Content

1. Introduction
2. Structuring the Overseas Operation
3. Chosing an Organizational Structure
4. Functions of Global Commercial Banks
5. Credit Analysis in International Lending
6. Noncredit Services
7. Conclusions

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 1. Introduction

Business of international banks – accepting deposits and

making loans, only ?

Trends:
1)Use of sophisticated financial instrumets
2)Increasing emphasis on nonleading activities
3)Traditional and less traditional services
4)Increasing number of venues

Examples of International Banks: Citicorp, Barclay’s, etc.

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2. Structuring the Overseas Operation
Methods:

1) Correspondent Banking
- Using a bank native to the foreign market to provide
services for foreign bank

Advantage: Foreign bank can provide services for its

multinational customers in foreign market,
without its own presence there
Disadvantage: it is expensive
Examples: J.P. Morgan in Thailand and Peru
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2) Representative Office
- Bank establish a phisical presence in foreign market
with limited functions (no deposits or lend funs)

Advantage: Marketing function, easy to open/close, use

in the case of local restrictions, less tax
liability

Disadvantage: limited capacity

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3) Branch Office
- Legal and functional arm of the head office
Advantage : Full empowerment
Disadvantage: Local law
Examples : J.P. Morgan in New York, Citibank in Indonesia

4) Agency
- An intergral part of the parent bank, but with less
function (not like rep office)
Advantage : can provide full-scale lending operations
Disadvantage : cannot accept domestic demand deposits

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2. Structuring the Overseas Operation
5) Subsidiary (can be through aquisition of an
existing bank)
- Full representative function, but legally
separate.
Advantages: can use entire capital of parent
bank, full range of services.
Disadvantages: separate legal entity, require big
start-up investment, threat of lose of contact
(competition with parent).

6) Consortium Banks
- A group of banks forming a joint alliance to
enter a new market.
Advantage: in group the capital requirements
U.S. Banking and Representatives of
are easy to meet.
International Banks in 1999.
Disadvantage: divide the share of power and
client in the joint venture.

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3. Chosing an Organizational Structure
Key factors:

-The host country’s banking laws. (WTO financial

services liberalization process)

-The bank’s resource contraints (subsidiary need more

capital than a branch, rep. office – least; Need of
skilled Human Resources: Citibank – Citi-university)

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-The bank’s degree of commitment to a new market
(test with rep. Office and after upgrade it).
Examples: 1996 Japanese banks in Vietnam, 1990
ING rep. Office in North Korea

-Tax considerations (Once a branch begins to earn

money, it can be converted into a subsidiary, whose
earning are no taxed at home until they are
remitted as dividents). Example: New York bank in
Turkey – tax planning strategy
Proove: Empirical research by Jan Ten Wengel 1990
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Scope of Foreing Banking Activities
• Foreing Banking has exploded since the 1960s
• Much internationa banking activity is still
centered in London
• 520 foreing banks are settled in London
• Leadership position for financial busines
• 72,000 employer in London’s finance

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 United States of America
• At beginning of the 1990s there were around
280 foreing banks from 65 different countries
• By 1999 foreing banks accounted 1/5 of total
U.S. banking assets
• International banks in U.S. focus on wholesale
rather than retail business
• Try to be relatively invisible to the average
consumers

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 Foreing presence in U.S.
• Japan (Bank of Tokyo,Industria Bank of
Japan,Mitsubishi,sanwa,Sumitomo)
• Netherlands with ABN AMRO Bank
• Uk with National Westminster Bank
• Canada with Bank of Montreal
• France with Credit Lyonnais
• Hong Kong and Shanghai Bank

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Banking Operation From 1980

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 Foreing Banks Ascent

• Forenig banks have made the most progress

in nations with stable and sophisticate
banking sistem

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Chile and Singapore for example

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 Central Europe
• Forenig banks are pouring in Central Europe
• For ex.: Poland,Hungary,the Czech Republic
and Slovakia
• Also Eastern Europe,where Citibank has
invested heavily since of Communism and has
gained a strong first mover advantage
• Provide service to multinationals

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 Financial Growth
• Foreing banks are increasinglt welcome in
emerging markets
• Reflect a growing belief that stabilize the local
banking system
• Add liquidity,improve efficency,reduce costs
• Growing country like Mexico and Hungary

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 4. Function of Global Commercial
Banks
• Lend money in local
currency to local
clients out of
branches or
subsidiaries in foreing
countries,funded by
local currency
deposits or by local
money-market
borrowings.
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 Cross-border Lending
• Federal Reserve Chairman Alan Greenspan in
1998
• Cross-border lending often takes the form of a
SYNDICATED facility
• The spread is akin to gross profit on the loan
• The spread should be sufficient to cover
overhead ,risk and profits

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 Revolving Credit
• Permits the costumer to borrow,or draw
down,up to certain maximum amount over an
agreed time period under an agreed interest
formula.
• This formula is usully based on the London
Interbank Offered Rate, or Libor
• Banks earn fees from a variety of lending-
based services,such as syndacated loans and
letters of credits

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Increasing of Revolving from 1996

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 Syndicated Loan Facilities

• Central Tool in international banking

– Banks used to meet costumers needs for large-
scale and/or high-risk loans
• A credit extended by a group of banks to a
single customer
• Groups of bank can accept high risk instead of
one bank
• Syndication technique enables large and
medium-sized regional banks to participate in
internacional lending activities
• Can be a handsome source of fee revenue for
the lead bank or banks.
• One or more large banks acts as lead or agent
in the facility, gathering information for use in
judging the creditworthiness of the borrower,
organizing the loan, and selling it down to
other participating banks.
Chase Manhattan
is the top bank in
syndicated lending
worldwide with 25
percent market
share.
• Syndicated loan market dried up after 1981
that had problem loans to emerging market
borrowers
• Syndicated process contributed to the third
world crisis of the 1980s
– In that way small banks face loans problems
because of weak connection
• Close Syndication departments and syndication experts
• Syndicated loan market began to rise form the
ashes in 1990s
 Project Finance
• Refers to financing for large-scale capital
projects
• Occurs when the debt is to be serviced only by
cash flows attributable to the project itself,
without recourse to the project´s “sponsors”
• Doesn´t appear on the balance sheet
• Doesn´t affect their financial structure or
creditworthiness
 A list of risk
• Resource Risk: the possibility that the oil, or
minerals expected to be in the ground will not
be present in sufficient quantities to service
the debt
• Input Risk: the chance that the basic viability
of the project will be threatened by the
unavailability or high prices of key inputs such
as energy or raw materials
• Completion Risk: the risk that the project will
be delayed indefinitely, resulting in substancial
cost overruns
• Market Risk: the risk that future demand for
the product will decline
• Operating Risk: the risk that even after the
project becomes operational, cost will change
or critical elements such as labor or
transportation will be disrupted
• Force majeure: the possibility that so-called
“acts of God” will occur to disrupt the project,
ranging from warfare to weather
• Political risk: the possibility that political
conditions surrounding the project will
become adverse
• Regulatory risk: the risk that is represented to
the project´s completion by changes in a
government´s rules and regulations pertaining
to a certain industry. Such actionsas tax hikes,
prohibition of certain activities, and opening a
market up to additional competition may
negatively affect the outcome of the project as
wll as jeopardize its ability to repay the loan.
 Trade Finance:
• Letter of credit (L/C): draft drawn by a company or
individual on a bank, ordering it to pay a specified
amount, at a specified time, accepted by the bank to
a named individal or the bearer.

Easy instrument for international trade between a

buyer and a seller, that want some guarantee that
payment will be made.

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 Other type of letter of credit:
• Standard letter of credit: issued to reassure creditor
that the bank will stand ready to make payment if
the original borrower is unable.

• Performance letter of credit: obliges the bank to

guarantee that its customer will perform some
service as required; if this doesn’t happened the
bank will be forced to make restitution.

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 Commercial Paper and Note Issuance
Facilities:
• Commercial Paper (CP): short therm
promissory notes issued by strong corporate
borrowers to sophisticated investors (other
corporations, pension funds, mutual funds,
banks)

short maturities (typically 90 days)

essentially a substitute for bank loans
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• Note issuance facility (NIF): credit facility
provided by a bank or a group of banks under
which the borrower may issue short-term
Euro-notes (notes sold in the euromarket)
over a given time period.

substitue for syndicated lending

provides fee-based income

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 5. Credit Analysis in International
Lending
Elements of analysis models for assessing the
creditworthiness of the borrower:
• Collateral: quality of the collateral that the
customer is offering; how liquid is it?
• Cash flow projections: how easily will the
customer be able to service his or her debt?
• Covenants: capacity of the banks in making strict
covenants
• Character: importance given by the bank about
the character and personal integrity of the
borrower (do we trust this person?)
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International credit analysis is more
difficult than domestic credit analysis:

• Differing accounting conventions make foreign

financial statements difficult to read and
understand
• In many emerging market countries financial
statements are different and suspect, as
judged by analysis from the USA and other
Western countries
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• Conventional tools may be nonexistent in
foreign markets
• Absence of adequate bankruptcy laws and
settlement procedures in many countries
(little protection)
• Evaluating foreign credits is complicated by
the presence of ever-changing currency rates

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 6. Noncredit Services
Fee-based, noncredit services that generate
income, without risk on bank’s capital
• Global custody: business of processing trades
and keeping shares safe on behalf of fund
managers
• Cash management: keep corporate cash
balances at the lowest level possible, since
cash is a nonproductive asset, without
compromise shortterm liquidity

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• Payment system:
– SWIFT: Society for Worldwide Interbank Financial
Telecommunications, a cooperative company that
transmits financial messages, payment orders,
foreign exchange confirmations and securities
deliveries
– Fedwire and CHIPS (Clearing House Interbank
Payment System): system for high-value, US dollar
payments
– CHAPS: London-based Clearing House Automated
Payment System)
– Euroclear, Cedel, Clearstream: Clearing Houses in
Europe

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