INTERNATIONAL BANK

An international bank is a financial entity that offers financial services, such as payment
accounts and lending opportunities, to foreign clients. These foreign clients can be
individuals and companies, though every international bank has its own policies outlining
with whom they do business.

International banking is just like any other banking service, but it takes place across different
nations or internationally. To put in another way, international banking is an arrangement of
financial service by a residential bank of one country to the residents of another country.
Mostly multinational companies and individuals use this banking facility for transacting.

Globalization and growing economies around the world have led to the development of
international banking facility. The world is now a marketplace and each business wants to
exploit it. Geographical boundaries are no more a concern. With access to technology,
banking facilities have grown vastly. One prime example of it is international banking. In the
years to come, such banks would see higher growth and higher profitability. Big business
houses are expanding themselves at a rapid pace. To maintain the growth, these businesses
will need the financial services of international banking. Therefore, the demand for
international banking facilities will increase.

The advantage of having international banks setting up their branches in India and offering
Indians and NRIs alike with their services and facilities has also been responsible to have
banks within India pull up their socks and offer customer services at par with what
international banks offer.

EXAMPLE OF INTERNATIONAL BANKING

Suppose Microsoft, an American company is functioning in London. It is in need of funds to
meet its working capital requirements. In such scenario, Microsoft can avail the banking
services in form of loans, overdraft or any other financial service through banks in London.
Here, the residential bank of London shall be giving its services to an American company.
Therefore, the transaction between them can be said to be part of international banking
facility.

FEATURES AND BENEFITS OF INTERNATIONAL BANKING

FLEXIBILITY

International banking facility provides flexibility to the multinational companies to deal in

multiple currencies. The major currencies that multinational companies or individuals can
deal with include euro, dollar, pounds, sterling, and rupee. The companies having
 headquarters in other countries can manage their bank accounts and avail financial services
in other countries through international banking without any hassle.

ACCESSIBILITY

International banking provides accessibility and ease of doing business to the companies
from different countries. An individual or MNC can use their money anywhere around the
world. This gives them a freedom to transact and use their money to meet any requirement
of funds in any part of the

INTERNATIONAL TRANSACTIONS

International banking allows the business to make international bill payments. The currency
conversion facility allows the companies to pay and receive money easily. Also, the benefits
like overdraft facility, loans, deposits, etc. are available every time for overseas transactions.

ACCOUNTS MAINTENANCE

A multinational company can maintain the records of global accounts in a fair manner with
the help of international banking. All the transactions of the company are recorded in the
books of the banks across the globe. By compiling the data and figures, the accounts of the
company can be maintained.

Examples of International Banks that are present in India.

 1. Citibank
 2. Standard Chartered Bank
 3. HSBC Bank
 4. Deutsche Bank
 5. Barclays Bank
 6. The Bank of America

What is Cross-Border Financing

Cross-border financing refers to any financing arrangement that crosses national borders.
Cross border financing could include cross border loans, letters of credit or bankers
acceptances (BA), for example, issued in the United States for the benefit of a person in
Canada.

Cross border financing within corporations can become very complex, mostly because
almost every inter-company loan that crosses national borders has tax consequences. This
occurs even when the loans or credit are extended by a third party, such as a bank. Large,
international corporations have entire teams of accountants, lawyers, and tax experts that
evaluate the most tax-efficient ways of financing overseas operations.
Cross-border finance also known as import finance or export finance requires the financial
provider to act as an intermediary between the business, the supplier and the end-
customer, supporting the transaction throughout the process to enable the business to do
cross-border business without the requirement for a large reserve of working capital.

This type of finance refers to any source of funding that enables a business to trade
internationally.

The rise in overseas trade has led to an increase in demand for cross-border finance.
International trade brings considerable benefits to businesses as well as the wider economy.
That said, it can also put businesses under immense pressure as they try to plug the cash
flow gaps between placing and paying for orders with suppliers and invoices being settled
by end-customers.

In cross-border financing, currency risk and political risk are also present. If structuring
terms of a loan across nations and currencies, the potential to obtain a favourable rate
could be a challenge; shifting political climates, including elections or coups, could hinder a
deal’s completion, too.

BANK DEBT IN INTERNATIONAL MARKETS

According to the Bank for International Settlements, the international debt market involves
the buying and selling of corporate and government bonds issued by non-residents of the
local debt market. In other words, an international debt market is a bond market where
only foreign bonds are traded.

International bonds are generally higher risk due to regional instability, currency
fluctuations and interest rate fluctuations; however, higher risk investments generally
provide greater returns. International debt market investors can minimize their risk by
diversifying their portfolios by including a variety of bond types, industry types, nations,
currencies and market types.

What is offshore market?

"Offshore" refers to a location outside of one's national boundaries, whether or not that
location is land- or water-based. ... A company may legitimately move offshorefor the
purpose of tax avoidance or to enjoy relaxed regulations.
An offshore bank is a bank regulated under international banking license (often called
offshore license), which usually prohibits the bank from establishing any business activities
in the jurisdiction of establishment. Due to less regulation and transparency, accounts with
offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions
that provide financial services to nonresidents on a big scale, can be referred to as offshore
 financial centres. Since OFCs often also levy little or no tax corporate and/or personal
income and offer, they are often referred to as tax havens.
With worldwide increasing measures on CFT (combatting the financing of terrorism) and
AML (anti-money laundering) compliance, the offshore banking sector in most jurisdictions
was subject to changing regulations.
An account held in a foreign offshore bank, is often described as an offshore account.
Typically, an individual or company will maintain an offshore account for the financial and
legal advantages it provides, including:

 Greater privacy.
 Low or no taxation (i.e. Tax havens).
 Easy access to deposits (at least in terms of regulation).
 Protection against local, political, or financial instability.

Offshore banking has often been associated with the underground economy and organized
crime, via tax evasion and money laundering

Advantages of Offshore Banking

 Offshore banks can sometimes provide access to politically and economically stable
jurisdictions. This will be an advantage for residents in areas where there is a risk of
political turmoil, who fear their assets may be frozen, seized or disappear.
 Lower cost base and higher interest rates 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.

 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, or who do not pay tax
until the tax return is agreed, or who feel that they can illegally evade tax by hiding the
interest income.
 Some offshore banks offer banking services that may not be available from domestic
banks such as anonymous bank accounts, higher or lower rate loans based on risk and
investment opportunities not available elsewhere.

Disadvantages of Offshore Banking

 Offshore bank accounts are sometimes less financially secure. In a banking crisis which
swept the world in 2008, some savers lost funds that were not insured by the country in
which they were deposited. Those who had deposited with the same banks onshore
 received all of their money back. Thus, banking offshore is historically riskier than banking
onshore.
 Offshore banking has been associated in the past with the underground economy and
organized crime, through money laundering. Following September 11, 2001, offshore
banks and tax havens, along with clearing houses, have been accused of helping various
organized crime gangs, terrorist groups, and other state or non-state actors. However,
offshore banking is a legitimate financial exercise undertaken by many expatriate and
international workers.
 Offshore jurisdictions are often remote, and therefore costly to visit, so physical access
and access to information can be difficult

INTERNATIONAL CAPITAL MARKET

A capital market is a system that allocates financial resources in the form of debt and equity
according to their most efficient uses. Its main purpose is to provide a mechanism to borrow
or invest money efficiently.

Purposes of the International Capital Market

The international capital market is a network of individuals, companies, financial

institutions, and governments that invest and borrow across national boundaries.

Large international banks gather excess cash of investors and savers around the world and
then channel it to global borrowers.

1. Expanding the Money Supply for Borrowers

a. Companies unable to obtain funds from investors in the domestic market seek financing
in the international capital market.

b. Essential for firms in countries with small or developing capital markets or emerging stock
markets.

c. An expanded supply of money benefits small companies that might not get financing
under intense competition for capital.

2. Reducing the Cost of Money for Borrowers

a. An expanded money supply reduces the cost of borrowing. The “price” reflects supply and
demand. Excess funds create a buyer’s market, forcing interest rates lower.

b. Projects regarded as infeasible because of low expected returnsmight be viable at a lower

financing cost.

3. Reducing Risk for Lenders

a. The international capital market expands the available set of lending opportunities.
Investors reduce portfolio risk by spreading their money over many debt and equity
instruments.

b. Investing in international securities benefits investors because some economies are

growing while others are in decline.

C. Forces Expanding the International Capital Market

1. Information Technology

Reduces time and money needed to communicate globally. Electronic trading after close of
formal exchanges facilitates fast response times.

2. Deregulation

Increases competition, lowers cost of financial transactions, and opens many national
markets to global investing and borrowing. Continued growth depends on further
deregulation.

3. Financial Instruments

Increased competition is creating the need to develop innovative financial instruments.

Securitization is the unbundling and repackaging of hard-to-trade financial assets into more
liquid, negotiable, and marketable financial instruments, or securities.

D. World Financial Centers

Three most important financial centers are London, New York, and Tokyo.

1. Offshore Financial Centers

They: (1) are economically and politically stable;

(2)are advanced in telecommunications;

(3) offer large amounts of funding in many currencies; and

(4) provide a less costly source of financing.

a. Operational Centers see a great deal of financial activity (e.g., London for currencies;
Switzerland for investment capital).

b. Booking Centers are usually located on a small, island nation or territory with favorable
tax and/or secrecy laws.

Funds pass through on their way to large operational centres. Typically are offshore
branches of domestic banks used to record tax and currency exchange information.
3. MAIN COMPONENTS OF THE INTERNATIONAL CAPITAL MARKET

A. International Bond Market

Consists of all bonds sold by issuing companies, governments, and other organizations
outside their own countries. Buyers include medium- to large-size banks, pension funds,
mutual funds, and governments.

1. Types of International Bonds

a. Eurobond

Issued outside the country in whose currency it is denominated.

Many emerging countries see the need to develop their own national markets. Volatility in
currency market hurts projects that earn funds in those currencies and pay debts in dollars.

B. International Equity Market

Consists of all stocks bought and sold outside the issuer’s home country.

Companies and governments issue equity and buyers include other companies, banks,
mutual funds, pension funds, and individuals.

1. Spread of Privatization

a. A single privatization often places billions of dollars of new equity on stock markets.

b. Increased privatization in Europe is expanding worldwide equity.

European Union integration has made investors willing to invest in stocks from other
European nations.

2. Economic Growth in Developing Countries

a. Growth in newly industrialized and developing countries contributes to growth in the

international equity market.

b. Because of a limited supply of funds in emerging economies, the international equity

market is a major source of funding.

3. Activity of Investment Banks

a. Investment banks facilitate the sale of stock worldwide by bringing together sellers and
large potential buyers.

b. Becoming more common than listing a company’s shares on another country’s stock
exchange.
4. Advent of Cybermarkets

a. Stock markets that have no central geographic location, but consist of online global
trading activities that allow listing of stocks worldwide for electronic 24-hour trading.

C. Eurocurrency Market

1. All the world’s currencies banked outside their countries of origin are called Eurocurrency
and trade on the Eurocurrency market (e.g., U.S. dollars in Tokyo are called Eurodollars.
British pounds in New York are called Europounds). Characterized by large transactions
involving only the largest companies, banks, and governments.

2. Four Sources of Deposits:

• Governments with excess funds from prolonged trade surplus.

• Commercial banks with excess currency.

• International companies with excess cash.

• Extremely wealthy individuals.

3. Eurocurrency market is valued at around $6 trillion, with London accounting for about 20
percent of all deposits.

4. Appeal of the Eurocurrency Market

a. Complete absence of regulation lowers costs. Banks charge borrowers less and pay
investors more but still earn profit.

b. Low transaction costs because transactions are large.

c. Interbank interest rates are interest rates that the world’s largest banks charge one
another for loans. London Interbank Offer Rate

(LIBOR) is the interest rate charged by London banks to other large banks borrowing
Eurocurrency. London Interbank Bid Rate (LIBID) is the interest rate offered by London
banks to large investors for Eurocurrency deposits.

5. Downside of Eurocurrency market is greater risk due to a lack of government regulation.

Still, Eurocurrency transactions are fairly safe because of the size of the banks involved.

MANAGEMENT OF FOREIGN EXCHANGE

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India
"to consolidate and change the law relating to foreign exchange with the objective of
facilitating external trade and payments and for promoting the orderly development and
maintenance of foreign exchange market in India".
 Foreign Exchange Market Foreign exchange is highly liquid assets denominated in a foreign
currency. In principle these assets include foreign currency and foreign money orders.
However most foreign exchange transactions are purchases and sales of bank deposits. A
foreign exchange rate is the price of one nation’s currency in terms of another’s. You can
find exchange rate time series on FRED: http://research.stlouisfed.org/fred2/categories/15
When goods, services, or securities are traded internationally, the currency denomination of
the payment may be an issue. The most obvious role of the foreign exchange market is to
resolve this issue. Suppose for example that a US exporter of calculators to Mexico wishes
to receive payment in dollars while the importer possesses pesos with which to make
payment. Transforming the pesos into dollars will generally take place in the foreign
exchange market

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India "to
consolidate and change the law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly development and maintenance
of foreign exchange market in India".

Objectives of FEMA:

The main objective of FEMA was to help facilitate external trade and payments in India. It
was also meant to help orderly development and maintenance of foreign exchange market
in India. It defines the procedures, formalities, dealings of all foreignexchange transactions
in India. These transactions are mainly classified under two categories -- Current Account
Transactions and Capital Account Transactions.

FEMA is applicable to all parts of India and was primarily formulated to utilize the foreign
exchange resources in efficient manner. It is also equally applicable to the offices and
agencies which are located outside India however is managed or owned by an Indian
Citizen. FEMA head office is known as Enforcement Directorate and is situated in heart of
city of Delhi.

The Main Features of the FEMA:

i. It is consistent with full current account convertibility and contains provisions for
progressive liberalisation of capital account transactions.

ii. It is more transparent in its application as it lays down the areas requiring specific
permissions of the Reserve Bank/Government of India on acquisition/holding of foreign
exchange.

iii. It classified the foreign exchange transactions in two categories, viz. capital account and
current account transactions.
iv. It provides power to the Reserve Bank for specifying, in , consultation with the central
government, the classes of capital account transactions and limits to which exchange is
admissible for such transactions.

v. It gives full freedom to a person resident in India, who was earlier resident outside India,
to hold/own/transfer any foreign security/immovable property situated outside India and
acquired when s/he was resident.

vi. This act is a civil law and the contraventions of the Act provide for arrest only in
exceptional cases.

vii. FEMA does not apply to Indian citizen’s resident outside India.