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InternationalBankFinance 25122011
InternationalBankFinance 25122011
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Chapter six
Chapter Objective: Differentiate between international bank and domestic bank operations and examine the differences of various international banking offices.
Chapter Outline International Banking Services Types of International Banking Offices Capital Adequacy Standards International Money Market
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Arrange trade financing. Arrange foreign exchange. Offer hedging services for foreign currency receivables and payables through forward and option contracts. Offer investment banking services (where allowed).
U.K.
Japan Germany Japan
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Smaller foreign banks that want to do business ,say in the U.S., will enter into a correspondent relationship with a large U.S. bank for a fee
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No traditional credit services provided Reps looks for foreign market opportunities and serves as a liaison between parent and clients
Representative offices also assist with information about local business customs, and credit evaluation of the MNCs local customers.
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More extensive range of services Foreign branches are not subject to Canadian reserve requirements or deposit insurance Compete with host country banks at the local level
Banks operate as branches or subsidiaries of the parent bank Primary credit services provided in currency other than host country currency Reasons for offshore banks
Low or no taxes, services provided for nonresident clients, few or no FX controls, legal regime that upholds bank secrecy
The IMF recognizes the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, Singapore as major offshore banking centers
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Min. Cap. Adequacy = 8% [risk weighted assets] Tier I Core capital = shareholder equity + retained earnings Tier II Supplemental capital = internationally recognized non-equity items Tier II < 50% total bank capital Asset Weights:
Government obligations = 0%; short-term interbank assets = 20% Residential mortgages = 50%; other assets = 100%
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VAR = (PV)(s)(Z.01)(D1/2)
PV = portfolio value; s = standard deviation of return(daily); Z.01 = standard normal value for 1-tail confidence interval; D = days
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Reserve requirement - NO Deposit insurance - NO Rapid growth, especially in the Eurodollar market.
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Eurocurrency Market
This is an external banking system that runs parallel to the
domestic banking system. Most Eurocurrency transactions are interbank transactions in the amount of $1,000,000 and up. Banks seek deposits and make loans to other Eurobanks.
- loan interest rate is the interbank offered rate. - interbank deposit interest rate is the interbank bid rate.
Eurocredits
Short- to medium-term loans of Eurocurrency to corporations, governments, nonprime banks or international organizations. Loans are often too large for one bank to underwrite; a syndicate of banks share the risk of the loan. Adjustable rate - Rollover 3-6 mo. Example 6.1 On Eurocredits originating in London, the base rate is LIBOR + X% based on the creditworthiness of the borrower.
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Hedge assets that a bank currently owns against interest rate risk. Speculate on the future course of interest rates.
Euronotes
Short-term notes underwritten by a group of international investment banks or international commercial banks (facility). 3-6 months They are sold at a discount from face value and pay back the full face value at maturity. Interest rate usually less than syndicated Eurobank loans. LIBOR + 1/8%, for example. Bank receives a small fee for underwriting.
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Eurocommercial Paper
Unsecured short-term promissory notes issued by corporations and banks. 1-6 months. Placed directly with the public through a dealer. Eurocommercial paper, while typically U.S. dollar denominated, is often of lower quality than U.S. commercial paperas a result yields are higher. Eurocommercial paper 2001 = $243.1billion
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Debt-for-Equity Swaps
As part of debt rescheduling agreements among the bank lending syndicates and the debtor nations, creditor banks would sell their loans for U.S. dollars at discounts from face value to MNCs desiring to make equity investment in subsidiaries or local firms in the LDCs. A LDC central bank would buy the bank debt from a MNC at a smaller discount than the MNC paid, but in local currency. The MNC would use the local currency to make preapproved new investment in the LDC that was economically or socially beneficial to the LDC.
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The Japanese financial system does not have a legal infrastructure that allows for restructuring of bad bank loans. Japanese bank managers have little incentive to change because of the Keiretsu structure.
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