Ugb 322.viet Ha Nguyen

UNIVERSITY OF SUNDERLAND
ASSESSMENT COVER SHEET
BA (HONS) BANKING AND FINANCE
Student ID: 159130423
Student Name: NGUYEN VIET HA
Module Code: UGB 322
Module Name / Title: International Banking
Centre / College: Banking Academy of Viet Nam
Due Date: 15th January 2017 Hand in Date: 15th January 2017
Assignment Title: Individual assignment
Students Signature:
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UGB322 International Banking – January 2017
A REPORT ON INTERNATIONAL BANKING
Title Page
International Banking Report
Module Title: International Banking
Module Code: UGB322
BA (Hons) in Banking and Finance
The University of Sunderland, UK
Word count: 3,300
(Excluding tables, graphs, charts, figures, examples, boxes, footnotes, references and
appendices)
Submission date: 13th January, 2017
Prepared by:
Student ID:
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Table of Contents
Title Page.........................................................................................................................................3
Table of Contents.............................................................................................................................4
List of Tables, Graphs, Charts, Figures and Boxes.........................................................................6
PART A...........................................................................................................................................8
THE CRITICAL COMPARISON OF CAPITALISM MODELS AND FINANCIAL SYSTEMS

ACROSS THE WORLD.................................................................................................................8
1.1 Introduction................................................................................................................................8
1.2 Overview of two capitalism models..........................................................................................8
1.2.1 The Rhine versus Anglo‐American model of capitalism..............................................8
1.2.1.i The Rhine model..........................................................................................................8
1.2.1.ii The Anglo‐American model.......................................................................................9
1.2.2 The Discussion about the Rhine and Anglo‐American models of Capitalism..............9
1.3 The Financial System..............................................................................................................14
1.3.1 Financial intermediaries..............................................................................................15
1.3.2 Financial markets........................................................................................................15
1.4 Comparison of financial systems.............................................................................................16
1.4.1 Bank-based financial systems.....................................................................................16
1.4.1.i Pros of bank-based financial systems.........................................................................17
1.4.1.ii Cons of bank-based financial systems.......................................................................20
1.4.2 Market-based financial systems..................................................................................22
1.4.2.i Pros of market-based financial systems......................................................................23
1.4.2.ii Cons of market-based financial systems....................................................................24
1.5 Conclusion...............................................................................................................................25
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PART B.........................................................................................................................................26
THE EXISTING INCOME OPPORTUNITIES AND THE IMPACTS OF REGULATORY

REFORMS ON BANK INCOMES SINCE THE GLOBAL FINANCIAL CRISIS....................26
2.1 Introduction..............................................................................................................................26
2.2 Existing income opportunities of international banks.............................................................26
2.2.1 Net interest income......................................................................................................26
2.2.2 Fees and commission income......................................................................................28
2.2.4 Trading income............................................................................................................30
2.2.5 Investment banking income.........................................................................................32
2.3 The discussions of regulatory reforms since the financial crisis.............................................35
2.3.1 Dodd-Frank Act in the United States..........................................................................35
2.3.2 Ring-Fencing Rules in the United Kingdom...............................................................36
2.3.3 Basel III.......................................................................................................................37
2.4 Impacts of regulatory reforms on incomes of international banks..........................................39
2.4.1 Impacts of the Dodd-Frank Act on banks’ earnings....................................................39
2.4.2 Ring-Fencing in the United Kingdom.........................................................................41
2.4.3 Basel III.......................................................................................................................42
2.5 Regulatory Arbitrage...............................................................................................................43
2.6 Conclusion...............................................................................................................................44
References......................................................................................................................................45
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List of Tables, Graphs, Charts, Figures and Boxes
LIST OF TABLES
Table 1: The Comparison of Forwards and Futures.....................................................................33
Table 2: Assets of financial intermediaries in 26 jurisdictions.....................................................37
LIST OF GRAPHS
Graph 1: Cross-border claims of BIS reporting banks...................................................................9
Graph 2: Foreign exchange market turnover by counterparty.....................................................17
LIST OF CHARTS
Chart 1: Global YTD $10bn+ Loans on Par with Record in 2000..............................................11
Chart 2: Global Industrials M&A Revenue ................................................................................18
Chart3 : Assets of financial intermediaries in 26 jurisdictions....................................................38
LIST OF FIGURES
Figure 1: Trade finance options by payment risk ........................................................................12
Figure 2: Letter of Credit .............................................................................................................13
Figure 3: Documentary Collection ..............................................................................................14
Figure 4: Forfaiting Transaction Diagram ..................................................................................15
Figure 5: Various Types of Risks in Banking Activities..............................................................19
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Figure 6: Risk Management Approach.........................................................................................21
Figure 7: The Consequences of Sub-Prime Lending and Securitization .....................................36
LIST OF BOXES
Box 1: The types of risks in international banks’ operations............................................................
Box 2: The Eurocurrency market......................................................................................................
Box 3: The genesis and growth of the Eurocurrency markets...........................................................
Box 4: The Eurobond market............................................................................................................
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PART A
THE CRITICAL COMPARISON OF CAPITALISM MODELS AND FINANCIAL
SYSTEMS ACROSS THE WORLD
1.1 Introduction
It is argued that the Rhine capitalism model is superior to the Anglo-American capitalism
model because the Rhine model promotes long-term economic growth with strongly
regulated markets. The Anglo-American followers are said that very deregulated markets
resulting in the recent financial crisis of 2008-2010. Indeed, this statement is true, proven by
the development of shadow banking system and the collapse of Wall Street titan-Lehman
Brothers. The sections below will clarify pros and cons arguments for two models.
1.2 Overview of two capitalism models
1.2.1 The Rhine versus Anglo‐American model of capitalism
Starting from two different standpoints, the Rhinemodel is more prevalent in European
Union (EU) while theAnglo‐SaxonorAnglo‐Americanmodel is mostly familiar with
English world as the U.S, the U.K, Canada, Australia and Ireland.
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1.2.1.i The Rhine model
The Rhine model

The Rhine model (also called social market economy) is characterized as a bank-
based financial system, in which the government and other regulatory agencies
enforce strict laws and regulations on banks, financial organizations, individual
investors, etc. to ensure a stable and sound financial market. The Rhine’s countries
generally pursue long-term economic developments and social goals to narrow the
gap of inequality and poverty at the lowest margins (Richter and Fuchs, 2003).
Their economy besides operates in a coordinated market that controls private
entities with bylaws and necessary interventions to create fair competition and to
balance between a high GDP, high employment rate, low inflation, good working
conditions, social welfare, and public services (Hertie School of Governance,
2015).
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1.2.1.ii The Anglo‐American model
The Anglo‐Americanmodel
By contrast, the Anglo‐Americanmodel ischaracterizedby a market-based
financial system, in which the government and other authorities enact more
simplified and less strict regulations on the operations and activities of financial
services industry to accelerate economic growth and thrive its financial market.
Focusing on short-term expansions and individual value, the Anglo‐American’s
countries provide minimalstate interference; reduce bargaining power of trade
unions; privatize public services and grant quite modest social welfare. Their
economy functions in a deregulated market that asymmetric informationisasourceof
speculation andearnings.
Concerning the 2008-2012 globalfinancialcrisis, the Anglo‐Americancountries suffer
more tragic impacts than those of Rhine model owing to marketfailure originating from
imperfectinformation, andinstable macroeconomic policiesfrom lack ofa long-term
economic scheme. If the U.S regulated its financial market more stringently and cautiously
with asymmetric information and longer-termmacroeconomic policy, the periodiccyclesof
speculative mania and the shadow-banking system would not exist and then the U.S
subprime mortgage crisis and economic recession in 2007-2009 would not happen causing
the worldwide turmoil.
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1.2.2 The Discussion about the Rhine and Anglo‐American models of Capitalism
Anglo‐American
Different Aspects Rhine Model
Model
Economy Coordinated Market Deregulated Market
Financial System Bank-based Market-based
Macroeconomic Policy Long-term Short-term
Regulation Strict Loose
Employment Secured Unsecured
Social Welfare More Generous Less Generous
Public Services Granted Privatized
Community & Solidarity Strong Weak
Lesser Inequality &
Overall Impact Greater Prosperity
Poverty
Table 1: Different aspects in the Rhine and Anglo‐American models of capitalism
The Rhine’s economies, typically the EU has some idiosyncrasies compared with
Anglo‐American capitalists, the U.S, the UK, Canada, Australia and Ireland. The EU is
known as the most generouswelfaresystem in the world. The post transferpoverty rates
are considerably lower than those in the U.S while the core poverty rate is greater due to
extensive subsidiesfor children, theunemployed, health care, and post-secondary
education. The employee benefits are at the expense of the companies, the industry and
thecountry. Further, long-term macroeconomicpolicy embracessocial fairness for the
whole society costing the EU a fortune.
For example, after the 2012 European debt crisis, the EU economy staggered and
struggled to support its members. When conventional monetary policy has become
ineffective, the ECB (European Central Bank) must launch quantitative easing (QE)
program to creat electronic money to purchase financial assets, so as to escape from
deflation. From March 2015 to September 2016, the ECB will buy €60 billion ($68
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billion) of assets per month, a total of €1.1 trillion (P.W., 2015). The assets will include
private assets, mainly covered bonds, asset-backed securities, since 2014 at about €10
billion a month in the secondary markets.
Figure 1: Quantitative Easing in the Euro area in 2012-2016 (P.W., 2015)
Mario Draghi, the ECB’s president, intended to be extend QE if needed, stating that “in
any case be conducted until we see a sustained adjustment in the path of inflation” which
is the ECB’s goal of under 2% inflation rate over the medium-term (P.W., 2015). On 10th
March 2016, the ECB’s 25-member Governing Council decreased interbank overnight
rate by 10 basis points to (-0.4%) and cut its benchmark rate to zero. Bond purchases
were enlarged to 80 billion euros ($87 billion) per month from 60 billion euros (Speciale
and Black, 2016).
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Figure 2: European Central Bank policy rates in 2010 – 2016 (Shotter and Jones, 2016)
It is almost 10 years since the 2007 economic depression. Until now, the Anglo-
American’s countries still battle with re-regulations and structural reforms their financial
markets. The model has been adjusted to suit current economic conditions. Although, its
core characteristics remains unchanged. The preference for entrepreneurship, minimal
state interference toshort-termcrunches andincomeinequality accept asan important mean
tomotivate innovations and competition. Social welfare and public services are quite
limited in the U.S. Macroeconomic policies are periodically modified within one and
two quarters to encourageeconomic growth and pricestability and full employment (the
U.S).
Differently from the ‘laissez-faire’ label, British and Americans do not waver from
government intervene in its own economy. The main and most fruitful export sectors,
military goods, agriculture and hi-tech information systems are offered great government
investment and subsidization. The trillions of dollars are used to bail failed banks out and
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revive the whole banking sectors through quantitative easing (QE) programs like its
opposite Eurozone.
For instance, since the beginning of the crisis in 2007, the four central banks of the
United States, the United Kingdom, the euro zone, and Japan have poured $4.7 trillion
into their economies, boosting interest rates to around zero (Figure 3) (Dobbs and Lund,
2013). Successfully, these QEs have lifted GDP about 1% - 3% and stopped a disastrous
fiasco in the global financial system. Overall, the total QEs of $6.7 trillion have been
injected into four countries in 2015 (Stratfor, 2015).
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Figure 3: Central bank balance sheets in the United States, the United Kingdom, The Eurozone and
Japan since 2007 (Dobbs and Lund, 2013)
Finally, even the EU offers very generous social welfare and public services, the Rhine
countries are wealthy and havea robust economic stance because among theworld’sthirty
richestcountries, sixteen countriesare in the EU. Otherwise, despite the European debt
crisis and the Brexit, the EU still is main sponsors for the developingcountries in
globalization and development movements.
1.3 The Financial System
A financial system
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A financial system is a system that consists of financial markets where financial
intermediaries as banks (run by the government or private sector) and non-bank
financial institutions delivering financial instruments and services to individuals,
companies and other entities so as to undertake economic activities.
Financial systems are generally categorized into two major types as “bank-based”
system and “market-based” system depending on their own characteristics and the
nature of national economy. In following sections of the study, these systems will be
compared and contrasted to spot out pros and cons of each type to affirm the
superiority of bank-based system over the market-based system.
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Figure 4: The financial system (, 2010)
Table 1: Classifying financial systems in selected countries (Mishkin, 2010)
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1.3.1 Financial intermediaries
The financial intermediaries

The financial intermediaries intermediate between lenders (surplus users) and
borrowers (deficit users) through various savings and investments vehicles in
diverse risk and return characteristics. In performing their roles, financial
intermediaries lessen transactions costs and problems of asymmetric information
between lenders and borrowers. Noticeably, the advent of complex derivative
instruments has enabled to enhance more efficient allocations of risks and capitals
in the economy, and strengthen the efficacy of the saving-investment process.
1.3.2 Financial markets
Financial markets
Financial markets play an important role in the mobilization of financial resources
for long term investment through financial intermediation. The existence of money
markets facilitate trading in short-term debt instruments to meet short-term needs
of large users of funds such as governments, banks and similar institutions.
Government treasury bills and similar securities, as well as company commercial
bills, are examples of instruments traded in the money market. A wide range of
financial institutions, including merchant banks, commercial banks, the central
bank and other dealers operate in the money market. Public as well as private
sector operators make use of various financial instruments to raise and invest short
term funds which, if need be, can be quickly liquidated to satisfy short-term needs.
Unlike the money market, the capital market mobilizes long-term debt and equity
finance for investments in long-term assets. Capital markets also help to strengthen
corporate financial structure and improve the general solvency of the financial
system.
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1.4 Comparison of financial systems
1.4.1 Bank-based financial systems
A bank-based financial system

A bank-based financial system is a system that banks dominate a country’s credit
channel in mobilizing savings, distributing funds, supervising corporate
governance of borrowers (i.e. corporate management), and bringing risk
management tools. Bank-based financial systems thrive in countries with the
legislative system of civil law and late industrialization in European Union,
particularly Germany, French and in Asia, particularly Japan, Korea. Other aspects
of bank-dominated economies would be poor accounting standards, austerely
regulated banking systems, and high inflation due to underdeveloped financial
systems. Though, it is best practice to choose bank-based financial systems in
developing countries since financial markets are not rigorous enough to develop on
its own. Yet, national authorities must foster financial systems and protect them
from economic shocks and crises. Given the sensitivity of the classification to
data sources, in particular for countries in the middle of our sample, we
identify two groups that maximize within-group homogeneity: “strongly
market-based” economies and “strongly bank-based” economies. Four
countries are strongly market-based—the United States, Australia, Canada,
and the United Kingdom— and four are strongly bank-based—Belgium,
Portugal, Spain, and Austria.
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Figure 5: Private Sector Financing, 2002-2011 (Allard and Blavy, 2011)
1.4.1.i Pros of bank-based financial systems
Bank-based financial systems lessen free-rider problem because banks other financial
intermediaries keep private information about borrowers and investments without
disclosing to the public. This pushes savers and investors to spend time, efforts and
money on analyzing corporate facts, and accordingly ease asymmetric information in the
market.
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The “Hausbank”
In Germany, the “Hausbank” is known as a principal bank which establishes a
very long-standing and focused bank-firm relationship with a specific company.
Otherwise, this bank tends to offer greater amounts of debt and equity for the client
company. Hausbanks can be large commercial banks or universal banks such as
Deutsche Bank AG, Dresdner Bank, AG Commerzbank AG, UniCredit Bank AG,
and Deutsche Postbank AG. In September 2016, these banks account for 73% of all
financial institutions and accounted for 79% of total interbank loans and over 68%
of aggregate non-monetary financial institutions lending (Table 3). German banks
are permitted to acquire cross long-term shareholdings in peer banks, insurance
companies and institutional organizations. It contributes to extremely sturdy
interconnections in German banking sector and financial markets. Thus, the system
is acknowledged as the spine of the EU (after the Brexit of the U.K in the third
quarter of 2016) and the most unbreakable bank-based economy. Hausbanks also
perform proxy voting on behalf of retail customers whose common shares are
delegated for them. Herein, Hausbanks might gain major voting rights, and so
govern companies’ daily operations. Understandably, Hausbanks would possess
higher bank’s representatives in companies resulting in more effectively monitoring
and directing powers and influences on the client company management decisions
than banks’ supervisor boards.
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Table 31: Principal assets and liabilities of banks (MFIs) in Germany, by category of banks (Deutsche
Bundesbank, 2016)
Some supporters argue banks are superior to markets in terms of the reduction of
informational asymmetries that banks can exert more powers on borrowers’ corporate
governance. Acting as primary lenders on behalf of depositors, banks would guarantee
borrowers (companies) to use funds in most proper and beneficial manners (herein,
minimize moral hazard problem). Also, banks moderate adverse selection by inducing
companies to reveal internal information and motivating investors exercise greater efforts
to acquire adequate information before investments.
Other aspect emanates from excess liquidity available in capital markets might drive
financial managers to create reckless investments. Thus, without banks’ supervision,
agency problems likely increase because ownership diffusions that an individual
shareholder has less motivations to watch over managers directly.
1.4.1.ii Cons of bank-based financial systems
Opponents of bank-based systems claim excessive controls from superintending and
extracting rents stifle companies’ growths and damage state financial infrastructure.
Holding a relative monopoly power, banks tend to favor riskier borrowers who offer
higher interest rates and abandon safer options from small businesses. Accordingly,
banks likely refuse giving loans for manufacturing and technology initiatives which have
less or no governments’ backings.
1
Assets and liabilities of monetary financial institutions (MFIs) in Germany. The assets and liabilities of foreign
branches, of money market funds (which are categorized as MFIs) and excluding those of the Bundesbank.
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The other disproval starts from bank managers might exploit own benefits rather than
pursuing shared goals of fortifying corporate governance. These bank managers, besides
can press on keeping or removing members of board of director or management. In some
worse cases, harmful impacts are ineffective firm controls, fruitless investments and
wasted expansions.
Undeniably, the more financial sophistication is, the more effective financial systems
are compelled to strengthen both domestic and cross-border credit allocation. As opposed
to risk diversification function, European banking sector is 316% higher than the zone’s
aggregate GDP and even surpasses the entire assets of Chinese banking system. Being
too dependent on traditional bank intermediation limits potential growths of equity
markets in the EU. The U.S equity markets are double compared to the rest nations.
Additionally, issuance of corporate and government debt securities in three bank-based
economies other than the US occupies just half of national GDP.
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Chart 12: Simplified structure of the financial sector in the EU, 2010-2014 (% GDP, average) (Valiante,
2016)
The reality of highly fragmented capital markets implies stagnation and uncertainty to
bank-based economies like the EU including Germany. European equity markets’
turnover experiences over five times lower than those of American market (see in Chart
2). Limited risk hedging instruments and sluggish asset management facilities plunge
dramatically fees and commission revenues of universal banks. Closed and segmented
banking system within Eurozone also increases the width but narrowing the depth of
crowdfunding distribution channels. Recently, the EU has 32,000 investment funds with
an average value of €186 million which is a seventh of their US counterparts with 7,600
investment funds in a total value of €1.34 billion. European investment pooling is still in
the embryonic stage compared to that of the US. Though, European banks are more
committed to private equity and venture capital investments than American rivals.
2
Notes: With debt securities, outstanding debt amounts are left out institutional debt securities containing in the
banking sector assets statistics. With equity securities, domestic market capitalization is applied. Otherwise, US
bank assets data are comprised gross notional value of derivative trades and credit union assets.
Data Sources: IMF (GDP), BIS, ECB, US Fed, BoJ, PBoC, WFE, FESE and Eurostat for exchange rates.
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Chart 23: Total turnover of European and US exchanges (€bn; 2009-14) (Valiante, 2016)
3
Note: *Includes London, Frankfurt, Paris, Milan, Amsterdam, Madrid, Stockholm, Copenhagen, Brussels,
Helsinki, Lisbon, Vienna, Dublin (98% of the market); **includes US NYSE, Nasdaq, BATS (sum of daily data).
Source: BATS Europe, BATS US.
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1.4.2 Market-based financial systems
A market-based financial system

A market-based financial system is a system that securities markets are more
dominant than banks in a country’s credit channel by transferring and allocating funds
from securities trading to end-users (i.e. firms, households and individuals),
monitoring borrowers’ corporate governance, and facilitating risk management
process. Market-based financial systems function well in countries with a common law
practice, focusing on shareholder wealth maximization. Typically, these systems seem
to bloom in developed countries as Canada, the United Kingdom, and the United
States. The market-dominated economies possess strong accounting standards, less
regulated banking systems, low degrees of inflation and greater economic growths, and
no obvious deposit insurances because of fairly laissez – faire financial markets.
1.4.2.i Pros of market-based financial systems
The first merit of market-based financial systems is cheaper and broader financing
sources from liquid capital markets. These sources are not completely separate from
banks but they are more easily and largely available than bank loans. Companies can
issue bonds and shares in different markets to raise funds. Maturity and interest rates are
determined arbitrarily by corporate managements rather than being customized by banks.
Regarding shares, there is no maturity but dividends as a form of returns would depend
on business profits and not under debt obligations. If companies have losses, no
dividends are distributed to shareholders. Otherwise, companies are free from banks’ rent
extractions and substantial asset collaterals when participating in capital markets.
Another line of agreements shows that market-based systems generate diverse risk
management vehicles. Markets offer higher flexibility and customization for each
market agent. They address specific risks to companies. It distinguishes from banks’
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standard products of deposits and loans at rigid terms to maturity and varying interest
rates. Derivatives markets for example, give market participants wider variety of
investment or saving choices hedged against unexpected losses from trading activities.
These markets possess financial instruments comprising forwards, futures, options,
swaps, and other synthetic collateralized debt obligations and credit default swaps based
on any possible underlying assets4, not always is cash. It is noticed that market strengths
are built through robust and dynamic legal and regulatory environment where developed
markets like the U.S, the U.K, Canada or Switzerland are only places to sustain.
Other positive influence of market-based systems is price discovery. Markets deliver the
unique mechanism to value asset prices through the interactions of sellers (supply) and
buyers (demand). High comparability data from company fundamentals, relevant
industries, and macroeconomic conditions among markets lift up the efficiency of price
discovery process. Market-based systems enable faster information dissemination and
lower costs of discovering prices and thus, well matching between savings and
investment chances cross-border levels.
1.4.2.ii Cons of market-based financial systems
Critics of market-based systems argue that markets cannot fully obtain information
about companies and exert corporate controls. Markets are just exchange venues where
connect sell sides and buy sides of securities trading transactions. Markets require
corporate information disclosures for both sides, though internal information is still
absent in the process. Therefore, actual operations and strategies are not revealed to the
public. Markets are not in direct supervisory roles like banks to demand the conformity
4
Underlying assets: stocks, bonds, commodities, currencies, interest rates and market indexes
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from the companies’ managers and directors. This escalates informational asymmetries
of adverse selection (ex-ante lending) and moral hazard problems (ex-post lending). As a
result, markets misallocate financial resources and worsen economic performances.
Market-based systems encounter other attack from their idiosyncrasies that markets are
imperfect and incomplete. Even markets deliver better customized risk hedging
instruments than banks. It is undeniably that banks are superior in intertemporal risk
sharing mechanism. Thus market-based systems do not efficiently accommodate risk
ameliorating services compared to bank-based systems.
1.5 Conclusion
The Rhine capitalism model is well adopted in bank-based economies where banks are the
blood vessel of the whole economy (i.e. the EU, German, Japan and Asia). Whist, under a
free-market orientation, the Anglo-American capitalism model works well in market-based
financial system (i.e. the U.K, U.S, Canada, etc.,). Actually, the deregulation age in market-
based countries brought about the worldwide financial crisis in 2007-2008, followed by
series of financial depressions across the world. In this aspect, the Rhine capitalism model is
superior to the Anglo-American capitalism model of deregulation.
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PART B
THE EXISTING INCOME OPPORTUNITIES AND THE IMPACTS OF REGULATORY
REFORMS ON BANK INCOMES SINCE THE GLOBAL FINANCIAL CRISIS
2.1 Introduction
Since the worldwide financial crisis in 2008, international banks’ incomes have been
decreasing substantially. It is partly because of many regulatory reforms and other reasons
belong to low interest rate and blue economic conditions. Recently, international banks are
more focused on earning traditional incomes of lending and borrowing activities and trading
incomes and investment-banking incomes are gradually dropping because of the restrictions
on speculations and shadow banking activities. The following sections below will illuminate
existing income opportunities and impacts of regulatory reforms on bank income
performances.
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2.2 Existing income opportunities of international banks
2.2.1 Net interest income
Net interest incomes

Recently, international banks’ net interest income has decreased because of tough
competition from non-bank organizations which are attempting to gradually
increase market share in banking sector. Net interest income comes from basic
products provided by international banks as loans, overdrafts, credit cards and
payment services. These net interest incomes are the differences in spreads
between banks’ assets (loans) and banks’ liabilities (deposits) at fixed rates or
variable rates. The wider spreads are the greater profits banks can earn.
For illustration: slow economic upturn from the US and the UK along with
accommodative monetary policies from the European Central Bank (ECB), the Bank of
Japan and the People’s Bank of China emphasize uncertainties and latent systemic risks
across the financial world. In parallel to regulatory and banking structural challenges;
sluggish national inflation escalate dangers to international banks’ net interest incomes.
Low profitability is guaranteed under the low-growth setting of persistently low or
negative interest rates and tightly pressed term premia. Bank return-on-equity ratios
cannot return back to prior levels before the global financial crisis (Graph 1, left-hand
panel). The ECB’s quantitative easing partly help to improve banks’ net income from
one-off capital gains and cheaper financing source in the short term. However, these
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unconventional monetary measures will not extend constantly. Hence, the even trend of
long-term yield curves shrinks net interest margins from maturity transformation.
Otherwise, the positive interest rates to all savers in European banks make lesser gross
interest income exceeding operational and funding cost reductions, bringing about
deteriorating net interest margins since 2010, particularly marked in Denmark, Sweden
and Switzerland (Graph 1, centre panel). Retail-funded banks obtain fewer profits from
abating interest expenses (Graph 1, right-hand panel). In market-based economies,
regulatory authorities try to encourage banks in enlarging traditional lending activities.
In British and American markets, banks make up their compressed revenues by trading
and fee-generating services in securities, whilst others seek for stronger efficiency to
reduce expenses by downsizing in staffs and offices.
Graph 1: Banks struggle with falling margins (BIS, 2016)
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2.2.2 Fees and commission income
Fees and commission income

Lately, fees and commission income (F&C income) grows their importance to
international banks’ sources of revenues since compression of net interest margins.
F&C incomes are all earnings differing from traditional loans and deposits
activities. They begin from syndicated loans, insurance contracts, stock dealing,
leasing, factoring, intermediary services (i.e. money transmission, cash
management, foreign exchange currency services, etc.) and trade finance (i.e.
credit facilities of letters of credit, documentary collections and forfaiting) and
other services isolated from interest revenues.
In syndicated lending, banks obtain arrangement fees from upfront payments to
form the deal; commitment fees compensatory payments to hold required capital
against the obligations and utilization fees. Money transmission and cash
management are handled by banks to ensure worker remittances and trade
payments smoothly flowing between developing and developed economies
For example: After the 2008 global crisis, European banks’ F&C income occupied 30%
of total operating income (Chart 2, left-hand panel). This proves other income sources
as net interest income and trading income have decreased sharply owing to negative
interest rates, higher regulatory requirements and weak credit demand. From different
business models, F&C income had largest share in the business model of custodian
banks and asset managers at 70%, followed by other types fluctuating from 15%-30% of
aggregate income, individually. Corporate/wholesale lenders and specialised sectoral
lenders (e.g. auto and shipping financing firms) only gained over 15%, accounting for
the slightest shares of F&C income. Besides, universal banks and retail lenders report
shares saw better position at 25-30% (Chart 2, right-hand panel). Generally, F&C-
related activities grow well in traditional bank models in which technology advances are
absent or insufficient to exercise more wide-ranging trading and investment banking
activities. Another reason is clarified by particular characteristics of banks’ business
models like savings banks, credit cooperatives and building and loan associations.
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Chart 25: Fee and commission income and its share cross bank business models (ECB, 2016)
5
SSM stands for Single Supervisory Mechanism
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2.2.4 Trading income
Trading income
Trading income of international banks stems from aggregate gains minus losses
from erratic fluctuations of market-making, derivatives dealing, commitments and
guarantees (e.g. underwriting clients’ obligations). International banks act as
market maker (dealer), broker, trading derivatives (predominantly
interest/currency), commitments and guarantees (such as letters of credit and bills
of exchange) to assure the best exchange practices and reliable financing sources
for both individual and institutional clients. Indeed, uncertainties and instabilities
across financial markets surge banking magnitude in shaping investment and profit
opportunities. Under regulatory pressures, derivatives, currency and commodity
markets are having insufficient volatilities to make operational efficiency.
For demonstration: in the 2016 Triennial Central Bank Survey, Bank for International
Settlements (BIS) reported the divergence between spot trades and FX swaps activities.
Spot trading turnover saw a daily decline of 19% to $1.7 trillion in April 2016. The share
of spot transactions dropped 5% in total foreign exchange market turnover between April
2013 and April 2016 to 33% (Graph 2). This decline in spot trading was the main driver
behind the overall fall in global FX turnover compared with 2013 (Graph 2, left-hand
panel). The US dollar keeps largest share of FX swap transactions at 91%, followed by
the euro and the yen shares of 34% and 19%, respectively.
In FX OTC derivatives market, trading volume of outright forwards increased 3% to
$700 billion from $679 billion in 2013. This surge is fastest in all FX instruments despite
its lowest trades and long-term maturity nature. Turnover in currency swaps reached to
$96 billion in 2016, a 79% rise since 2013. However, FX options turnover fell 24% to
$254 billion with a major decrease (52%) belongs to the yen cross rates ($74 billion)
(Graph 2, left-hand panel).
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Graph 3: Foreign exchange market turnover by instrument (BIS, 2016)
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2.2.5 Investment banking income
Investment banking income
Undertaking the role as investment banks, international banks acquire investment
banking income by providing various services of underwriting, asset and wealth
management, and advisory services on mergers and acquisitions. International
banks underwrite both debt and equity securities. Commercial papers, corporate
bonds government and municipal bonds as debt securities are intermediated by
banks to lift up liquidity and accelerate selling process. Otherwise, international
banks participate in equity underwriting process such as initial public offerings
(IPOs) and secondary market offerings to guarantee most lucrative auctions to
lenders/companies. There are rewards for banks’ contributions, including 3%-5%
of total funds to compensate for potential risks threatening in these practices.
Asset and wealth management services also fortify considerable banks’ earnings
from wholesale clients such as pension funds and insurance companies, or high-
net-worth individual customers. Besides, banks receive advisory fees by providing
investment risk hedging vehicles; consulting corporate balance sheet
restructurings; and mergers and acquisitions (M&A) deals.
For instance: investment banking revenues are sluggish in the same growth as it was in
2005 and 2006. Investment banking-related activities suffer a downward tendency year-
on-year. These activities have been going backward rather than blooming (see in Figure
6). In the first nine months of 2016, global investment banking revenue dropped 10%
at $53.3 billion to its lowest level since the 2008-2012 financial ($49.3 billion). Debt
capital markets (DCM) and M&A won the largest share around 31% of total share.
Seeing positive outlook, equity capital markets (ECM) still experienced its lowest value
of 19% share compared to the similar period in 2015. Monthly IB revenue had an
average value of $5.9 billion, decreased 10% from a 2015 value of $6.6bn.
35 | P a g e
Figure 6: Global Investment banks – Clean investment bank revenues 1999-2018E ($bn)(Butcher, 2016)
American IB revenues declined 13% to $25.4 billion. Showing the uptick, syndicated
loan revenue bounced back to 10% annual growing rate. American incumbents gave
M&A a push of 36% up, to $9.1 billion whereas ECM revenue lost its momentum and
fell over 37% from $5.8 billion last year. In Eurozone, IB revenue bear equivalent
position recorded stood at a 13-year contraction of $11.8 billion. After the UK’s Brexit,
everything in the EU became gray, ascertaining worse scenarios of latent crisis as a 22%
decrease within three months $3.1 billion in 2nd quarter to $3.1 billion in 3rd quarter.
Unsurprisingly, British IB revenue disappeared 19% value each month since 2015 ($225
million) with an abnormal earning of $323 million in 2016 August. Generally, the UK IB
revenue ($3.0 billion) reduced 7% per annum, occupying 25% share of European IB
revenue, the peak since the 2008 global depression. Across the world, glooming setting
36 | P a g e
covered from developed economies to emerging economies, remarking China was the
frontrunner of 27% upturn to $6.2 billion (see in Figure 7).
Figure 7: IB Revenue Breakdown by Product (WSJ, 2016)
2.3 The discussions of regulatory reforms since the financial crisis
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Figure 6: Major Banking Legislation
2.3.1 Dodd-Frank Act in the United States
Dodd-Frank Act in the United States

The Wall Street Reform and Consumer Protection Act, also recognized as the
Dodd-Frank Act was signed by previous U.S. president - Barack Obama in July
2010. Under the Act, the Financial Stability Oversight Council (FSOC) and the
Consumer Financial Protection Bureau (CFPB) was formed to minimize “contagion
effect” in financial markets, and the latter is to protect investors from mistreats and
dubious institutional lending activities. The FSOC would focus on detecting
systemic risks, precluding “too big to fail” banking organizations from practicing
reckless investments and increasing reserve requirements. Being so questionable,
the Volcker Rule stops banks from participating in proprietary trading practices
and ownership, sponsorship, or investment in hedge funds or private equity funds,
except for funds produced below 3% of total bank’s revenues. The Volcker came
into effect in 2014, though seeing a 5-year postponement until 2019 and a complete
exit of shareholdings in banning funds in 2022.
Figure 7: Key Government Institution (Meltzer, 2016)
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2.3.2 Ring-Fencing Rules in the United Kingdom
Ring-Fencing Rules in the United Kingdom

Depending on the Vickers Report by the Independent Commission on Banking 6,
Ring-fencing was addressed by the Financial Services (Banking Reform) Act 2013
and passed on 18th December 2013. Ring-fencing states that deposits are only taken
by special entities called ‘ring-fenced bodies’, which are banned from performing
some activities (or excluded activities). Ring fencing will be implemented through
the Banking Reform Act 2013 and secondary legislation7 and the Prudential
Regulatory Authority (PRA) rules from 1 January 2019. Ring-fenced banks 8 are
required to take deposits from retail and small business customers, which need to be
separated from other banking activities (i.e. investment banking activities). Ring-
fencing rules are applied to all UK deposit-taking institutions with £25 billion or
more of “core deposits” (presently six banks in the UK: HSBC, Barclays, Lloyds,
RBS, Santander and the Co-operative Bank).
6
The Independent Commission on Banking is chaired by Sir John Vickers
7
The secondary legislation includes four statutes or orders for ring fenced bodies and concerns the following: the
permitted “core activities” of the ring-fenced bank; those activities which are excluded; Banking Reform (Loss
Absorbency Requirements) order specifying the level of capital a bank needs to survive potential losses; fees and
regulation for prescribed organizations which defines how banks have to contribute to fees incurred by the Bank of
England for the latter’s membership of international organizations such as the Financial Stability Board.
8
Ring-fenced bank’s core activities as:
1. Facilities for the accepting of deposits or other payments into an account, which is provided in the course of
carrying on the core activity of accepting deposits;
2. Facilities for withdrawing money or making payments from such an account;
3. Overdraft facilities in connection with such an account.
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Figure 11: Comparison of Dodd-Frank on Fees of Product/Service (CGI Group Inc., 2015)
2.3.3 Basel III
Basel III
Being considered as the first collaborative regulatory framework of international
authorities after the global depression in 2008, Basel III (or the Third Basel Accord)
stresses on bank capital adequacy, stress testing, and market liquidity risk. Basel III was
approved by all members of the Basel Committee on Banking Supervision (BSBS) in
2010–2011, and was initiated in the 1st phase of 2013-2015. Though, BSBS lengthened
Basel III implementation to 31st March 2019 owing to numerous bank complaints and
lobbies. Basel III was created to encounter market failures and banking contagion during
recent financial crisis six year ago. Basel III is supposed to bring stronger financial stability
by fortifying market efficiency, bank real assets and prohibiting dubious practices of off-
balance-sheet assets.
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Figure 7: Financial Stability (Kruger, 2011)
The formation of Basel III is to eliminate fiascoes of Basel I and Basel II in recent
financial recessions. Basel I is just a descriptive regulatory approach. Similarly, Basel II
is an improper framework for greater bank risk exposures. Its capital requirements are
intended to assure bank capital can absorb every reckless activity that banks desire to
take. Yet, Basel III was come out to abolish relaxed market disciplines causing
deficiencies across financial markets which originated from Basel I and Basel II’s light-
touch regulations.
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Figure 89: Basel I, Basel II, and Basel III Capital Requirements (Kruger, 2011)
9
Note:
1/ Effective as of 2019. In the interim, several phase-in arrangements are in force.
2/ Consisting of tangible common equity.
3/ Not applicable.
4/ Ratio of Tier 1 capital to total assets.
5/ Goodwill and deferred tax assets are to be deducted in the calculation of common equity Tier 1 capital.
6/ Hybrid capital instruments with an incentive to redeem through features such as step-up clauses, which, under
Basel II counted toward Tier 2 capital and up to 15 percent of the Tier 1 capital base, will no longer be eligible as
capital. Under Basel III only dated subordinated debt will be deemed Tier 2 capital.
42 | P a g e
2.4 Impacts of regulatory reforms on incomes of international banks
2.4.1 Impacts of the Dodd-Frank Act on banks’ earnings
Aiming at splitting large banking titans, the Dodd-Frank has significantly forcing down
banks revenues by increasing compliance costs. At the end of 2015, JPMorgan’s earnings
declined 6% to $160 billion compared to $170 billion in the 2014 same period (Gandel,
2015). Assets at Bank of America were almost even to previous quarter. However, Bank
of America has attempted to cut costs by sacking 2,667 workers and disinvest
shareholdings of off-shore and hedge funds in the third quarter of 2016. Downsizing does
not appear to be an effective solution, but its temporary results against low net interest
margins and profitability. At the same time, other big incumbents, Citigroup and Wells
Fargo eliminated 5,000 and 700 positions, respectively (Roberts, 2016). Unsurprisingly,
Bank of America’s net income dropped by 18% to $4.2 billion in this quarter. The Dodd-
Frank and Volcker Rule are not principal culprits here. These declining revenues derive
from persistent low interest rates and tougher market conditions. Similarly, a report of the
Dodd-Frank Act studied by Peirce, Robinson and Stratmann (2015) found that Volcker
Rule had a slight negative impact to 172 American banks, but the Act’s mortgage
regulation dramatically pressed down banks’ earnings.
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Figure 910: Impact of Policy on Bank Earnings (Peirce, Robinson and Stratmann, 2015)
Otherwise Peirce, Robinson and Stratmann (2015) identified fees of overdraft and debit cards
plummeted considerably more than 5% under the restrictions of the Dodd-Frank Act.
10
Sample size N = 172. Figures representing “no impact” have been omitted.
44 | P a g e
Figure 1011: Effects of Dodd-Frank on Fees of Product/Service (Peirce, Robinson and Stratmann, 2015)
2.4.2 Ring-Fencing in the United Kingdom
Recently, bank incomes have gradually diminished. It is partly from persistently negative
to low interest rates. Other reasons may derive from too strict structural reforms to grow.
Heftier compliance costs and mandatorily shrinking capital bases force British banks to
downsize operations to be more focused. We cannot know whether banks are able to
create more innovative vehicles to escape from strongly regulated markets or not.
Nevertheless, banks always find their ways out to survive or thrive at the expense of tax
payers.
Ring-fencing implementation is costly and time-consuming. The U.K banking sector has
to hold billions of pounds or more for capital buffers, which could weaken banks’ lending
ability to retail consumers and small businesses. The Prudential Regulation Authority
(PRA) estimates six largest banks including HSBC, Barclays, Lloyds, RBS, Santander
and the Co-operative Bank must spend £200 million each to complete new norms, and an
annual expenditure of £120 million to pay for the extra staff in IT, HR and risk
management (Wallace, 2015). Also, ring-fenced banks must still meet Basel III of a
10.5%-13% capital buffer, plus an up to 3% systemic risk buffer. Banking outlook
becomes more blue and volatile under continuous regulatory reforms which dramatically
press on their incomes and profitability.
11
Sample size N = 172. Figures representing “no impact” have been omitted.
45 | P a g e
46 | P a g e
2.4.3 Basel III
The proponents of Basel III argue stricter regulations from Basel III promote safety and
soundness of financial systems. These regulations safeguard financial markets against
systematic risk and bank runs. It is controversial that whether Basel III conveys more
positive impacts than Basel II or not. Knowing well that Basel III is an effective
device to build up the public confidence and market disciplines with harsher standards.
International banks are compulsory to keep true assets without being strongly geared
capital structure. As a result, bank capital is gradually contracted along with lending and
investment capabilities. To survive during this tough time, banks must stay focused by
exercising operational restructuring through sacking current workers and divesting non-
core businesses worldwide. Hence, banks have exploited less economies of scale and
economies of scope due to their narrower geographical presences in both domestic and
international markets. Altogether, these reasons dramatically compress incomes.
Recently, international banks have smaller operations compared to before the 2008 global
recession. Otherwise, Basel III’s heavy regulations have suffocated economic growth by
forcing banking consolidation (i.e. merges and acquisitions of small banks) and
increasing regulatory costs. All of these costs are tolerated by customers rather than
banks. Does Basel III really benefit the whole public? In this case, it is not completely
true. Though, we should consider that everything comes with a price, unexceptionally for
better market disciplines.
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2.5 Regulatory Arbitrage
Since the global financial crisis of 2008, financial regulators enacted onerous regulatory
reforms to enhance more bank ethical and legal ecosystem. The U.S Dodd-Frank Act, the
U.K ring-fencing and Basel III are endless efforts of regulatory controllers to stabilize
financial markets worldwide. Regulations are too harsh to grow bank profits. That is why
banks seek for regulatory arbitrage to easy their pains. Banks do not aim at illegal
undertakings but trying to make a detour to arrive in tax havens or light-touch territories.
This will weaken the efficiency of regulations worldwide.
For illustration: in New York, the Ovid Regulatory Capital Relief Fund was established
to direct bank capital to “capital relief trades” or “regulatory capital trades” through
purchasing credit default swaps being offered by the Fund. Another bigger player of
regulatory arbitrage is HSBC. The bank attempts to move their profits around the world
and do not want to comply with rough national regulations where it is domiciled. In October
2010, the US Office of the Comptroller of the Currency (OCC) asked HSBC to set up
“effective compliance risk management program across their US businesses”. Hitherto,
HSBC announced: “HSBC Bank USA is not currently in compliance with the OCC order.
Steps are being taken to address the requirements of the orders.” (Treanor, 2016) This
program was strongly enforced after the US Department of Justice punished the bank for
$1.9 billion over money laundering for senior government officials in Asia, under
“princelings” scheme (Treanor, 2016). The HSBC chairman, Douglas Flint said “HSBC is
pivoting towards Asia but holding a focus on the UK and the US”. Both Flint and another
HSBC Chief Executive-Stuart Gulliver call Hong Kong home. HSBC implied that these
decisions are to acclimatize to new obligations, considering better ecosystems where HSBC
48 | P a g e
has strong local presence (HSBC, 2016). The bank is urging U.S regulators that if the US
market stifles their operations, the bank will move to Hong Kong where Chinese authorities
has indulged HSBC for so long.
2.6 Conclusion
International banks’ incomes have been lessening sharply owing to stronger banking
regulations. National regulators and international regulatory agencies have imposed
numerous new regulations on banks’ operations and activities. The U.D Dodd-Frank Act,
ring-fencing rules in the U.K and Basel III adversely reduce the profitability of international
banks. That is why banks must take advantage of regulatory arbitrage in developing
countries where regulations are looser to be able to survive and grow.
49 | P a g e
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UNIVERSITY OF SUNDERLAND

ASSESSMENT COVER SHEET

BA (HONS) BANKING AND FINANCE

Student ID: 159130423

Student Name: NGUYEN VIET HA

Module Code: UGB 322

Module Name / Title: International Banking

Centre / College: Banking Academy of Viet Nam

Assignment Title: Individual assignment

International Banking Report

Module Title: International Banking

Module Code: UGB322

BA (Hons) in Banking and Finance

The University of Sunderland, UK

Word count: 3,300

Submission date: 13th January, 2017

List of Tables, Graphs, Charts, Figures and Boxes.........................................................................6

THE CRITICAL COMPARISON OF CAPITALISM MODELS AND FINANCIAL SYSTEMS

1.2 Overview of two capitalism models..........................................................................................8

1.2.1 The Rhine versus Anglo‐American model of capitalism..............................................8

1.2.1.i The Rhine model..........................................................................................................8

1.2.1.ii The Anglo‐American model.......................................................................................9

1.3 The Financial System..............................................................................................................14

1.3.1 Financial intermediaries..............................................................................................15

1.3.2 Financial markets........................................................................................................15

1.4 Comparison of financial systems.............................................................................................16

1.4.1 Bank-based financial systems.....................................................................................16

1.4.1.i Pros of bank-based financial systems.........................................................................17

1.4.1.ii Cons of bank-based financial systems.......................................................................20

1.4.2 Market-based financial systems..................................................................................22

1.4.2.i Pros of market-based financial systems......................................................................23

1.4.2.ii Cons of market-based financial systems....................................................................24

THE EXISTING INCOME OPPORTUNITIES AND THE IMPACTS OF REGULATORY

2.2 Existing income opportunities of international banks.............................................................26

2.2.1 Net interest income......................................................................................................26

2.2.2 Fees and commission income......................................................................................28

2.2.4 Trading income............................................................................................................30

2.2.5 Investment banking income.........................................................................................32

2.3 The discussions of regulatory reforms since the financial crisis.............................................35

2.3.1 Dodd-Frank Act in the United States..........................................................................35

2.3.2 Ring-Fencing Rules in the United Kingdom...............................................................36

2.3.3 Basel III.......................................................................................................................37

2.4 Impacts of regulatory reforms on incomes of international banks..........................................39

2.4.1 Impacts of the Dodd-Frank Act on banks’ earnings....................................................39

2.4.2 Ring-Fencing in the United Kingdom.........................................................................41

2.4.3 Basel III.......................................................................................................................42

2.5 Regulatory Arbitrage...............................................................................................................43

List of Tables, Graphs, Charts, Figures and Boxes

Table 1: The Comparison of Forwards and Futures.....................................................................33

Table 2: Assets of financial intermediaries in 26 jurisdictions.....................................................37

Graph 1: Cross-border claims of BIS reporting banks...................................................................9

Graph 2: Foreign exchange market turnover by counterparty.....................................................17

Chart 1: Global YTD $10bn+ Loans on Par with Record in 2000..............................................11

Chart 2: Global Industrials M&A Revenue ................................................................................18

Chart3 : Assets of financial intermediaries in 26 jurisdictions....................................................38

Figure 1: Trade finance options by payment risk ........................................................................12

Figure 2: Letter of Credit .............................................................................................................13

Figure 3: Documentary Collection ..............................................................................................14

Figure 4: Forfaiting Transaction Diagram ..................................................................................15

Figure 5: Various Types of Risks in Banking Activities..............................................................19

Figure 7: The Consequences of Sub-Prime Lending and Securitization .....................................36

Box 1: The types of risks in international banks’ operations............................................................

Box 2: The Eurocurrency market......................................................................................................