chapter 24 international banking. 24 - 2 mcgraw-hill/irwin money and capital markets, 9/e © 2006...

Chapter 24

International Banking

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McGraw-Hill/IrwinMoney and Capital Markets, 9/e

© 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

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.

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Introduction

• Until recently, the international activities of U.S. banks were concentrated principally in their foreign offices, due mainly to federal government controls over foreign lending.

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Introduction

• The gradual relaxation of government controls in recent decades, the high cost of maintaining a large network of foreign bank branches, political instability overseas, and improvements in communications technology have encouraged many international banks to offer more international services from their domestic offices.

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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

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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.

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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

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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.

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Foreign Banks in the United States

• Originally, foreign-based banks penetrated the U.S. markets to follow their customers who had established operations in the U.S.

• Subsequently, foreign banking activities in the U.S. expanded, reflecting growth in international trade and investments, the opportunity for profit in the huge U.S. market, and a search for safety when overseas markets are in turmoil.

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Foreign Banks in the United States

• Today foreign banks are strong competitors with domestic U.S. banks, especially in the market for business loans.

• As of year-end 2002, 193 foreign banks from 55 nations operated just over 300 branch offices and nearly 150 representative offices in U.S. territory, and accounted for about 18 percent of total U.S. commercial banking assets.

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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)

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Foreign Banks in the United States

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Foreign Banks in the United States

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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.

• 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.

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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.

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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)- Basel I Agreement (1988) (11 countries)- Basel II Accord (2007?)

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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.

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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.

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Markets on the Net

• Bank for International Settlements at www.bis.org• European Central Bank at www.ecb.int• European Monetary Union at

www.europa.eu.int/euro/entry.html• Export-Import Bank at www.exim.gov or www.tradeport.org

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Markets on the Net

• Guide to Banking Law at www.hg.org/banking.html• Guide to International Banking at www.bankinfo.com• Foreign Banks in the U.S. at www.federalreserve.gov• Foreign Exchange News at www.forexnews.com

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Markets on the Net

• International Monetary Fund at www.imf.org• ISI Emerging Markets at www.securities.com• World Bank at www.worldbank.org

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Chapter Review

• Introduction to International Banking• 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

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Chapter Review

• Foreign Banks in the United States- The Growth of Foreign Bank Activity in the U.S.- Federal Regulation of Foreign Bank Activity

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

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Chapter Review

• The Future of International Banking- The Risks of International Lending- Public Confidence and Bank Failures- The Spread of Deregulation: How Fast Should We Go?

• Prospects and Issues for the 21st Century