international banking.ppt
TRANSCRIPT
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International Banking
August-December 2013
Facilitator: Wajahat A Qureshi
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Introduction & Overview
Banking transactions crossing national boundaries
Cross border lending All claims of domestic banks offices on foreign residents
Claims of foreign banks offices on local residents
Claims of domestic banks offices on domestic residents in foreign
currency
Similar classification of deposits
Eurodollar Bonds
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Products & Services
Commercial banking--branch banking, and other services conventionally offered by domestic banks,like accepting deposits and lending
Trade Finance--financing imports and exports
Corporate Finance and other investment bankingproducts & services
Foreign Exchange & Foreign Currency Hedging--using derivatives and structuring customisedsolutions
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Types of International Banks
Subsidiary & Affiliate Bank
Subsidiary is normally a wholly or majority owned entityincorporated locally
Affiliate bank is a partially owned entity, without havingcontrol
Foreign Branch
Operates like a local bank, legally part of the parent, andnot a separate entity
Subject to regulations of both home country and foreigncountry
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Types of International Banks
Representative Office
Established to assist with information of localcustoms and develop and/or further strengthenrelationship with multinational customers, whomay have operations in home country
May also be used to explore prospects for settingup a full service facility--by acquiring a local entityor establishing one
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Types of International Banks
Correspondent Bank
Offering services to banks, located cross border,in settling their claims/receipts in that particular currency
Banks located in different countries establishaccounts in other banks
Accounts used to settle trade payments andtransfers
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Financing International Trade
One of the core functions performed byinternational banks
Different payment methods used in facilitatinginternational trade:
Clean Payments/Advance Payments
Letters of Credit
Documentary Collections
May also be facilitated using non-fundedinstruments like Guarantees
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Financing International TradeClean/Advance Payment (Contd....)
Two types:
Advance Payment
Exporter receives the value of goods to be shipped, in advance,and then effects the shipment, thus zero risk but may accept lower price--Time value of money and risk mitigation
Open Account
Importer receives the shipment/goods and documents directly fromthe exporter and then makes the payment, as per the agreed terms
No risk to importer; High risk to exporter--non payment, rejection,etc.; May get a higher price due to these risks and delayed payment
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Financing International TradeLetter of Credit (Contd...)
Underlying principle--Banks deal in documents and not goods
If the documents, on the face, are in accordance with the termsand conditions of the L/C, bank is liable to effect the payment,regardless of the fact that the actual shipment received is notas per agreed between the buyer and the seller
International Chamber of Commerce (ICC) issues
standardised/agreed upon rules, definitions and practicesgoverning L/Cs--called UCP for Documentary Credits (Version600 effective July 2007 currently available and in practice)
ICC has also issued and regularly updates the standard termsused in international trade--International Commercial Terms
(INCOTERMS)
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Types of Letter of Credit
Letter of Credit Types/Terms
Revocable & Irrevocable
Unconfirmed & Confirmed
Sight & Usance
Transferrable & Assignment of Proceeds
Revolving & Standby
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Types of Letter of Credit
Revocable Letter of Credit
Could be revoked by the applicant (importer) anytimewithout getting consent from the exporter
Cancelled and amended anytime before the receipt of documents
Not much in use/practice
Irrevocable Letter of CreditNon-cancellable or amendable without prior consent of theexporter
Almost all of the L/Cs currently used are Irrevocable
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Types of Letter of Credit
Unconfirmed L/C
Where the credit-worthiness of the L/C issuing bank andcountry risk is acceptable to exporter
All L/Cs are unconfirmed, unless otherwise mentioned
Confirmed L/C
In cases where the exporter has doubts about the creditquality of the L/C issuing bank or is not comfortable withthe country risk
Requires confirmation from a third bank, usually a soundcredit quality international bank or a bank located in thecountry of exporter
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Types of Letter of Credit
Revolving L/C
Replaces the need for opening more than one L/Cs
Single L/C covering more than one shipments
Allows for relatively longer period, until maturity, as againsta normal L/C
Cumulative--Allowing for roll-over of un-utilised amount
Non-Cumulative--Which doesn t allow for roll-overs
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Types of Letter of Credit
Standby L/C
Acts as a guarantee to third party, issued on behalf of customer, to ensure payment in case of non-payment bythe original obligor
Issued with a validity of one year
Used in place/leu of bank guarantee, where it is otherwise
legally barredCertain conditions imposed in Pakistan, on its issuance
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L/C Process Flow
L/C Process FlowExporter (Seller) sends in Pro-forma invoice to Importer (Buyer)
Importer submits Accepted Pro-forma Invoice, Purchase Order or Contractto Exporter
Importer places application for Letter of Credit with Importer s bank
Importer s bank sends confirmation of opening of Letter of Credit toExporter s/confirming bank
Confirming bank sends copy of Letter of Credit to Exporter
Exporter sends order confirmation to Importer
Exporter ships the goods through Air/Sea/Land route
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L/C Process FlowL/C Process Flow (Contd...)
Exporter presents Letter of Credit and export documentation toconfirming/own bank for settlement/negotiation/discounting
Confirming bank confirms authenticity of L/C and export documents, pays
Exporter per terms of the L/C
Confirming bank forwards export documents to Importer s Bank
Importer s bank presents copies of export documents to Importer
Importer pays bank under terms of the L/C
Importer s bank releases original export documents to the Importer
Importer presents original export documents to local customs authorities
Customs authorities after verifying the authenticity of documents release
goods to the Importer
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Documentary CollectionsMethod of payment whereby Exporter assigns theresponsibility of handling export documents to banks, andinstructs the banks concerning the release of thesedocuments to the Importer.
Banks do not guarantee the payment
Collections are subject to the the Uniform Rules for Collections (URC)
Comes mainly in two types
Documents Against Payment (DP)
Documents Against Acceptance (DA)
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Documentary Collections
Documents Against Payment (DP)
Documents released to the Importer only after the paymentis effected
Also known as a Sight Collection or Cash Against Documents(CAD)
Less costly than L/C, but carries risk of refusal, commercial
and country risks for exporter No credit line/limit required for importer
Forward cover/Currency hedging not allowed in Pakistan
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Documentary Collections
Documents Against Acceptance (DA)
Documents released to the Importer only againstacceptance of a draft
Carries risk of non-acceptance of documents, for exporter
Even after the acceptance by the importer, there is no
guarantee for the paymentBeneficial for importer, because of no payment obligationupon receipt of documents
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Foreign Exchange Markets
Currency Markets where money denominated in onecurrency is bought and sold with money denominated inanother currency
A foreign exchange transaction is an agreement between abuyer and a seller that a fixed amount of one currency will bedelivered for some other currency at a specified date
International International Trade and
Capital Transactions facilitated with the ability totransfer purchasing power between countriesMostly OTC transactions (with no exchange or clearing
house, customized trades, etc.) done over phone, throughbroker, system Reuters, Bloomberg
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Foreign Exchange Markets
Works almost 24 hour-a-day with no specific location housed in any particular building like an exchange
Highly flexible and liquid
Exists in Spot Value date 2 business days from the dateof transaction, and Forward Value date beyond Spot
Value date means the date of settlement of the transaction
Central banks also participate to maintain some sort of control on their currency, especially in terms of its value
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Foreign Exchange Markets
Fixed exchange rate is the official rate set by the monetaryauthorities/central banks
Under floating exchange rate, the value of the currency isdecided by supply and demand factors
Outright Forward Single leg sale or purchase transactionmaturing at any future date
Swap Dual leg transaction, with near leg maturing inspot/forward and the far leg in forward (Ready-Forward,Spot-Forward or Forward-Forward Swap)
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Foreign exchange Markets
Foreign Exchange Mechanism
Managed Exchange Rate
Dual Exchange Rate
Floating Exchange Rate
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Foreign Exchange Markets
Forward FX Agreement between two parties for purchase/sale of a specific amountof one currency against another at a predetermined rate and a date infuture
Price is worked out using the interest rate differential
May be Fixed for delivery or may carry an option period
Option period provides the buyer/seller with the privilege of take-up/delivery during the specified period
Non cancellable, unless otherwise required under specificcircumstances
Closed out upon expiry, if remained un-utilized
Difference to be settled with payment or receipt to/from the customer
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Foreign Exchange Markets
Forward Rate Calculation
3-Month USD Interest Rate = 0.50% P.A & 3-Month PKR Interest Rate= 9.50% P.A
USD/PKR Spot Rate = 104
Day-count For USD = Actual / 360 & Day-count for PKR = Actual / 365
Three Month Forward Rate = Spot Rate * (1+PKR Interest Rate *91/365) / (1+USD Interest Rate * 91/360)
104 * (1 + 0.095 * 91/365) / (1+0.005 * 91/360) = 104 * (0.273 / 0.254)
Based on these calculations 3-Month USD/PKR would be 111.78
Also be presented in percentages--(Forward Premium or Discount /spot rate) * (360/Number of contract days)
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International Banking Crisis
Real Estate Bubbles and Financial Crisis
Housing Bubble Burst, after it peaked in 2006
Causing real-estate backed assets prices toplummet
Damaging Financial Institutions Balance Sheets
and P & L holding such assets Liquidity Evaporated, Credit tightened due to
deteriorating financial conditions
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International Banking Crisis
Affected Exposure Limits (Among Counter-parties) and Impacted Banks Liquidity &Balance Sheet Management
Resulting in Global Economic slowdown
High Risk, Complex Financial Products,Failure of Regulators & Credit Rating
Agencies, Conflicts of Interest, Market Self Discipline and Investors Greed could beconsidered the possible reasons for thecrisis
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Risks in International Banking--Liquidity & Liquidity Risk Management
Liquidity Risk Defined
Probability of loss arising from a situation where:
There will not be enough cash (or cash equivalents) to meet the need
of borrowers or depositors Sale of illiquid assets yield a value lesser than their fair value
Illiquid assets will not be sold at the time it is needed, due to lack of demand/buyers
Availability of funds to meet all known and unknown commitments
- In the right currency
- In the right place
- At the right time
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Liquidity & Liquidity Risk Management
Funding Liquidity
Ability of an institution to arrange funding for its assets when it is needed
Refers to funding of long term assets with short term liabilities
Market Liquidity
An assets ability to get liquidated without causing a significant movement in the price and with minimumloss of value
TFCs, Pak Eurobonds, Dubai Government Sukuk, Other emerging market Sukuk and bonds
Funding and Market Liquidity
Both are closely related to each other
Inability to generate funding could affect the market liquidity
The dealer would find it hard to fund high margin instruments, affecting the market liquidity of suchinstruments
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Liquidity & Liquidity Risk Management
Liquidity Vs. Solvency Liquidity refers to cash and instruments that can be
converted into cash to meet the business requirements
Solvency refers to a firms ability to meet its obligationsas these become due
Liquidity relates more to short term business strategywhile Solvency is something related to the firms overallhealth
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The Treasury Function
Functions like a heart in the human body Funds flow in, from units with surplus, and flow out to units with deficit
Local currency (LCY) and FX
Customer facilitation--with profitability objective
Interest Rate Risk management
Liquidity & Funds management Fund Transfer Pricing
Medium to long term Investment
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The Treasury Function--Organizational Design
Generic Design has Treasury as a separate group headed by a direct report
May contain different departments depending on the size and complexity of the function
FX desk--Dealing with the foreign exchange exposure
Buying from exporters and selling to importers; market maker--dealing with the
interbank
Money Market--To deal with the short term liquidity issues
Placing surplus liquidity and managing shortfalls
Equity Desk--Dealing with investments in the equity market, Margin Financing, CFS, etc.
Derivatives Desk--To deal with structuring and trading of derivatives like FRA, IRS,Currency Options, etc.
Corporate Desk-- Treasurys Face With The Customer
deals with customer requirements for various solutions
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The Treasury Function Key Functions/Activities
Liquidity & Funding
LCY
Call/Clean Borrowing/Placement
Investment in T Bill & PIB
Repo/Reverse Repo
FX
Balance Sheet Management/ALM
Interest Rate Risk Management
Market & Liquidity Risk Management
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The Treasury Function Supporting Roles
Middle Office
Reporting line with Risk or Operations
May act as Risk Watchdog or support to Operations
Monitoring and reporting of treasury positions and risk limitsProfit reconciliation
Back Office/TROPS
Processing and settling Inter-bank deals initiated at Front Office
Dealing with branches for placement (record keeping) of their LCY and FXdeposits
Generating position related MIS
Maintaining Nostros