INTERNATIONAL FINANCE

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(AcFn 721)
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 CHAPTER THREE

INTERNATIONAL BANKING
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CONTENTS:

3.1 Global Commercial Banking

3.2 Financing Foreign Trade
3.3 International Lending & Country Risk
Analysis

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 3.1
Global Commercial
Banking

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Global Commercial Banking
 Global banking activities involves both
traditional commercial banking & investment
banking operations.
 International commercial banks: accept deposits,
make loans, provide letters of credit, trade bonds
& foreign exchanges, & underwrite debt & equity
securities in dollars & other currencies.
 With the globalization of financial markets, all
firms compete directly with other major
commercial & investment banks throughout the
world.

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Global Commercial Banking…
• Foreign banks offer the same products & services
denominated in their domestic currencies & in
foreign currencies.
International banks do everything domestic banks
do. Besides, international banks:
◦ arrange trade financing,
◦ arrange foreign exchange,
◦ offer hedging services for foreign currency
receivables & payables through forward &
option contracts,
◦ offer investment banking services.
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The World’s 10 Largest Banks
1 Citigroup United States
2 JP Morgan United States
3 Bank of America United States
4 HSBC United Kingdom
5 Mitsubishi UFI Financial Group Japan
6 Groupe Crédit Agricole France
7 Royal Bank of Scotland Group United
Kingdom
8 BNP Paribas France
9 Santander Central Hispano Spain
10 Mizuho Financial Group Japan
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Types of International Banking Arrangement
1. Correspondent Bank
A correspondent banking relationship exists when
two banks maintain deposits with each other. They
do not have their own banking operations.
Correspondent banking allows a bank’s MNC
client to conduct business worldwide through its
local bank or its correspondents.
A large New York bank will have a correspondent
bank account in a London bank & the London
bank will maintain one with the New York bank.

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Types of International Banking
Arrangement…
2. Representative Offices
A representative office is a small service facility
staffed by parent bank personnel that is designed to
assist MNC clients of the parent bank in dealings
with the bank’s correspondents.
Representative offices also assist with information
about local business customs, economic information
& credit evaluation of the MNC’s local customers.
The parent bank will open a representative office
in a country in which it has many MNC clients or at
least one important client.

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Types of International Banking
Arrangement…
3. Foreign Branches
A foreign branch bank operates like a local bank,
but is legally part of the parent.
Subject to both the banking regulations of home
country & foreign country.
Most popular way for banks to expand overseas.
Loan limits are based on the capital of the parent
bank & not the branch bank.
◦ Thus, likely be able to extend a larger loan to a
customer than a locally chartered subsidiary
bank of the parent.

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Types of International Banking
Arrangement…
4. Subsidiary and Affiliate Banks
A subsidiary bank is a locally incorporated bank
wholly or partly owned by a foreign parent.
An affiliate bank is one that is partly owned but
not controlled by the parent.
Both banks operate under the banking laws of the
country in which they are incorporated.

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Types of International Banking Arrangement…
5. Offshore Banking Centers
An offshore banking center is a country whose
banking system is organized to permit external accounts
beyond the normal scope of local economic activity.
Operate as branches or subsidiaries of the parent bank.
The host country usually grants complete freedom
from host-country governmental banking regulations-
low reserve requirements, no deposit insurance, low
taxes, favorable time zones & to a minor extent strict
banking secrecy laws.
The primary activities are to seek deposits & grant
loan in currencies other than the host country currency.

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Regulations in International Banking
Banks fail because they do not have enough or the
right kind of assets to pay for their liabilities.
The reasons for uniform global standard includes:

◦ Increasing competition among international

banks,
◦ Greater volatility of financial market, and
◦ Banking crises
In many countries, there are several types of
regulations to avoid bank failure
No single best rule for all countries and in all
conditions

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Regulations in International Banking…
The need to regulate international banks arises
due to the fact that any change of variance of
rules may result in conflicting transactions.
In order to have supervisory standards across
countries the Basel Committee was formed.

READING ASSIGNMENT

The Basel Committee and

its Accords.

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Difficulties in Regulating International
Banking
1. Reserve requirements act as a form of insurance for
depositors, but countries cannot impose reserve
requirements on foreign currency deposits in agency
offices, foreign branches, or subsidiary banks of
domestic banks.
2. Bank examination, capital requirements & asset
restrictions are more difficult internationally.
3. No international lender of last resort for banks exists.
4. The activities of nonbank financial institutions are
growing in international banking, but they lack the
regulation & supervision that banks have.
5. New & complicated financial instruments make it
harder to assess financial stability & risk.

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 3.2
Financing Foreign
Trade

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Financing Foreign Trade
International trade is the exchange of goods & services
across international boundaries or territories.
In most nations, it represents significant share of GDP.
While international trade has been present throughout
much of history; its economic, social, & political
importance has been on the rise in recent centuries.
Industrialization, advanced transportation,
globalization, MNCs, & outsourcing are all having a
major impact.
Increasing international trade is basic to globalization.

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Payment Methods for International Trade
1. Prepayments
The goods will not be shipped until the buyer has
paid the seller.
 Time of payment : Before shipment
 Goods available to buyers : After payment
 Risk to exporter : None
 Risk to importer : Relies completely on
exporter to ship goods
as ordered

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2. Letters of Credit (L/C)
L/C are issued by a bank on behalf of the
importer promising to pay the exporter upon
presentation of the shipping documents.
 Time of payment : When shipment is made
 Goods available to buyers : After payment
 Risk to exporter : Very little or none
 Risk to importer : Relies on exporter to ship
goods as described in
documents

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2. Letters of Credit (L/C)…
The importer pays the issuing bank the amount of
the L/C plus associated fees.
Commercial or import/export L/Cs are usually
irrevocable.
The required documents typically include a draft
(sight or time), a commercial invoice, & a bill of
lading (receipt for shipment).
Variations include:
 Standby L/Cs
 Transferable L/Cs
 Assignments of proceeds under an L/C

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 L/C Procedures

 Sale Contract
Buyer Seller
(Importer) (Exporter)
 Deliver Goods

   
Request Documents Present Deliver
for Credit & Claim for Documents L/C
Payment
 Present
Documents
Importer’s Bank Exporter’s Bank
 Payment
(Issuing Bank) (Advising Bank)
 Send Credit
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3. Drafts (Bills of Exchange)
Drafts (Bills of Exchange) are unconditional
promises drawn by the exporter instructing the
buyer to pay the face amount of the drafts.
Banks on both ends usually act as intermediaries
in the processing of shipping documents & the
collection of payment.
In banking terminology, the transactions are
known as documentary collections.

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3. Drafts (Bills of Exchange)…
1. Sight drafts (documents against payment):
When the shipment has been made, the draft is
presented to the buyer for payment
Time of payment : On presentation of draft
Goods available to buyers : After payment
Risk to exporter : Disposal of unpaid goods
Risk to importer : Relies on exporter to ship
goods as described in
documents

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3. Drafts (Bills of Exchange)…
2. Time drafts (documents against acceptance):
When the shipment has been made, the buyer
accepts (signs) the presented draft
 Time of payment : On maturity of draft
 Goods available to buyers : Before
payment
 Risk to exporter : Relies on buyer to pay
 Risk to importer : Relies on exporter to
ship

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4. Consignments
The exporter retains actual title to the goods that
are shipped to the importer.
 Time of payment : At time of sale to third
party
 Goods available to buyers : Before
payment
 Risk to exporter : Allows importer to sell
inventory before paying
exporter
 Risk to importer : None

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5. Open Accounts
The exporter ships the merchandise & expects the
buyer to remit payment according to the agreed-
upon terms.
 Time of payment : As agreed upon
 Goods available to buyers : Before
payment
 Risk to exporter : Relies completely on
buyer to pay account as
agreed upon
 Risk to importer : None

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6. Countertrade
These are foreign trade transactions in which the
sale of goods to one country is linked to the
purchase or exchange of goods from that same
country.
Common countertrade types include:
 Barter,
 Compensation (product buy-back), and
 Counter repurchase.
The primary participants are governments &
multinationals.

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 3.3
International Lending
and
Country Risk Analysis
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International Lending and Country Risk Analysis

Foreign lending by international banks:

 Support foreign investment
 Provide credits in countries where banking
facility is low
 Facilitate trade finance & loan rescheduling
International lending procedures include:
 Analysis of risk factors
 Establishment of loan limits
 Centralized record system
 Periodic examination of loan procedures
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Country Risk Analysis
Country risk analysis has become an important
role of bank control procedures:
Country evaluation is used:
 To analyze loan portfolio quality
 To satisfy regulatory agencies
 To establish country loan limit
 To price international loan
The international debt crises brought a
fundamental change in international lending

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CHAPTER THREE

ENDS!
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