final ibf project

7/30/2019 Final Ibf Project

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INTERNATIONAL

BANKING

AND FINANCE

VISHAKA VAMANJUR

TYBBI , ROLL.NO- 55


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INDEX

SR.NO INDEX PAGE.NO

1. INTERNATIONAL BANKING

ORIGIN

FEATURES

FUNCTIONS

EXISTING STRUCTURE AND

IMPORTANCE WITH REFERNCE TOINDIA.

3

2. ALMASSET LIABILITYMANAGEMENT

6

3. EURO BONDS 8

4. INTEREST RATE PARITY THEORY 9

5. BIBLIOGRAPHY. 11


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INTERNATIONAL BANKING :

ORIGIN:

The origin of international banking dates back to the 2nd century BC when Babyloniantemples safeguarded the idle funds and extended loans to merchants to finance the movementsof goods. The loans extended by the Florentine banking houses were the first instance ofinternational lending.

During the nineteenth century many innovations were witnessed in the international lending,leading to trade financing and investment banking. Trade financing started as short termlending. Of the two investments banking accounted further great bulk of the international

lending and financial companies acted as agents or underwriters for the placement of funds.

By 1920, American banking institutions dominated international lending, and the Europeannations were the major borrowers. There was perfect international banking system existing tillthe time of First World War. The Bretton system had installed a secured financial frameworkand revolutionized the economic life by creating a global shopping center. International

banking speeded up after the first oil crisis in 1973. Progress in the telecommunications sectoracross the world supplemented the growth of international banking.

FEATURES OF INTERNATIONAL BANKING

1. Currency Risk :International banks operate in different currencies. Currencies may weaken orstrengthen with respect to each other. Accordingly wealth value of the bank may vary.This is a significantly sensitive aspect in International arena.

2. Complexity of credit risk:Credit risk has additional dimensions of sovereign-political risk and also socio-culturalfactor about honoring credit .

3. Competition for market share among banks:Competition is stiff because of presence of many giant bankers. This in effect reducesmargins and demands highly efficient performance.

4. Cyclical nature, with periodic crises:World economies are not moving in unison. Cycles of growth and recession move

from one continent to another. Multinational banks face these waves and alsooccasional crisis such as crash of an economy. (e.g. south Asian crisis)

5. Competition for banks loans from the international bond market:Threat of disintermediation is more because international banking has many big valuetransactions which may eventually bypass banks. Bond market is matured in developedcountries, even for foreign currency denominated bonds.

6. Importance of international interbank market (IIBM) as source of liquidity andfunding for banks:Interbank transactions in multiple currencies are common in International banking. Ineffect bankers enjoy better liquidity solutions.

7. Role of risk management activities (swaps, options, futures):

Being in forex market, banks deal with additional hedging instruments such ascurrency futures/options, etc.


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FUNCTIONS OF INTERNATIONAL BANKING :Banks transact with forex customers, with other banks with regulatory authorities,

within internal entities(department/branches)and with transaction facilitators.Accordingly International banking functions are sub-grouped as:

1. Customer Related functions:

Trade Finance Export Avenue

a) Pre-shipment Export Credit (packing credit)b) Pre-shipment Export Credit in Foreign currency(PCFC)c) Post shipment Export creditd) Export bill rediscountinge) Letter of Creditf) Value added (gold card)

Import Avenuea) Foreign Currency Import Credit

b) Suppliers Creditc) Bank guarantees

International Merchant Banking (Forex ) International loan syndication :

Arranging External Commercial Borrowings (ECB) in form of commercialloans, loans backed by export credit agencies, Lines of Credit from foreign

banks and Financial Institutions, Import Finance for Indian corporate.

Finance of Project export Non fund based facilities

a) Letter of Credit facilityb) Guarantees

I. Bid Bond GuaranteeII. Advance Payment Guarantee

III. Performance GuaranteeIV. Retention money GuaranteeV. Maintenance Guarantee

VI. Overseas borrowing Guarantees

Fund Baseda) Pre-shipment Credit

b) Rupee/foreign currency suppliers creditc) Buyers credit

Derivatives Offering

Remittances

2. Compliance related (regulatory) functions:Bank has to continuously monitor all the transactions to ensure adherence to regulatory

provisions (e.g. FEMA in India) act and also relevant central bank circulars

3. Inter-bank functions :


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Banks maintain corresponding banking relations with many banks in many countries.The accounts such as Nostro, Vostro and Loro and also mirror accounts and to befinanced and monitored .

4. Internal functions:These include branch management and communication, accounting, risk managementand forex markets, settlement with in various offices, money market investment of

bank, etc.

STRUCTURE OF FOREIGN EXCHANGE MARKET IN INDIA :The foreign exchange market in India maybe broadly said to have three segments orlayers.First layer consists of the central bank i.e. RBI and the Authorized dealers (ADs). ADsor mostly commercial banks and financial institutions such as IDBI, ICICI, and the

travel agent Thomas Cook.Second layer is the inter-bank segment in which Ads deal with each other.Third layer is in which Ads deal with their corporate customers.

In retail market in addition to ADs there are moneychangers who are allowed todeal in foreign currency. Full-fledged moneychangers are allowed to buy and sellforeign currency and restricted moneychangers are allowed only to buy.

Indian market also has accredited brokers who match buyers and sellers. FEDAIi.e. Foreign Exchange Dealers Association of India has made it mandatory to root deals

between two ADs through brokers.

IMPORTANCE:I. India poised to be the 3rd largest in Public Private Partnership PPP by the year 2025.

PPP solicits participation of private sector enterprises in infrastructure development.Infrastructure was so far the monopoly and responsibility of the government. Privatesect participation requires greater role of banks in this process. In PPP India is only

behind US, China and Japan.II. India is 6th largest in foreign exchange reserve.

III. India is haven for techno-MNCs- third biggest market for computer goods, cellularindustry CAGR-35%,which is highest in asia pacific and japan.

IV. Internationally acknowledged base for ITES( IT enabled services) segment.V. Identified hub for auto component industry.

VI. Foreign corporate in out right acquisition, MNAs and JVs.VII. Indian conglomerates on foreign acquisition spree. Tatas and others have acquiredinternational firms.

VIII. Vast industrial and service infrastructure.


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Explain ALM (Asset Liability Management) in Banks.ALM is a comprehensive and dynamic framework for measuring, monitoring and managingthe market risk of a bank. It is the management of structure of balance sheet (liabilities and

assets) in such a way that the net earning from interest is maximized within the overall risk-preference (present and future) of the institutions. The ALM functions extend to liquidly riskmanagement, management of market risk, trading risk management, funding and capital

planning and profit planning and growth projection. Benefits of ALM - It is a tool that enables bank managements to take business decisions in amore informed framework with an eye on the risks that bank is exposed to. It is an integratedapproach to financial management, requiring simultaneous decisions about the types ofamounts of financial assets and liabilities - both mix and volume - with the complexities of thefinancial markets in which the institution operates The concept of ALM is of recent origin in India. It has been introduced in Indian Bankingindustry w.e.f. 1st April, 1999. ALM is concerned with risk management and provides a

comprehensive and dynamic framework for measuring, monitoring and managing liquidity,interest rate, foreign exchange and equity and commodity price risks of a bank that needs to beclosely integrated with the banks business strategy. Therefore, ALM is considered as an important tool for monitoring, measuring and managingthe market risk of a bank. With the deregulation of interest regime in India, the Bankingindustry has been exposed to the market risks. To manage such risks, ALM is used so that themanagement is able to assess the risks and cover some of these by taking appropriatedecisions.The assets and liabilities of the banks balance sheet are nothing but future cash inflows or

outflows. With a view to measure the liquidity and interest rate risk, banks use of maturityladder and then calculate cumulative surplus or deficit of funds in different time slots on the

basis of statutory reserve cycle, which are termed as time buckets.As a measure of liquidity management, banks are required to monitor their cumulativemismatches across all time buckets in their Statement of Structural Liquidity by establishinginternal prudential limits with the approval of the Board / Management Committee.

The ALM process rests on three pillars: ALM Information Systems

Management Information SystemsInformation availability, accuracy, adequacy and expediency

ALM Organization

Structure and responsibilitiesLevel of top management involvement ALM Process

Risk parametersRisk identificationRisk measurementRisk managementRisk policies and tolerance levels.


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ALM functions and its growing importance:1. In the 1980s, volatility of interest rates in USA and Europe caused the focus to broaden

to include the issue of interest rate risk. ALM began to extend beyond the banktreasury to cover the loan and deposit functions.

2. The induction of credit risk into the issue of determining adequacy of bank capital

further enlarged the scope of ALM in the later 1980s.

3. In the current decade, earning a proper return of bank equity and hence maximization

of its market value has meant that ALM covers the management of the entire balance

sheet of a bank.

4. The bank managements are now expected to target required profit levels and ensure

minimization of risks to acceptable levels to retain the interest of investors in their

banks. This also implies that ALM encompasses costing and pricing policies in thecomprehensive sense.


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DISCUSS THE ADVANTAGES OF EUROBONDS TO INVESTORS AND

BORROWERS :A Eurobond is defined as a bond underwritten by an international syndicate of banks and

marketed internationally in countries other than the country of currency in which it isdenominated. The issue is thus not subject to national restrictions.Eurobonds are similar in many respects to the normal domestic bonds. Eurobond market isalmost free of official regulation. It is, however, self-regulated by the association ofinternational bond dealers.For each currency, the bond market can be divided into two parts: the markets within thecountry of the currency, namely the domestic and foreign bond markets, and the marketsoutside of direct jurisdiction of the country, that is the Eurobond market.Eurobonds can be denominated in any of the several different currencies. These differentmarkets are linked to one another through the currency swap market. Swap market providescontracts for future exchange of interest and principal in two different currencies, or

alternatively through the long dated forward-exchange market.ADVANTAGES OF EUROBONDS TO THE BORROWERS (ISSUNING COMPANIES):

1. Large amounts: the size and depth of the Eurobond market are such that it has the

capacity to absorb large and frequent issues.

2. Freedom and flexibility: the Eurobond market has the freedom and flexibility not

found in domestic markets. The issuing techniques make it possible to bypass

restrictions.

3. Lower cost of issue: the cost of issue of Eurobonds is relatively low. It is around 2.5%

of the face value of the issue.

4. Lower interest cost: Interest costs on dollar Eurobonds are competitive with those in

New York. Often US multinationals have been able to raise funds at slightly lower

costs in Eurobond market than in the US domestic market.

5. Longer maturities: Eurobonds are suitable for long term funding requirement. Most of

them are issued for 15 years, but some are also issued upto 30 years of maturity. Five

to ten years Eurobonds compete with medium term Eurodollar loans. Longer

maturities ensure funds availability for longer term at known rate.

ADVANTAGES OF EUROBONDS TO INVESTORS:1. Tax free income: Eurobonds are issued in such a form that interest can be paid free of

income tax or withholding tax of borrowing countries. Also, the bonds are issued in

bearer form and are held outside the country of the investor, enabling investors to

evade domestic income tax.

2. Low risk investment: issuers of the Eurobonds have an excellent reputation for

creditworthiness. This makes it an attractive investment at low risk.

3. Convertible to equity: convertible Eurobonds are optionally (at the discretion of the

investor) convertible to equity shares at a fixed price and within a specified period.

4. Liquid investment: Eurobonds are actively traded in primary and secondary markets.

Hence this is a good investment with good level of liquidity.


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arbitrage.

If foreign currency does not trade at a forward discount or if the forward discount is not large

enough to offset the interest rate advantage of foreign country, arbitrage opportunity exists fordomestic investors. So domestic investors can benefit by investing in the foreign market.

If domestic interest rates are more than foreign interest rates, foreign currency must trade at aforward premium to offset any benefit of higher interest rates in domestic country to preventarbitrage.

If foreign currency does not trade at a forward premium or if the forward premium is not largeenough to offset the interest rate advantage of domestic country, arbitrage opportunity existsfor foreign investors. So foreign investors can benefit by investing in the domestic market.

Limitations of Interest Rate Parity Model

In recent years the interest rate parity model has shown little proof of working. In many cases,countries with higher interest rates often experience it's currency appreciate due to higherdemands and higher yields and has nothing to do with risk-less arbitrage.


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BIBLIOGRAPHY

http://www.moneyschool.indianmoney.com/money-gyan-

modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic

=Banking&mid=157&lid=157

http://en.wikipedia.org/wiki/Asset_liability_management

http://www.forexkarma.com/interest-rate-

parity.html#.UgDXVL-BL-Y

Also reffered to International Banking and FinanceVipul Prakashan
http://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157http://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157http://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157http://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157http://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157http://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157http://en.wikipedia.org/wiki/Asset_liability_managementhttp://en.wikipedia.org/wiki/Asset_liability_managementhttp://www.forexkarma.com/interest-rate-parity.html#.UgDXVL-BL-Yhttp://www.forexkarma.com/interest-rate-parity.html#.UgDXVL-BL-Yhttp://www.forexkarma.com/interest-rate-parity.html#.UgDXVL-BL-Yhttp://www.forexkarma.com/interest-rate-parity.html#.UgDXVL-BL-Yhttp://www.forexkarma.com/interest-rate-parity.html#.UgDXVL-BL-Yhttp://www.forexkarma.com/interest-rate-parity.html#.UgDXVL-BL-Yhttp://www.forexkarma.com/interest-rate-parity.html#.UgDXVL-BL-Yhttp://en.wikipedia.org/wiki/Asset_liability_managementhttp://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157http://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157http://www.moneyschool.indianmoney.com/money-gyan-modules.php?page_id=3&subcat=1&cat=2&subcat=1&topic=Banking&mid=157&lid=157

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