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STUDENT NAME
Milton Hanna Jr

STUDENT NUMBER
000-06-4313

MAJOR
BBA Banking & Finance with French

BKGI303
MULTINATIONAL BANKING

QUESTION:
Discuss the events and rationale and structure that led to the
development of the Euro as a major trading currency and by default,
region in International Banking? Are there any similar examples in our
Region?

What are Euro Bonds? Why are these instruments important in the
development and success of multinational banking?

Due Date: Wednesday, 8th January 2015

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The Euro is the official currency for the Eurozone which consists of 19 European-Union

members; it remains a major trading currency, receiving myriad windfalls and opportunities from

the foreign exchange market. The Euro is the second largest reserve currency so as the most

traded currency in the world after the United States dollar. Outside of Europe, there are also

several overseas territories of EU members that also use the euro as their currency.

The onset of Eurodollar and Eurobond market commenced in the early 1940s, developed in the

middle of the 1950s, and had gradually grown in size and scope between the 1960s and 1970s.

The Eurodollar and Eurobond markets became the largest developing financial markets of

significance and sometimes referred to the well-known ‘Eurocurrencies Market.’ Eurocurrencies

are funds deposited in the bank of a European country in the currency of another country. For

example, Eurodollars are time deposits denominated in U.S. dollars at banks outside the United

States, and are not under the jurisdiction of the Federal Reserve. Since the Eurocurrency market

has expanded to financial centers outside Europe, the term ‘offshore’ is more appropriate to

describe its location. In another dimension, one can use the term ‘onshore’ to describe the

traditional, domestic marketplace. The key distinction between offshore and onshore markets is

the not only the location but also the regulatory environment. The Eurodollar market is an

international money market focused on short-term credit flows, while the euro bond market is an

international capital market dealing with long-term bonds debt (Hughes & MacDonald, 2002).

The development of these two markets was interrelated and mirrored to the structure of Cold War

politics and international economics.

(Abhijeet, 2010) – Info on Growth of Euro Currency Market***

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The Eurodollar was one of the most significant development in international banking

during the post war period. Between 1939 and 1945, the World War II, had created a long period

of both political and financial tension, owing the Eurocurrency market its first presence. While

the war was going on, political challenges caused by the takeover of the continent by the Axis

Powers meant that there was a limited marketplace for trading foreign currency

(Madhurakangan, 2014). With no friendly government operations within the European market

place, the traditional economies of the nations were displaced, along with the currencies. To

combat this, enormous sums of U.S. dollars were in the custody of both foreign and U.S. bank

branches located outside the United States, particularly in Europe. The European market place

operated under stringent financial regulations combined with declining barriers to international

capital movement (Yeetien, 2010). The outburst of U.S. banking business, all over the world,

meant that the U.S. currency exist everywhere and that the U.S. dollar was the legal tender of

international trade. Large multinational corporations, for example, conducted its entire business

in US currency; factories were built in Germany, France, or Spain, foreign workers were paid

and raw materials were purchased in U.S. dollars (Hughes & MacDonald, 2002).

In the aftermath of the Great Depression and World War II (1939-1945), the leadership of

the surviving powers, in particular, the United States and the United Kingdom, pushed for the

creation of a new plan in the international economy. Efforts to reconstruct Europe’s economy,

like the Marshall Plan, resulted in large amounts of U.S. dollar flows into European nations

(Hughes & MacDonald, 2002). Some dollars from foreign countries, like the Soviet Union, were

repatriated into American banks abroad because of several threatening events. After the invasion

of Hungary in 1956, the Soviet Union feared that its deposits in American banks could be frozen

as retaliation. British banks offered the Soviets the possibility of receiving its US dollars reserves
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as deposits, outside the United States (Madhurakangan, 2014). This operation was the first to

create the Eurodollars. In addition, Russian banks in Paris and in London also started disguising

their balances by placing them into Western European banks rather than in New York. Gradually,

as a result of the successive financial threats by the United States, the Eurodollar market

expanded until today where it is available in virtually every country.

The Eurocurrency market also has strong roots in the Cold War era. During the war, one

of the most memorable events can be traced back to communist governments who held their

dollar deposits abroad. In 1949. China, a major communist, manage to repatriate all of its US

dollars into the Soviet-owned French bank, Banque Commerciale pour l’Europe du Nord

(Northern European Commercial Bank), in Paris because China feared that its dollars earnings

would be blocked by United States at the time of the Korean war (Madhurakangan, 2014).

Consequently, another stream of U.S. dollars was created outside the borders of the United

States. It is vital to underscore that though the Communist pool of dollars was important, the

U.S. dollars that remained in Western Europe were far more substantial and formed the real

foundation for the development of the euro dollar market.

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The Eurocurrency market owes its existence to differences in national financial regulation

combined with declining barriers to international capital movements. The Eurocurrency market

and its offspring -the Eurobond, Eurocommercialpaper, and Euroequitymarkets -comprise some

of the most important financial innovations of the last 40 years.

It is mainly an inter-bank market trading in time deposits and various debt instruments. What

matters is the location of the bank neither the ownership of the bank nor ownership of the

deposit. The prefix "Euro" is now outdated since such deposits and loans are regularly traded

outside Europe. Over the years, these markets have evolved a variety of instruments other than

time deposits and short-term loans, e.g. certificates of deposit (CDs), euro commercial paper

(ECP), medium- to long- term floating rate loans, eurobonds, floating rate notes and euro

medium-term notes (EMTNs). The difference between Euro markets and their domestic

counterparts is one of regulation. Eurobonds are free from rating and a disclosure requirement

applicable to many domestic issues as well as registration with securities exchange authorities.

Emergence of Euro markets:

1. During the 1950s, the erstwhile USSR was earning dollars from the sale of gold and other

commodities and wanted to use them to buy grain and other products from the West, mainly from

the US. However, they did not want to keep these dollars on deposit with banks in New York, as

they were apprehensive that the US government might freeze the deposits if the cold war
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intensified. They approached banks in Britain and France who accepted these dollar deposits and

invested them partly in US.

2. Domestic banks in US (as in many other countries) were subjected to reserve requirements,

which meant that a part of their deposits were locked up in relatively low yielding assets.

3. The importance of the dollar as a vehicle currency in international trade and finance increased,

so many European corporations had cash flows in dollars and hence temporary dollar surpluses.

Due to distance and time zone problems as well as their greater familiarity with European banks,

these companies preferred to keep their surplus dollars in European banks, a choice made more

attractive by the higher rates offered by Euro banks. The main factors behind the emergence and

strong growth of the Eurodollar markets were the regulations on borrowers and lenders imposed

by the US authorities which motivated both banks and borrowers to evolve Eurodollar deposits

and loans. Added to this are the considerations mentioned above, viz. the ability of Euro banks to

offer better rates both to the depositors and the borrowers and convenience of dealing with a

bank that is closer to home, who is familiar with business culture and practices in Europe.

Conclusion

The creation and growth of the Eurocurrency market has been an important contributor of the rising

international economic activity over the past few decades. The market has expanded largely as a

means of avoiding the regulatory costs involved in dollar-denomination. Due to the size and importance of

the foreign exchange market, it remains largely unregulated. There is no international

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organization to look over it or any institutions that sets rules. The name ‘Eurocurrency market’ is

normally referred to any bank deposits in any country held in a different country‘s currency. A perfect

example to this is U.S. dollars depositing in a British bank. Nearly two-thirds of all assets around

the globe are represented by U.S. currency. The business in the Eurocurrency market has always remained

lucrative since it gives investors an opportunity to hold short-term claims on commercial banks, allows

for more convenient borrowing, and improves the international flow of capital for trade for countries and

companies and attracts domestic depositor with a higher interest rate.

http://www.scribd.com/doc/213864290/eurocurrency-market#scribd

http://en.wikipedia.org/wiki/Eurodollar

http://www.scribd.com/doc/38618987/Euro-currency-Market-Dnc#scribd

http://www.google.bs/url?

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