U.S. bank expansion abroad.

Legally part of the parent bank
Subject to regulations at home and in foreign market.
Branch lending limits are based on parent capital (not
branch office)
Can provide larger loans

Allows for fast clearing of checks within the bank

Types of International Banking

Offices
Subsidiary Bank
Locally incorporated (in foreign country) bank.
Either wholly owned by parent, or joint venture
Non-controlling subsidiary is referred to as an
affiliate bank.

Operate under the banking laws of the

country in which they are incorporated.
Desirable before the abolition of Glass
Steagell Act!

Types of International Banking

Offices
Offshore Banking Centers
Organized branches or subsidiaries in recognized
offshore countries.
A country whose banking system allows for external
banking activity.
Accepting deposits and making loans in currencies other
than the home currency of the offshore country.

IMF recognizes the following as offshore countries:

Bahamas, Bahrain, the Cayman Islands, Hong Kong, the
Netherlands Antilles, Panama, and Singapore.

Minimal host country regulations, low taxes, favorable

time zone, banking secrecy laws all promoting
external banking transactions!