International Banking

Iveta Brivne
JC George
 Origins of International Banking
 Economic Development with Decreased
Cross-Border Communication Costs
 Growth of International Trade and
Increasing Capital Mobility
 Eurodollar Deposits
 Dollar as Unit of Exchange Worldwide
between foreign parties
 Functions of International
Banking:
 Risk Sharing
 Provide Liquidity
 Information Services
 Risk Sharing
 Managing FX risk - several methods

match assets and liabilities

loan syndication

hedging tools such as options and futures
may be used to reduce risk

banks may have more information and may
be net positive successful hedgers
 Provide Liquidity
 Collection of Offshore Deposits
 Reduce Transaction Costs
– Currency Swaps / FX Trading
– Firms are better known in their home countries.
When they undertake activities in foreign lands,
they are better off borrowing domestically and
‘swapping’ the principle with firms in the
foreign country to enjoy better interest rates.
 Information Services

 Reduce Credit Risk

– Banker’s Acceptances
– total outstanding are barometric of world
trade and economic activity
 Banker’s Acceptance in detail
 Are instruments that can be traded in the money market
 Bank can sell to maintain lending capacity, however may be subject to RR
Banks use banker's acceptances to finance importing and exporting.
Importer's bank backs the importer by paying the foreign party for the importer
(It is credit to the importer). The importer is then obliged to repay the bank.
If the bank so desires, it may sell the contract before it is repaid (by importer)
as a way to restore its lending capacity (rebuild cash). This feature makes it
highly liquid. The bank is liable for payment if the importer defaults.
Banker's acceptances are usually issued in denominations over $100,000 and
are sold at discounts. Their maturities range from 30 to 180 days and their
yields are a little less than those of CDs.
 Until 1977, Federal Reserve used to purchase outright via FOMC (OMO)
until market matured. Until 1984 used Repo’s on BA’s to manage reserves.
For more info: http://www.e-analytics.com/bonds/fed23.htm
 Organizational Structure - 1/3
 US Banking Overseas
 Branches, activities beyond Glass-Steagall (1933)
 Edge Act Corporations
 created in 1919, designed to facilitate trade and may
transact with foreign and domestic parties to accommodate
 Interests in Foreign Financial Service Firms
 International Banking Facilities
 created in 1981 by US Fed, can only perform
internationally
 Organizational Structure 2/3
Foreign Banks in the US
 An Agency Office
 A Foreign Bank Branch
 Subsidiary of a US Bank
 Organizational Structure - 3/3

 3 Similarities to domestic banking


accept deposits, lend to borrowers

lowering transaction costs

financial innovation in international
banking from outside a country as
domestic regulation stimulates innovation
from within
 Regulatory Issues for banks in US
 All under scrutiny of the Fed.

exempt from RR - IBFs

exempt from state and local taxation

no restrictions on the interest payments to
depositors - IBFs

more relaxed minimum capital requirement, banks
develop their own risk assessment model,
determine their own capital requirement

exempt from interstate branching requirements

no separation of commercial banking & securities
trading
Regulatory Issues for banks in US, continued
 Compliance with the US Banking Rules
 Agency Agency Office
 Foreign Bank Branch
 International Regulatory Issues
 The Fed and other regulatory bodies’ supervision
– Foreign Bank Supervision Enhancement Act of 1991
– BIS (1995), banks must develop their own risk models
subject to regulatory review
– Capital Requirements, Central Bank Intervention, Deposit
Insurance and International Coordination
– Examples
» Long Term Capital (1998)
» BCCI (1991)
 Conclusions
 Questions?