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Definition An international bank is a financial entity that offers international companies and individual clients financial services, such as payment accounts and lending opportunities. Although the term ‘foreign clients’ encompasses both international businesses and individuals, every international bank will operate under its own policies that outline how they conduct their particular business. According to OCRA Worldwide—an international organization that connects individual customers and companies to various international banking systems—an international bank will tend to offer their varied services to companies wealthy individuals typically individual clients with $100,000 or above accounts. That being said, some international banks, specifically banks in Switzerland, will offer their services to customers of any income bracket.
Introduction to International Banking
Banks are the key players in the financial system of a country. They perform the function of financial intermediation in an effective manner. Banks in many nations have internationalized their operations since1970. The quantum of operations has increased in such a manner that the concept evolved into a subject in itself. International banking and multinational banking can be used interchangeably. Multinational banking signifies the presence of banking facilities in more than one country. According to Aiber,”International banking" is defined as a sub-set of commercial banking transactions and activity having across-border and/or cross- currency element. International banking comprises a range of transactions that can be distinguished from purely domestic operations by: I. The currency of denomination of the transaction, II. The residence of the bank customer, and III. The location of the banking office. A deposit or a loan transacted in local currency between a bank in its home country and a resident of that same country is termed as pure domestic banking. Thus, the term international banking is used to refer to the cross—currency facets of banking business. Euro-currency market is an example of a typical international banking community. The euro-currency market conventionally encompasses all deposit and loan operations of a bank transacted in a currency other than that of the nation where the office is located. Euro-currency banking involves intermediation in foreign currencies and the relative freedom from local reserve requirements and monetary regulation.
explanations suggests that banks expand across national borders to continue to serve customers by establishing branches or subsidiaries abroad. 3 • • • • • • . Effectively it was the commercial banks which mobilized savings and channelized them to these institutions for development use. Progress in the telecommunications sector across the world supplemented the growth of international banking. maintaining a particular organizational structure. Trade financing started as short term lending. International banking theories explain the reasons behind the banks choice of a particular location for their banking facilities. Certain theories are as such:• Follow the leader. Expansion abroad has a pervasive effect on competition. Market imperfections due to domestic rules. The multi-lateral system of payments came into existence after the creation of the IMF and the World Bank.The origin of international banking dates back to the 2nd century BC when Babylonian temples safeguarded the idle funds and extended loans to merchants to finance the movements of goods. There was perfect international banking system existing till the time of First World War. Banks can take ownership-specific and location-specific advantages while operating abroad. Reasons for the Growth of International Banking There are number of explanations or theories provided to support the growth in international banking operations. Resources were new raised through financial markets for financing the development projects in member countries. International banking speeded up after the first oil crisis in 1973. Of the two investments banking accounted further great bulk of the international lending and financial companies acted as agents or underwriters for the placement of funds. By 1920. Banks use management technology and marketing knowhow developed countries for domestic uses at very marginal cost abroad. and the underlying causes of international banking. regulations and taxations along with the drastic reduction in the cost of communications prompt the banks to set up operations abroad. and the European nations were the major borrowers. The Bretton system had installed a secured financial framework and revolutionized the economic life by creating a global shopping center. American banking institutions dominated international lending. The loans extended by the Florentine banking houses were the first instance of international lending. leading to trade financing and investment banking. Inter-country differences in the cost of capital attract banks to set up their operations in different countries. During the nineteenth century many innovations were witnessed in the international lending.
• CORRESPONDENT BANKING – This represents an informal linkage between banks and its customers in different countries. exchange rates were determined by market demand. The linkage is setup when banks maintain correspondent accounts with each other and facilitates international payments and collections for customers. and. The shell branch. • • Recent Trends • In the past two decades. people around the world have come across complex developments in the financial sector which have evolved gradually.• With the introduction of the flexible exchange rate system. BANK AGENCIES – The agencies mostly deal in the local currency markets and in the foreign exchange markets. Since all transactions went through the banking system involved with International Banking were ideally placed to establish the demand supply equilibrium. Apart from the above. two kinds of overseas bank operations characterized international bank expansion in the late 1960s and 1970s. it has acquired certain new characteristics and dimensions. Banks have started diversifying their sources of funds along with the assets. 4 . arranges loans and clears cheques. was created.supply forces. FOREIGN BRANCHES – These are operating banks and are subject to local banking rules and the rules at home. • • A multinational consortium bank. which is not really a bank but a device to get around the domestic government regulation. The maturities have risen considerably and now the average maturities are about ten years. Characteristics and Dimensions Though international banking concept is quite old. Features of International Banking International banks are organized in various formal and informal ways from simply holding account with each other to holding common ownership. was created by several established by parent banks. These branches most of the time offer quality services and safety that are provided by a large bank to the customers in small countries. The role of establishing exchange rate was therefore transferred from central banks to commercial banks.
structured and barter trade. companies should also expect the financial institution to be able to provide products through a web-enabled delivery portal. In the past. The expansion of the internet and the advent of e-banking are also helping to increase the number of banks that companies can work with for their international banking requirements. Foremost among the global trends in the world’s financial industry are consolidation and convergence. Government-backed insurance and guarantee programs: These are available from government bodies such as Exim bank or private insurers and can help your company 5 . Many of the best trade banks are already doing this. commodity companies. In addition to providing the services above. there are several products and services available from major international banks that can help you to get ahead of the competition. your international bank should also be able to offer information on the following value-added trade products and services such as: • • • Prepayment and structured pre-export facilities: these services finance pre-export fabrication and provide export financing for a country’s key exports. most companies didn't need to know about letters of credit. collections. Multinational companies. export letter of credit. Your banker can and should be a key member of your advisory team.• The increasing domination of securities of markets by financial institutions managed by professional bankers has led to the institutionalization of markets. stand-by letters of credit. EXIM Financing In order to be a success in your export activities. These two encompass financially driven mergers within domestic market. capital equipment and consumer product producers are the primary users of trade financing products. • Services offered by international bank 1. you need to know how to finance your import or export and how to get paid. especially when dealing in foreign currencies. Services offered under EXIM financingDepending upon the industry in which your company operates. Export receivables financing. which include import letter of credit. Globalization has affected the financial markets in the world almost entirely. Financing and speed are integral to any sale and now is the time to look for banks on the leading edge. trade-related loans. The most common of these is the letter of credit. Finding a bank that is comfortable and proficient in providing the various products and services required by exporting and importing firms is becoming easier as international sales become more and more common. Knowledge is power and you should learn about each of these instruments and evaluate if they are applicable to your particular transaction. Simply put a letter of credit is a banking mechanism that permits importers to offer secure terms of sale to exporters. With the expansion of international trade. this has changed and even small companies increasingly are coming to utilize letters of credit and other even more advanced international financing services. Additionally.
the system can be kept secure by a series of passwords. in some countries that export value-added products (Asia has many). In the case of fast changing market requirements such as fashion or toys. Safety of informationThe information in the system is not public and if fact most people wouldn't have access to it. Recently Imperial Bank launched its online SWIFT trade service at www. • • • • 2 Online Letters of Credit For a company dealing globally. as well. Global trade management: This allows you to out-source the trade documentation preparation to others who are more familiar with it and who work with these forms daily. foreign exchange. these are risk spreading options. These can be made part of the transaction if desired. Forfeiting: This is a provision of medium-term trade finance where trade contracts are sold into the secondary market. Option-linked financings for commodities: Again. customs brokers or other specialists. The company receiving the letter of credit can also allow others to view the document such as freight forwarders. Tracking the status of letters of credit. the exporter then doesn’t have to wait to be advised by his bank in his home city and can begin production immediately. Imperial Bank’s customers can obtain a letter of credit immediately and have it seen immediately by those who need to know about it. this speed can be critical. the importer can let the person selling to him see the letter of credit online by supplying a password. Sending electronic copies of letters of credit to the beneficiaries via e-mail. however. so preparation and paperwork can begin in those areas.com/home. and other institutions support international sales by providing guarantees as credit support or enhancement• Linked exports and import financing: In some countries the export contract can act as security for essential imports.spread the risk. Monitor account activity. ADB. Examples are trade finance solutions that have interest rate. Allowing shippers and other partners of the company acquiring the letter of credit to have access to specific portions of the information to speed their work. even for accounts held with foreign banks. For example. has been in financing international deals.imperialbank. and commodity-hedging options. Programs offered by regional development banks and institutions: the IFC. the internet is a critical tool for speed and efficiency of communications. durable and other goods are essentially bartered. For example. This is changing. SWIFT trade is still being enhanced but can already provide the following online services: • • • • • Letter of credit issuance. In the case of imports. 6 . One area where it is still in its infancy. With this service. An international bank can credit-enhance the deal by using the export contract as security thus allowing country imports to continue. if imports (generally but not always raw materials) do not flow into the country then value-added exports stop.asp the site was in beta testing for two years prior to this so this is a very mature service at this point. Counter-trade transactions: commodities. World Bank.
In this way the emergence and growth of 7 .• International Trade Banks International Banking Operations International banking operations are essentially to facilitate the movement of goods across the political boundary of countries. The transaction of commodities across countries required financial intermediation in the international level and thus international banking business was born. the present-day international trade developed. As civilization narrowed down the social distances and mankind learned about the benefits of exchanging commodities across political boundaries. What started with movement of gold and silver across country-borders became ultimately an efficient institution of international transfer of not only yellow metal but the currencies of sovereign countries. Banking system came along with the development of money as an institution.
What determines the growth of international banks in the domestic banking sector of a particular country? Analytically we can proceed as follows: • International Trade – Since international trade is closely related to international banking. Thus factors like non-financial multinational corporations. During the period 1940-1960 regulatory control on capital flow and convertibility of the currencies reduced the importance of international banking. Determinants of growth in International Banking Activity In today's world no country can afford to be autocratic either in the field of international trade or in international banking.international banking is closely interwoven with the development of international trade and international capital movement. 1996). From a historical standpoint. There have been several studies which attempt to measure empirically the role of the different factors behind the growth of the US banks in the international fields (Nandi. The latter has been characterized by an increasing turnover in international trade. But there are many aspects of this development. volume of international trade (imports and exports together) is a determinant of the growth of international banking and the relationship is direct. These factors along with other forces of globalization have established the huge international financial architecture which rule the international financial market today. a phenomenal increase in the international flow of capital and also an increasing flow of funds from the banks to non-bank sectors. Assuming that no specific restrictions are imposed on the 8 . but not many studies are found testing the theory empirically. the proximity to customers abroad. From 1960 onwards globalization of capital market started and the emergence of surplus in petro-dollars in the seventies gave the much needed liquidity to the international banking business. but in today's scenario the major business of international banks is based on international trade . The theoretical studies mentioning the factors helping the expansion of international banking are important. the competitive advantage with better information technology and the benefits due to international diversification have been mentioned in the literature in the contexts when these become relevant. To understand the causative factors properly the literature has attempted to identify the factors supporting the internationalization of banking business. the recent growth of international banking can be regarded as a reversion to the situation before World War I when European banks dominated the world capital market. But the latter is subject to much more restrictions in almost all the countries compared to the former. The above gives the general perspective of the growth of international banking. international transfer of capital and money and derivatives. The literature abounds in the exploration of the causative link in the development of international banking.
To what extent the increase in income will help the growth of foreign banking activity in domestic soil depends on the preference of the consumers and also the participation of the foreign banks in the trade. If we take per capita income as the explanatory variable for the growth of international banking activity. as the cost of the maintenance of deposits may be too high compared to business. That helps the building up of the asset 9 . Alternatively. though this facility is crucial for the increase in business. • Growth in Banking SectorBanking service as a commodity is supposed to have positive income elasticity. both domestic and international. of the host country. • Foreign Direct Investment – Foreign direct investment has been cited as an important determinant for the expansion of international banking. then the growth of per capita income may facilitate the growth of international banking in the host country on the assumption that foreign banks have complementary role in the domestic banking structure. In fact. the presence of international banks facilitates the inflow of foreign capital and it is expected that the increase in foreign direct investment should have a positive impact on the growth of international banking. Many foreign branches of Indian banks operating abroad have not created the domestic deposit base for this reason.operation of foreign banks so far as their operations are concerned in international banking vis-à-vis the practice of international banking done by home country's banks. • Deposit MobilizationAn increase in domestic deposit is supposed to have positive influence on the deposit mobilization of all banks including the foreign banks. • Growth of Banking DepositThe growth of domestic deposit should have influence on the activity of foreign banks. As national income is growing. This alternative formulation can be tested. Foreign banks often face difficulties in the creation of domestic deposit base even when it is allowed. But in many countries the foreign banks are not allowed to create a domestic deposit base. it can be said that an increase in the turnover of international trade should have positive impact on the growth of international banking. demand for banking service should increase. the ratio of export to gross domestic product can be taken as the explanatory variable.
the central bank earns the seignior age revenue and this is passed on to the government as profit. In a softer sense. which are mostly fiduciary issues now-a-days (which means less than 100 per cent backing by gold and foreign exchange reserve). This is lost to the government.e. Full dollarization has some sacrifices. full dollarization ensures a way of avoiding a currency and balance of payments crisis as there is no domestic currency and so no fear of sudden depreciation and capital flight from the country.portfolio. this acts negatively so far as the growth of international banking is concerned. To what extent deposit mobilization will affect the activities of foreign banks depends on the competition between domestic banks and the foreign banks in the host country.sheet of the foreign banks in the head office is in their mother currency. as the latter is perceived to help the foreign bank to mount an attack on the domestic currency. i. An increased volatility of the exchange rate increases the risk factor in international banking.. We are to understand that the balance. Foreign banks prefer the creation of a domestic deposit base in the domestic currency as this helps in the expansion of business. it also means allowing US dollar to be used as a medium of exchange side by side the domestic currency. Dollarization Dollarization of a country currently means replacement of its currency completely by US dollar so that the latter becomes the legal tender. 10 . Currency is a sovereign symbol of the country. Many countries do not allow the foreign banks to create a domestic base. As the issuer of the national currency. If Indian rupee appreciates vis-à-vis their mother currency that would show a good results in their foreign operations. The first. and unless this aspect is properly taken care of. • Exchange rateThe exchange rate changes affect the activities of the foreign banks.
Eurodollar system developed as an inter-bank market. The Eurodollar System The Eurodollar system evolved through a complex process of history. for later distribution to European banks.60's up through the early 1970's.Further. and the opposite has been the case in Europe with a surplus of dollar borrowers. In the process the Eurodollar system grew. differences in legislative requirements. differences in transactions costs. relative to dollar depositors. it made sense for US banks to shuffle funds from surplus US banks to London branch banks. Also some American banks were eager to do banking outside the legal arms of the Federal Reserve of the USA. Again. Given the assumptions of regional imbalances in dollar deposits. in its early development. from the mid. 11 . as an inter-bank market for dollars. and also refrain from the use of central bank credit to provide liquidity support to the banking system. Some countries in east Europe preferred to deposit dollars in non-American banks in Europe. a country adopting dollar as the currency is to relinquish any possibility of having an autonomous policy regarding monetary and foreign exchange issues. there is a surplus of dollar depositors relative to dollar borrowers in USA.
5 per cent of risk-weighted assets.5 percent. or in gold. in terms of information and accounting costs. The Russians wanted to store the proceeds of this gold sale in a hard currency. The committee announced that the total capital banks need to hold will remain at around 8 per cent of their risk-weighted assets but it will be strengthened by an additional capital buffer of 2. 3. in world business. Many thought that the Euro –dollar market had peaked. The American banks doing the Euro-dollar business outside of the jurisdiction of the Federal Reserve System. under the Bretton Woods fixed exchange-rate system. multinational firms kept their consolidated accounts. and started taking deposits. There were obvious savings. bringing it to 10. across several countries. in doing business in dollars. 12 . Russia could hardly deposit the money in Chase Manhattan for fear of siege. could offer deposit rates that were not regulated at zero (the famous Regulation Q). It is important to see the Eurodollar bank facilitating the development of the dollar as the vehicle currency or key currency. The result was that borrowing and lending in dollars in the Eurodollar markets was much more a "market oriented phenomena". or a much less distorted market. and making loans in dollars.S. The London banks accommodated the Russians. However. Bilateral payments imbalances were settled in dollars. The Basel Committee recommendations 1. almost doubling capital requirements. and could charge borrowers rates without ceilings set by state usury laws in the United States.The interest rate in the Eurodollar markets is known as the LIBOR rate or London Inter-bank Offered Rate. in dollars. Since ruble was not fully convertible. Bank regulators and representatives from 27 leading rich and developing nations have reached an agreement on reforms to the international banking system aimed at reducing the risk of future financial crises. Then came the OPEC crisis and that paved the way for rapid expansion of the Eurodollar markets. compared to the internal U. Again. 2. The Basel Committee on Banking Supervision has agreed to substantially strengthen the existing capital requirements of banks. The market grew and stabilized through the mid-70. market.
The announcements are also in line with the committee's efforts to deliver global financial reforms in order to prevent future financial crises. Currently. The Basel Committee has also increased tier one capital from 4 per cent to 6 per cent. which will be phased in over the next few years. These capital reforms coupled with the introduction of global liquidity standards have been delivered to enable banks to withstand future periods of stress.4." 17. banks will also be required to hold a capital conservation buffer of 2. lenders are required to set aside capital valued at 8 per cent of their risk-weight assets. says that the new rules will make a paramount contribution to long-term financial stability and growth. Banks that fail to meet the second 2. 15. 12. Globally. out of which 4 per cent must be tier one capital with a minimum of half being core tier one. there has been significant political pressure to tighten the reins on banks' risktaking behavior by implementing stricter capital rules and creating new financial reform measures. 19. "The agreements reached today are a fundamental strengthening of global capital standards. 13. requirements from 2 per cent to 4. The reforms also include increasing common equity. 2015. 8. however they will not be forced to raise cash.5 per cent. President of the European Central Bank and chairman of the Basel Committee's governing council. 18. a measure of financial strength includes common equity and other equity-like debt instruments based on stricter criteria. taking the total common equity requirements to 7 per cent. The new rules will force lenders to sell new shares and restrict the money they return to their shareholders over the coming years. 11. 14. Trichet said. 7. 10. Their contribution to long-term financial stability and growth will be substantial. Tier one. In addition to increasing minimum common equity. 9.5 per cent. "The transition agreements will enable banks to meet the new standards while supporting economic recovery. the highest form of loss-absorbing capital. President of the Netherlands and chairman of the Basel Committee on Banking Supervision. 16. The new adjustments made to tier one capital are set to be phased in by January 1. 6.5 per cent buffer will be stopped from paying dividends." Mr. 5. Jean-Claude Trichet. Tier two assets make up the remainder. Nout Wellink says that the new design also means that banks are better 13 .
23. "The combination of a much stronger definition of capital.5 per cent of common equity or other loss-absorbing capital. 26. New offices and branches abroad increased bank’s presence. The committee issued a statement saying the purpose of this buffer is to achieve the broader macro prudential goal of protecting the banking sector from periods of excess aggregate credit growth. The counter-cyclical buffer will be set within a range of 0 per cent to 2. For any country. 24. These factors have resulted in a pressing need for banks to adapt its organizational structures in its domestic and international fields of operations and make them future oriented." Mr. with a tentative finish date of October. The Basel committee has another meeting scheduled for September 21 where it will further complete its work on a package of financial reforms. changes have taken place in customer structure and behavior. commencing 2013. therefore supporting economic growth. 20. Another buffer. to substitute capital instruments that no longer qualify. Today's decisions by the so-called Basel III will be submitted for approval at the G-20 summit of advanced and emerging economies in Seoul in November. is the counter-cyclical buffer. Nout said in a statement. which will be implemented according to national circumstances and during times of excess credit growth. 27. A number of US federal banking agencies have voiced support for an international agreement. 28. higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress. enabling them to be less reliant on tax payers money to be bailed out. 22. 21.protected during periods of losses. The stringent new rules are set to be gradually phased in and banks will be allowed a 10year period. 25. The Importance of Banking Instruments in International Trade Transactions • Internationalization of banksBanking has become internationalized and globalized in the wake of the liberalization of the financial markets. this buffer will only take effect when there is an overflow of credit growth that might result in build up and exposure to risk. • GlobalizationGlobalization has touched banking mainly in terms of: 14 .
This way. fundamental reformation of International Financial Institutions. 3) the expansion of transborder branch networks. 2. and 5) the emergence of new credit instruments such as savings accounts for children and savings account calculator. besides actions on international level. 5. 15 . Stiglitz’s opinion. Having analyzed the reasons and development of the crises in a number of countries. It is also important to achieve the decrease in unemployment level and economic increases. imposing certain sanctions on them for not fulfilling the agreements setting Trusteeship over economies of troublesome countries. the search for new forms of cooperation with sides that carry out reforms is necessary. In professor. Nevertheless. 2) the advent of transborder bank lending. The economic increase requires the presence of financial institutions that provide credit for undertakings of the national economy. Among other forms of safety nets. One of the regulations lies in establishment of government safety nets that are created to prevent bank runs by maintaining depositor’s confidence and protecting their savings. he has suggested the following steps on the level of separated country: 1.Stiglitz. 4. The admittance of foreign capital into the banking sector must be careful and should be followed by the adequate facilitation of the National Banking System. 6. often politicians and economists see different solution of this problem.1) the growth of transborder deposits. After a number of years of trials and faults in supporting financial stability. Facts explain why government financial system and why banking is the heavily regulated sector in the economy. The linking of national currency rate to any other including reserve one is inadmissible. 4) the emergence of instantaneous transworld interbank fund transfers. Overcoming and prevention of the system banking crises can be achieved only through the complex solution of the global instability problem. That is why it is significant to provide a relevant development of the financial infrastructure. deposit insurance is probably the most sophisticated. Economic policy must rely on social stability. It is not permitted to focus only on one angle of the “Magic triangle” – inflation. the ex-president of the European Bank of Reconstruction and on the long term supervision over economic in different countries. There are many Development I. Quiet appropriate program for getting out of the formed situation was proposed by the professor of economics of Columbian University.” authorized with resources and real authorities supporters of the further Globalization for the purpose of increase in the role of International Institutions. the cutting down of the budget expenses is forbidden. Nobel Prize winner G. a system of deposit insurance came into life. G. Attaché offered to modified IMF into “International gendarmes. 3. some times even diametrically opposite. During the period of recession. While realizing the reforms it is important to take into account historico-national peculiarities if this are that country.
Moreover. 16 . typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. • Risky cross country transportSending goods from one country to another. Configurations of credit portfolios of commercial banks make them sensitive to liquidity and insolvency. Working group on deposit insurance. buyer and seller specifically refer to one of the ICC Incoterms. On the contrary. These advantages typically include: greater privacy low or no taxation (i. including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra. 1999. or if delivery does not take place for some other reason. banking business is a risky venture. the climate of confidence between parties may degenerate to the point where a lawsuit is brought. can be a risky business. Offshore bank An offshore bank is a bank located outside the country of residence of the depositor. and most offshore banks are located in island nations to this day. the term is used figuratively to refer to such banks regardless of location. sellers and buyers in international contracts want their deals to be successfully completed. in its turn. • Banking business a risky ventureAt the same time. a badly organized system may negatively affect economic stability due to pitfalls such as moral hazard and adverse selection arising under these guarantees. 2000). Through there are contrary opinions on desirability of deposit guarantees. This factor. could lead to panic and wide scale financial crisis. In so doing they eliminate any possibility of misunderstanding and subsequent dispute. as a part of a commercial transaction. simply and safely. market situation fluctuation both across economy and within various economic sectors.e.• Worldwide expansionSuch a worldwide expansion allows economists to investigate different aspects of deposit insurance and make recommendations concerning its parameters. Because of this. they can be sure of defining their respective responsibilities. most economists agree that a well organized deposit insurance system effectively prevents bank runs keeping a banking system sound (Santomero. Garcia. a banking system is often exposed to “triggering effect” when the bankruptcy of one bank may trigger bankruptcy of several banks which are closely interconnected with one that went bankrupt first. above all. If they are lost or damaged. However. 2000. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability While the term originates from the Channel Islands being "offshore" from the United Kingdom. 1997.
and have no legal obligation to do so as they are protected by bank secrecy. Defenders of offshore banking have criticised these attempts at regulation.Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. being possible crossroads for major illegal money flows. Lower Cost and Higher Interest.Offshore banking has often been associated with the underground economy and organized crime. Advantages of offshore banking Stable Jurisdiction. via tax evasion and money laundering. and clearing houses such as Clear stream. however. However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability. are required to declare on penalty of perjury. This will be an advantage for residents in areas where there is risk of political turmoil. this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. tax havens. legally. reducing interest rates on deposits. Persons subject to US income tax. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries. 2001. They claim the process is prompted not by security and financial concerns but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. based in Luxembourg. during the.who fear their assets may be frozen. Following September 11. any offshore bank accounts—which may or may not be numbered bank accounts—they may have. seized or disappear example. suggesting that Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition. 17 . offshore banking does not prevent assets from being subject to personal income tax on interest. there have been many calls for more regulation on international finance. for example. Except for certain persons who meet fairly complex requirements the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad. in particular concerning offshore banks. Although offshore banks may decide not to report income to other tax authorities.Offshore banks can sometimes provide access to politically and economically stable jurisdictions.
Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income.2% in December 2009. such as offshore companies. In banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. in which geographically remote island nations can competitively engage. and can help redistribute world finance from the developed to the developing world. In reality only 40% of depositor funds had been repaid 24.Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts. Linked to Other Financial Institutions. which may have specific tax advantages for some individuals.000 for most other categories of depositor and point out that 18 .Offshore bank accounts are less financially secure.Offshore finance is one of the few industries. higher or lower rate loans based on risk and investment opportunities not available elsewhere.Source of Investment. trusts or foundations. Additional Services. Both offshore and onshore banking centres often have depositor compensation schemes. along with tourism.000 of net deposits per individual depositor or £20.8% in September 2009 and 15. It can help developing countries source investment and create growth in their economies. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. Tax free Interest. or who do not pay tax until the tax return is agreed. Disadvantages of offshore banking Less Financial Security. For example The Isle of Man compensation scheme guarantees £50.Offshore banking is often linked to other structures. or who feel that they can illegally evade tax by hiding the interest income.
simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. 2001. along with clearing houses. International Monetary System The Gold and Gold Bullion Standards The gold standard was the first modern international monetary system. Accessible to High Incomes. tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups. One of the major advantages of the system was in its stabilizing influence. Accounts can be set up online. The tax burden in developed countries thus falls disproportionately on middle-income groups.Offshore private banking is usually more accessible to those on higher incomes. However. Costly Jurisdiction. and thus lowered the value of the domestic currency. However only offshore centres such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapse.Offshore jurisdictions are often remote. As a result of such an injection of gold raised prices. Money Laundering. higher prices resulted in decreasing the demand for exports. as previously sheltered income is brought back into the mainstream economy. 19 . Gold was received in payment in balance by those countries that exported more than it imported.potential depositors should be aware that any deposits over that amount are at risk. terrorist groups. by phone or by mail. Under this system. a depletion of gold to pay for the relatively cheap imports. Historically. offshore banks and tax havens. Yet in a world with global telecommunications this is rarely a problem for customers. and therefore costly to visit.Offshore banking has been associated in the past with the underground economy and organized crime. because of the costs of establishing and maintaining offshore accounts. Further. and other state or non-state actors. offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers. gold was the only standard of value. However. Onshore depositors have been refunded in full regardless of what the compensation limit of that country has stated thus banking offshore is historically riskier than banking onshore. have been accused of helping various organized crime gangs. and eventually return to the original price level. The gold standard facilitated the free circulation between nations of gold coins of standard specification. Following September 11. through money laundering. so physical access and access to information can be difficult.
gold was completely demonetized. Under such a system. like the discovery of a rich deposit of gold. although Special Drawing Rights were created as a new reserve currency. a system of fixed exchange rates was adopted. The Gold-Exchange System This system came into existence after World War II.This system was not free from defects. Many nations fixed their currencies against U. which was known as the “key currency” country. In spite of such measures.S. the value of gold was set at $35 an ounce. with its price set by supply and demand. which is in turn fixed to and redeemable in gold. nations peg the value of their currencies some foreign currency instead of gold.S.S. started depleting and in order to correct the situation. In this system there were two tiers: • • The official tier. the two-tier system was created in 1968. By this method the gold standard became obsolete and the values of various 20 . the drain on U. Floating Exchange Rates and Recent Developments After the fall of the gold convertibility the IMF was compelled to agree on a system of floating exchange rates. But this system too couldn’t see the day-light and was abandoned in the 1930s. dollar and preserved dollar reserves in the United States. consisting of central bank gold traders. In the free-market tier.S. confidence in the dollar diluted. Gold and the U. and gold payments to non-central bankers were prohibited. It lacked liquidity since the world's supply of money would be limited by the world's supply of gold. Moreover. would cause prices to rise suddenly. any unusual increase in the supply of gold. Then eventually. Under the gold bullion nations no longer issued gold coins but backed their currencies with gold bullion and agreed to buy and sell the bullion at a fixed price. gold reserves continued and eventually in 1971 the United States was forced to abandon gold convertibility. causing some dollar-holding countries and speculators to exchange their dollars for gold. dollar remained the major reserve assets for the world's central banks. and the International Monetary Fund (IMF) was created for the task of maintaining stable exchange rates on a global level. As a result gold reserves in U. commitments abroad drew gold reserves from the nation. The Two-Tier System The 1960s saw the fall of the gold-exchange system because the U.S. the international gold standard broke down. in 1914. At the Bretton Woods international conference in 1944. Later during the 1920s the gold bullion standard took the place of gold standard.
Britain is the most notable. Great Britain.S. faced with the fact that economic downturns had put France and Germany in violation of the ceilings. reduce debt. which was established in 1979. the Euro was introduced in financial markets in 1999 as replacement for the currencies of 11 countries belonging to the European Union (EU). which had become the second most commonly used currency after the dollar in the primary international bond market.. however. At the beginning of 1999. dollar weakened with respect to them and diminished in importance.currencies were to be determined by the market forces. In the early 1990s this system was stressed due to the differing economic policies and conditions of its members. many members of the Union violated the ceilings established on the budget and deficit ceilings in part because of national government measures to stimulate economic growth. A common economic policy helped the nations to put a constraint on excessive public spending. and local currencies were no longer accepted as legal tender two months later. Derived from a basket of varying amounts of the currencies of the EU nations. In the late 20th century. the same EU members adopted a single currency called the Euro. the ECU was a unit of accounting used to determine exchange rates among the national currencies. Denmark. In 2003. and Sweden did not adopt the euro when it was introduced. the Japanese Yen and the German Deutschmark strengthened and became increasingly important in international financial markets. and the EU high court annulled the finance ministers' decision in 2004. 21 . The European Commission challenged that move. The euro replaced the European Currency Unit. In 1994 the European Monetary Institute was formed as intermediary in establishing the European Central Bank (ECB) and a common currency. The ECB is responsible for setting a single monetary policy and interest rate for the adopting nations. The European Currency Unit (ECU). Of the European Union members. It came into existence in 1979 to stabilize foreign exchange and counter inflation among members. However. temporarily suspended the pact. Euro coins and notes began circulating in Jan. In all three nations there has been strong public anxiety that dropping their respective national currencies would give up too much independence. whereas the U. and make a strong attempt at soaring inflation. in line with their national central banks. European Monetary System It is an arrangement by which most nations of the European Union (EU) associated their currencies in order to prevent fluctuations relative to one another. was the forerunner of the euro. which continues to regard itself as separate from Europe. Moreover. It was regarded as a major step toward European political unity. 2002. EU finance ministers.
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