Globalization of

Banking and
Finance-I
Dr HK Pradhan
XLRI Jamshedpur
 Globalization of Finance

Internationalization
of Banking Floating Exchange
Rates, Interest rates &
Inflation divergence

Globalization Eurocurrency Financial

of Finance Markets, Eurobonds Products & Process Market
markets, Euro equity Innovations: Integration
markets(GDR, ADR) Securitization,
Disintermediation,
Technology

Transnational Debt Crises,

Corporations, Currency
Institutional Asset Classes: Crises,
Investors, Central USD, Gold & Oil Banking
Banks, Hedge Crises,
Funds, SWFs Global Finan-
cial Crisis
 Growing importance of global finance

• Countries have different currencies

• Exchange rate systems (with capital controls) differ
• Countries have different tax & regulatory structure
• MNCs, FIIs, SWFs, Hedge Funds, etc have cross
border operation
• Investors seek diversification of assets
• Globalization of banks and asset markets
 Evolution
• Until World war I
– Capital came from Britain, and went to US, Canada, and to an extent to their colonies
• Inter-war years
– US emerged as the major suppliers of capital, but mostly to Canada and Latin America
• World War II
– US provided major assistance to Western Europe under Marshall plan
• 1950s and 60s
– US, other developed nations provided ODAs, IMF & World Bank started assistance to
LDCs(Aid, grants), IFC(private funding)
• 1960s
– Eurocurrency markets emerged as London accepted non-sterling deposits, Soviet Union and
Oil economies kept dollars in London
• 1970s Oil Shocks and After
– Surge in Bank lending, financial intermediation thro banks
• 1982 Debt Crisis and After
– Bank lending dwindled, securitization of finance, innovations
• 1990s and Beyond (Asian Crisis 1997, Global Financial Crisis 2008)
– Private flows, more importantly to emerging markets, capital markets
2008 Global Financial Crisis and beyond:
– Deepening of disintermediation, prudential regulation and governance, Basel III and risk
management system
2020 COVID Pandemic
– Governance and ESG
 National Capital Markets
• Domestic capital markets deals with loans and securities
denominated in the local currency.
– Dynamics of those markets are determined to a significant
extent by the respective government policy
– Government policy have allowed foreign participation
– Differences in regulation and taxation could divide the
various markets, producing incentive for investors and
borrowers to take advantage of cross country differences
– At times the regulations and taxes are designed to
discriminate against foreigners
 Global Financial Markets
• New York, London, and Tokyo, Frankfurt,
Singapore, etc serve as major financial centres for
the world
• Important characteristics are large size,
convertible currency, deregulation, political and
economic stability, internationalized currency, low
transaction costs, efficient clearing and settlement
systems, financial deepening, and innovations
Offshore Banking Centers:
• Cayman Islands, Bahamas, Hong Kong, Mauritius,
Singapore, Switzerland, etc.
• Emerged since 1970s, expressly to serve needs of foreign
investors/borrowers
• Most of the capital in these markets supports investment
outside the offshore centers
• Often act as tax heavens, with little or no taxes on financial
transactions.
• In US, the International Banking Facility (IBF) acts as OBC,
serves to make loans to foreign customers
• International Financial Services Centres(IFSC) in
Gandhinagar provides tax exemptions for offshore fund
management and offshore banking at IFSC.
 Evolution of Eurocurrency
• Rise of Eurodollar market
– Banks followed flag, then trade and now capital
– Marshall Plan, that involved billions of dollars used
in Western Europe
– Oil shocks of 1970s, rise of petro-dollars
– Big Bang in Britain (1986) and the little bangs that
followed in several countries
– Rise of Int’l Banking as an escape from the
limitations of domestic regulation
– Cross listing of major companies
 Euro Currency Markets
• Eurocurrencies are called Eurodollar, euroyen,
eruodeutschemark, etc
• U.S. dollar deposits placed in banks outside USA are
called Eurodollars and are not subject to U.S.
regulations.
• The market is made up of several large banks called
eurobanks that accept deposits and provide loans in
various currencies.
• Eurobanks may/may not special banks but could be
specified as functions in eurocurrency
 Defining characteristics
– currency can be separate from the location of
the market
– freedom from government regulation
– Markets outside national jurisdiction
– Extremely competitive in loan pricing
– Innovations typically happen in Euromarkets
 Eurocurrency Markets
• Wholesale markets, with few name banks
predominate
– Significant credit risks, country risks, and
currency risks, therefore the prevalent of
interbank markets
• Interbank markets facilitate loan syndication
– Reduces transaction costs for banks
– Flexible in term of loan currency and maturities
– Finer rates for the borrower, yet better
profitability for the banks
 Euromarkets

• Pooling and unbundling

• Maturity and geographic transformations
• Fewer formalities, regulated under Basel norms
• Tendency to innovate and packaging products
(financial engineering)
• Competitive rates, but finer rates for the borrowers
• Arbitraging tax-domains and regulations
 Eurocurrency Rates

Compare with corresponding domestic rates

 Eurocurrency Rates
• Globally competitive rates
• Eurobanks set international interest rates
– London Interbank Offered Rate (LIBOR) is being replaced
by Secured Overnight Financing Rate (SOFR) in US and
SONIA (Sterling Overnight Index Average) rate in UK, as
interbank rates serving benchmarks
• Domestic and foreign currency rates are linked thro interest
rate parity arbitrage
– Currency markets and eurocurrency markets are linked thro
money markets
• Eurocurrency lending rate is a 'floating' rate.
 Globalization of Finance:
Opportunities
– opportunities for investors: higher expected
returns & diversification benefits in cross
currencies
– opportunities for corporations: reduction of
cost of financing and hedge their ER exposure
– opportunity for Institutions: Operating
globally: diversification adds value
Thank You