1 International Banking and Money Market 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 6 Chapter six
3. Worlds 10 Largest Banks Japan UFJ Bank Ltd. Germany
HypoVereinsbank Japan Sumitomo Mitsui Banking Group U.K. Royal Bank
of Scotland Group Germany Deutsche Bank U.S. JP Morgan Chase U.S.
Bank of America U.K. HSBC Holdings Japan Mizuho Bank/ Mizuho Corp
Bank U.S. Citigroup
4. Types of International Banking Offices
Correspondent bank
Banks located in different countries establish accounts in
other bank
Provides a means for a banks MNC clients to conduct business
worldwide through his local bank or its contacts.
Provides income for large banks
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
5. Types of International Banking Offices
2. Representative office
A small service facility staffed by parent bank personnel that
is designed to assist MNC clients of the parent bank in dealings
with the banks correspondents.
No traditional credit services provided
Reps looks for foreign market opportunities and serves as a
liaison between parent and clients
Useful in newly emerging markets
Representative offices also assist with information about local
business customs, and credit evaluation of the MNCs local
customers.
6. Types of International Banking Offices
3. Foreign Branch
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 and
foreign country.
Reasons for establishing a foreign branch
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
Most popular means of internationalizing bank operations
7. Types of International Banking Offices
4. Subsidiary and Affiliate Bank
A subsidiary bank is a locally incorporated bank that is either
wholly owned or owned in major part by a foreign parents.
An affiliate bank is one that is only partially owned, but not
controlled by its foreign parent.
Both subsidiary and affiliate banks operate under the banking
laws of the country in which they are incorporated.
They are allowed to underwrite securities.
8. Types of International Banking Offices
5. Offshore Banking Center
A country whose banking system is organized to permit external
accounts beyond the normal scope of local economic activity.
The host country usually grants complete freedom from
host-country governmental banking regulations.
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
9. Capital Adequacy Standards
Bank capital adequacy = equity capital and other securities a
bank holds as reserves.
How much bank capital is enough to ensure the safety and
soundness of the banking system?
Basle Accord 1 (1988): Rules-based approach + VAR
Basle Accord 2 (2003 - ?) - 3 pillars
- min. cap. Requirements
-supervisory review process
-market discipline
10. Basle Accord I: minimum bank capital adequacy ratio (
rules-based )
Banks involved in cross-border transactions .
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%
11. Basle Accord I: Risk-focused Cap. adequacy
1996 amendment allows banks to use modern portfolio models to
specify adequate Cap. Adequacy.
VAR(value-at-risk) = loss exceeded with a specified probability
over a specified time period.
1% chance: maximum loss over 10 days > banks capital
VAR = (PV)( )(Z .01 )(D 1/2 )
PV = portfolio value;
= standard deviation of return(daily);
Z .01 = standard normal value for 1-tail confidence
interval;
D = days
12. International Money Market
Eurocurrency is a time deposit in an international bank located
in a country different than the country that issued the
currency.
Eurodollars are U.S. dollar-denominated time deposits in banks
located outside the United States.
Euroyen are yen-denominated time deposits in banks located
outside of Japan.
The foreign bank doesnt have to be located in Europe.
13. Eurocurrency Market
This is an external banking system that runs parallel to the
domestic banking system.
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
.
Lower cost structure:
Reserve requirement - NO
Deposit insurance - NO
Rapid growth, especially in the Eurodollar market.
14. Eurocurrency Market
Most Eurocurrency transactions are interbank transactions in
the amount of $1,000,000 and up .
Common reference rates include
LIBOR = London Interbank Offered Rate
PIBOR = Paris Interbank Offered Rate
SIBOR = Singapore Interbank Offered Rate
New reference rate for the euro
EURIBOR = rate at which interbank time deposits of are offered
by one prime bank to another.
15. 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.
16. Forward Rate Agreements
An interbank contract that involves two parties, a buyer and a
seller.
The buyer agrees to pay the seller the increased interest cost
on a notional amount if interest rates fall below an agreed
rate.
The seller agrees to pay the buyer the increased interest cost
if interest rates increase above the agreed rate.
Forward Rate Agreements can be used to:
Hedge assets that a bank currently owns against interest rate
risk.
Speculate on the future course of interest rates.
17. 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 .
18. 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
19. International Debt Crisis
Some of the largest banks in the world were endangered when
loans to sovereign governments of some less-developed
countries.
At the height of the crisis, third world countries owed $1.2
trillion.
Like a great many calamities, it is easy to see in retrospect
that:
Its a bad idea to put too many eggs in one basket, especially
if:
You dont know much about that basket.
20. 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 pre-approved new
investment in the LDC that was economically or socially beneficial
to the LDC.
21. Debt-for-Equity Swap Illustration International Bank Equity
Investor or MNC LDC Central Bank LDC firm or MNC subsidiary $60m
Sell $100m LDC debt at 60% of face Redeem LDC debt at 80% of face
in local currency $80m in local currency $80m in local
currency
22. Japanese Banking Crisis
The history of the Japanese banking crisis is a result of a
complex combination of events and the structure of the Japanese
financial system.
Japanese commercial banks have historically served as the
financing arm and center of a collaborative group know as keiretsu
.
Keiretsu members have cross-holdings of an anothers equity and
ties of trade and credit.
The collapse of the Japanese stock market set in motion a
downward spiral for the entire Japanese economy and in particular
Japanese banks.
This put in jeopardy massive amounts of bank loans to
corporations.
It is unlikely that the Japanese banking crisis will be
rectified anytime soon.
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.
23. The Asian Crisis
This crisis followed a period of economic expansion in the
region financed by record private capital inflows.
Bankers from the G-10 countries actively sought to finance the
growth opportunities in Asia by providing businesses with a full
range of products and services.
This led to domestic price bubbles in East Asia, particularly
in real estate.
Additionally, the close interrelationships common among
commercial firms and financial institutions in Asia resulted in
poor investment decision making.
The Asian crisis is only the latest example of banks making a
multitude of poor loansspurred on no doubt by competition from
other banks to make loans in the hot region.