International Banking

Globalization
 Since 1970, there has 6
been tremendous
5
growth in international
trade 4

0
1979 1986 1989 1992 1995 1998
 Globalization
 Even more 400
impressive is the 350
growth in foreign 300
exchange 250
200
150
100
50
0
1979 1989 1995
 International Banking
 Citigroup has over 50% of its assets ($600B)
located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!
 International Banking
 Citigroup has over 50% of its assets ($600B)
located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!
 General Motors has an established relationship to buy
auto parts from a Mexican supplier. GM may find it
convenient to have an account with Citibank in
Mexico (Banamex)
 International Banking
 Citigroup has over 50% of its assets ($600B)
located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!
 Honda has a manufacturing plant outside of
Columbus, Ohio. It might be convenient for Honda to
open an account with Deutschebank in the US to
finance its US operations.
 International Banking
 Citigroup has over 50% of its assets ($600B)
located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!
 Fidelity operates a global bond fund. It may be
convenient for the to have several accounts around
the world to manage the flow of interest payments.
 International Banking
 Facilitation of international transactions
 Managing exchange risk
 Avoiding Regulation (Eurodollars)
 Avoiding Taxes (Offshore Banking)
 Types of Banks
US Banks Abroad Foreign Banks in the US
 Branches  Branches
 Edge Act  Agency Offices
Corporations  US Subsidiary
 Foreign Subsidiary
 International Banking
Facility
 Eurodollars
 Since WWII, the dollar has become the premier
international currency. Therefore, many foreign
companies and governments hold dollars rather than
their own currency.
 Further, to avoid interest rate restrictions, US banks
began offering dollar denominated accounts at their
foreign branches. These accounts became known as
Eurodollar accounts.
 Euromarkets have expanded into Eurobonds, Euroloans,
Euro Commercial paper. There is currently over $30
Trillion in Eurodeposits around the world.
 Exchange Rate Risk
 In addition to information, liquidity, and
interest rate risk, international banks must
also deal with exchange rate risk.
 An Example
Assets
Cash Reserves: $2M Liabilities
E2M Transaction Deposits
Securities (3%): $15M Checking (0%): E10M
Loans Savings (2%): E10M
Consumer: Eurodollar Accounts: $10M
Commercial (7%): $5M Loans:
E20 Equity: $8.25M
Real Estate (8%): E3M
Other:
 An Example
Dollar Assets: $22M
Euro Assets: E25M * $1.25/E = $31.25M
Total: $53.25M

Dollar Liabilities: $20M

Euro Liabilities: E20M * $1.25/E = $25M
Total: $45M

Equity = $53.25M - $45M = $8.25M

 Exchange Rate Risk
 In addition to information, liquidity, and
interest rate risk, international banks must
also deal with exchange rate risk.
 Suppose that the dollar depreciates to
$1.30
 An Example
Dollar Assets: $22M
Euro Assets: E25M * $1.30/E = $32.5M
Total: $54.5M

Dollar Liabilities: $20M

Euro Liabilities: E20M * $1.30/E = $26M
Total: $46M

Equity = $54.5M - $46M = $8.5M

 Regulating International
Banking
 In the US, monitoring/regulating of US
banks is done by either the Fed, OCC or
FDIC.
 British Banks in England are regulated by
the Bank of England.
 Who regulates British banks in the US or
US Banks in Britain?
 Regulating International
Banking
 After 1978 (International Banking Act),
foreign banks were subject to basically the
same laws as US Banks, but were not
subject to as much oversight.
 Prompted by the BCCI scandal in 1991,
the US passed the Foreign Bank
Supervision Act giving the Fed and OCC
greater control over foreign banks.
 Bank For International
Settlements
 Established in 1930 to handle German
WWI reparations, the BIS has become a
center for international cooperation.
 Played a central role in the Bretton Woods
Exchange Rate System
 Integral in the Establishment of the Euro

 The BIS is like a central bank for central

banks.
 Basle Accords
 In 1988, the G-10 countries established
uniform worldwide standards for:
 Capital Requirements
 Off Balance Sheet Assessments
 Risk Weighting
 Interest rate sensitivity
 Problems with International
Regulation
 The key issue is that the banking industry
in Japan and Europe is Fundamentally
different.
 Top Ten World Banks

Bank Assets
(Billions)
Citigroup (US) 1,497
JP Morgan + Bank One (US) 1,097
Mizuho Financial Group (Japan) 1,080
Bank of America + First Union (US) 851
UBS (Switzerland) 851
Sumitomo Mitsui (Japan) 844
DeutscheBank (Germany) 795
Mitsubishi Tokyo (Japan) 781
HSBC (UK) 759
BNP Paribas (France) 744
 European Banking
 Unlike the US, European Banks are
allowed to engage in securities markets
(universal banking)
 In fact, in Europe, banks are generally
significant shareholders in European
companies.
 Banks rely much more on equity than
deposits.
 Japanese Banking
 Japanese industry is organized into industrial
groups (keiretsu)
 Mitsubishi
 Mitsui
 Sumitomo
 Fuyo
 Daiichii
 Kangyo
 Sanwa
 Japanese Banking
 These “groups” are both vertically and
horizontally integrated and are comprised
of a very large number of companies:
 Sumitomo has 15 divisions ranging from
electronics to mining to consumer goods.
 Sumitomo controls assets equal to $50T.
 Japanese Banking
 Each “group” has its own bank which
handles its finances. This “main” bank
 Owns equity in member firms
 Monitors member firms
 Provides credit for member firms.