Money and Capital Markets

2626C h a p t e r

Eighth Edition

Financial Institutions and Instruments in a Global Marketplace

Peter S. Rose

McGraw Hill / Irwin Slides by Yee-Tien (Ted) Fu

International BankingInternational Banking

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Learning Objectives

To understand the importance of large multinational banks in both domestic and foreign markets.

To explore how multinational banks operate around the globe and to identify the financial services that they offer.

To see how and why international banking is closely regulated in many areas of the world.

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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The Scope of International Banking Activities

The facilities operated by multinational banking corporations include: international departments in their home offices full-service branch offices in foreign markets shell branches on offshore islands representative offices Edge Act and Agreement corporations international banking facilities (IBFs) agency offices

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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The Scope of International Banking Activities

The kind of facility adopted by a multinational bank depends on government regulations, as well as the bank’s size, goals, and location.

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Services Offered by International Banks

Multinational banks offer a wide variety of international financial services to customers: issuing letters of credit for importers buying and selling foreign currencies accepting Eurocurrency deposits and making

Eurocurrency loans marketing and underwriting domestic and

Eurocurrency bonds, notes, and equity shares securitizing loans advising and assisting foreign investments

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Services Offered by International Banks

Some of the world’s largest banking firms attempt to offer their customers “one-stop shopping” and become “universal banks.”

Universal banking combines traditional banking, insurance, securities trading, and even real estate brokering under one corporate umbrella.

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Foreign Banks in the United States

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1975 1980 1985 1990 1995 2000

$ billions Total assets held by commercial banks in the U.S.Assets held by domestically owned banksAssets held by U.S. offices of foreign banks

5.3% 11.9%16.1%

21.4% 21.7%19.9%

Data Source: Board of Governors of the Federal Reserve System

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Foreign Banks in the United States

There was pressure on Congress for more extensive regulation of foreign banks, so as to be fair to domestic banks, and to ensure the effectiveness of domestic monetary policy. Bank Holding Company Act Amendments (1970) International Banking Act (1978) Depository Institutions Deregulation and Monetary

Control Act (1980) Foreign Bank Supervision Enhancement Act

(1991)

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Regulation of the International Banking Activities of U.S. Banks

The Federal Reserve Board is the chief regulatory agency for U.S. international banking activities, especially where Fed member banks are involved.

Since it is difficult to separate a bank’s foreign operations from its domestic activities, the protection of domestic deposits and the stability of the domestic banking system is of prime concern to the Fed.

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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The Future of International Banking

The future of international banking is clouded at this time due to the many cross-currents of economics and politics that pervade our world.

Considering political and currency risk, lending funds in the international arena is riskier, on average, than domestic lending.

Not surprisingly, surveys of U.S. banks show that loans to distant nations are mainly short term, and many are made to banks themselves.

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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The Future of International Banking

A persistent problem in international banking is the preservation of public confidence in the banking system.

Essentially, this means protecting the major multinationals against failure. International Lending and Supervision Act (1983) Basle Agreement (1988) (11 countries)

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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The Future of International Banking

Deregulation: There is a growing trend toward relying more on the private marketplace and less on government rule-making in order to regulate global banking.

At the same time, regulatory cooperation and harmonization of banking regulations across nations is necessary to ensure a minimum level of public scrutiny.

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Prospects and Issues for the 21st Century

Limited by capital and the availability of experienced management, the future growth of international banking should be more gradual and loan quality more of a factor.

The actions of regulatory authorities and competition from nonbank firms can also affect the future development of international banking.

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Money and Capital Markets in Cyberspace

More information about international banking can be found at: http://www.bankinfo.com/ http://www.hg.org/banking.html http://jolis.worldbankimflib.org/external.htm http://www.bis.org/ http://www.worldbank.org/

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Chapter Review

The Scope of International Banking Activities Multinational Banking Corporations Types of Facilities Operated by Banks Abroad

Services Offered by International Banks Universal Banking Services and One-Stop

Shopping

Foreign Banks in the United States Recent Growth of Foreign Banks in the U.S. Federal Regulation of Foreign Bank Activity

2003 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw Hill / Irwin

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Chapter Review

Regulation of the International Banking Activities of U.S. Banks

The Future of International Banking The Risks of International Banking Public Confidence and Bank Failures The Spread of Deregulation: How Fast Should We

Go?

Prospects and Issues for the 21st Century