Foreign Banking Systems

The U.S. banking system is similar to the banking systems in other industrialized countries and other ways in which it differs from them. Moreover, these differences change over time, since financial systems and regulations are not static; in recent decades banking reforms have increased the similarity of U.S. and foreign banking systems.



Prakash Misal

supervised. Another feature was that U. 6/1/2012 Prakash Misal 2 . banking industry was that banking institutions were chartered. and regulated at both the state and federal level. and real estate-related financial services than did foreign banks in many countries.S. A key characteristic of the U. insurance. banks had more limited authority to provide securities.S. banking industry also was the very large number of very small banks.   One feature that characterized the U.S.

Banks were allowed only limited investments in industrial companies. 6/1/2012 Prakash Misal 3 .S. in the past two decades significant banking industry reforms have resulted in consolidation in the U. and industrial companies were permitted only limited ownership interest in banks. However.S. banks also was restricted.  Ownership of U. banking system and increased the scope of banking activities that are permitted in the U.S.

Similarities       Around the globe. "banks" provide an array of banking-related financial intermediation services. 6/1/2012 Prakash Misal 4 . and Payments-related services. including:1 Credit cards Deposit taking Foreign exchange Loan making.

S. Even though these restrictions were removed in the 1990s as part of the process of authorizing and implementing interstate banking. at year-end 2001 there were still more than 8.Differences   The structure and regulation of banking systems varies widely across countries-just as it may across states within the U. In 2001. restrictions that favored the existence of many small local banks.000 insured commercial banks and about 1. and they limited branching activity.S. Historically. U.500 insured savings institutions in operation in the US 5 6/1/2012 Prakash Misal . banking laws prohibited interstate banking. almost three out of every four banks was chartered and regulated at both the state and federal level.

experience. 6 6/1/2012 Prakash Misal . only 13. Canada's banking laws tended to favor larger national institutions-in 2001 that nation's banking industry had a relatively small number of domestic banks.S.  In contrast to the U. Even the large Japanese economy only had 170 banks in 1998.

7 6/1/2012 Prakash Misal .2 percent).6 percent in 1999. the Bank for International Settlements banking industry concentration ratio (a measure of the cumulative percentage share of deposits or assets as a share of total industry deposits or assets) for the five largest banks in the U.S.S.8 percent) far exceed the ratio for the U.1 percent). banking industry also is less highly concentrated than the banking industries in many other industrial countries. was 26. The U.S. France (70. Concentration ratios for Canada (77. and Switzerland (57. For example.

were restricted by Depression-era banking laws.Banking Powers  Banks in many other developed nations are permitted to engage in securities and insurance activities that until recently in the U. The Institute of International Bankers lists several activities that may be permissible for banking organizations across countries. In 2000 those five powers included: 6/1/2012 Prakash Misal 8 .S.

and management) Bank investments in industrial firms (including through holding company structures) Industrial firm investments in banks 6/1/2012 Prakash Misal 9 . and mutual funds) Insurance powers (underwriting and selling insurance as a principal and an agent) Real estate (real estate investment. dealing and brokering securities.     Securities powers (underwriting. development.

Interest rates have been deregulated. Consolidation. Regulatory reforms have played an important role in shaping the U. Those challenges include financial market innovation. 10 6/1/2012 Prakash Misal . competition from fast growing nonbank financial institutions.S.Trends   The U. banking system has experienced major competitive challenges in the past two decades. has cut the number of commercial banks almost by half.S. in part driven by interstate banking. banking industry over this period. Interstate banking reforms allowed bank holding companies to expand across state lines and set up nearly nationwide operations. and from foreign banking firms.

  In March of 2000 the Gramm-Leach-Bliley Act extended the banking industry's ability to offer securities and insurance services through the creation of financial holding companies.S. 6/1/2012 Prakash Misal 11 . banking institutions the opportunity to provide a broader and more competitive array of financial services. more like banking institutions in many other developed nations. This banking reform now affords U. including those in the European Union.

Globalisation    Globalisation has given Birth to Financial Liberalisation Due to this foreign banks are playing significant role in emerging economies Foreign flow Funds has its merits and demerits 12 6/1/2012 Prakash Misal .

and better service facilities However they try to link the local economy to global economy which may lead to economic crisis 13 6/1/2012 Prakash Misal . technology .   For emerging economies it always needs Funds mitigated by foreign banks These bring innovative products .

  When developed economies run short of funds or liquidity crisis . they can understand the market effectively and leverage its skills 6/1/2012 Prakash Misal 14 . foreign banks/investor starts pulling back their money which gives financial shocks to emerging markets Foreign banks enter through Joint Venture model operation through local banks .

Role : Advantages       Foreign banks are more efficient because of their global presence and experience Can bring innovative products Better skilled management Brings more competition Better placed to serve MNCs Lower cost of funds 6/1/2012 Prakash Misal 15 .

Disadvantages     Domestic players unable to compete and may become obsolete Coupling with global economy has its own perils Currency may become volatile if not managed properly Foreign Banks do not serve masses and serve only in CREAM area 6/1/2012 Prakash Misal 16 .

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