CHAPTER TWO

ORGANIZATION OF US BANKS

• As with other businesses, banks are strongly affected by needs and interest of customers.

• It was until after the World War II that the US banks began to conduct international activities. Before that London’s merchant banks were dominating this field.

1. International Departments

• The move into international banking begins with establishing a department in the banks head office for handling international transactions. It should be tailored to meet the needs of customers.

• Until the international businesses expand, the international department can use the bank’s existing domestic facilities (auditing, book keeping, collections, money transfer, etc.).

2. Foreign Branches

• US banks were slow to develop foreign branches for several reasons. First, the law that permitted banks to establish foreign branches was passed in 1913. Second, US were a debtor country.

• Branches are subject to examination by both the host and US banking authorities.

• Subsidiaries are only subject to host country examination.

• Overseas branches do not maintain reserves and deposits overseas are not insured by the FDIC.

• Deposits at branches are subject to local regulations.

3. Shell Branches

• Some overseas branches are established not for general banking but for a special purpose. The Bahamas and Cayman Islands are famous in this aspect (offer low tax). They have few staff and pay little tax.

• They garage loans that originate in foreign countries.

4. Edge Act Corporations

• They are engage strictly in international banking operations and they are established in the USA. Both US and foreign banks can set up such subsidiaries.

• The difference between a branch and an edge act corporation of a US bank is that the branch is located outside the US while the edge act corporation is in the US.

5. International Banking Facility

• It is like an overseas shall branch while physically located in the US. Banks can have separate accounts in their domestic office. They may take euro-dollar deposits from non-residents and make Euro-dollar loans. They are free from Federal Reserve regulations on reserve

requirements.

6. Representative Office

• It is usually established in a city, or in a country where there is no enough business or new branches of foreign banks are prohibited (as in Mexico) to justify the expense of a branch. It has minimum staff; it does not take deposits or make loans but direct businesses to the head office of the bank or its branches.

7. Subsidiaries and Joint Ventures

•In addition to overseas branches, banks have affiliates which may be subsidiaries or joint ventures.

•Subsidiaries: A foreign company has majority ownership or some other form of control.

•The Joint Venture: Foreign banks make partnership with local investors. Foreign banks provide expertise, management, name or vision.

8. Export Trading Company (ETC)

•The aim is to improve export capacity of the nation. They give consulting, marketing, financing, insurance, forwarding, warehousing advice and services to small and fragmented businesses.

•Japanese trading companies are called Sogo Shasha.

9. Merchant Bank

•It is an investment bank. It specializes in corporate financing needs as underwriting stocks and bonds, handling mergers and acquisition and giving financial advisory services.

10. Foreign Bank in the United States

•In 1989 there were 263 foreign banks in the US and controlled approximately 22% of the US banking assets. Foreign branches are not US banks and they are not insured by the FDIC. Therefore Central Banks work closely with the regulator of the foreign parent bank to ensure the sound operation of these banks. Most foreign banks in the US are specialized in corporate customers. They avoid the retail market.

11. Bank Accounting for International Banking

• The Balance Sheet: It shows the assets, liabilities and capital (and contingent) of a bank on a given date.

• The Income Statement: It shows flows of revenues and expenses over a period of time, usually one year.

• Both combine international and domestic business.

• Minimum Capital of a bank in the US should not be less than 6% of the assets. In Turkey the government wants to increase it to 8%. This is very much related with the risk ratio of the bank investments.

• Risk-Based Capital: The guidelines are established by the bank for higher risk assets. Each asset are multiplied by a risk weight average (0.20, 0.50 or 100).