International Banking and the Future of Banking and Financial Services Chapter Twenty International Banking and the Future of Banking and Financial Services McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Key Topics Types of International Banking Organizations 20-2 Key Topics Types of International Banking Organizations Regulation of International Banking Foreign Banking Activity in the United States Services Provided by International Banks Managing Currency Risk Exposure Challenges for International Banks in Foreign Markets The Future of Banking and Financial Services

Types of International Banking Organizations 20-3 Types of International Banking Organizations Representative Offices Limited-service facility: markets home-office services; does not take deposits or book loans Agency Offices Does not take deposits from the public but extends commitments to make or purchase loans Branch Offices The most common organizational form for most international banks: a local office that represents a single large financial-service corporation Subsidiaries Foreign subsidiary possesses its own charter and capital stock; may not necessarily close down if its principal owner fails Joint Ventures Edge Act Corporations Domestic US companies owned by the US or foreign bank but located outside of he home state of the bank that owns them; limited to international transactions

Types of International Banking Organizations (cont.) 20-4 Types of International Banking Organizations (cont.) Agreement Corporations Subsidiaries of a bank organized under Section 25 of the Federal Reserve Act; devote the bulk of their activities to serving international customers International Banking Facilities (IBF) Computerized account records that are not part of the domestic US accounts of the bank that operates them Shell Branches – offshore locations Export Trading Companies (ETC)

Goals of International Banking Regulation 20-5 Goals of International Banking Regulation Protecting the Safety of Depositor Funds Promote Stable Growth in Money and Credit Foreign Exchange Controls Restrict the Outflow of Scarce Capital Protect Domestic Financial Institutions and Markets from Foreign Competition

Regulation of Foreign Bank Activity in the U.S. 20-6 Regulation of Foreign Bank Activity in the U.S. International Banking Act of 1978 Branches and agency offices of foreign banks must secure federal licenses for the US operations Foreign branching in the US is regulated, with a designated home state Larger foreign branches and agencies (>$1 billion) are subject to legal reserve requirements Foreign Bank Supervision Act of 1991 Tighter control of foreign bank operations in the US. Empowered the Fed to examine the US offices and affiliates International Lending and Supervision Act of 1983 Federal regulatory agencies should prepare capital and lending rules for US-supervised banks Basel Agreement Calls for all banks to achieve a minimum total-capital- to-total risk-adjusted assets ratio

Customer Services Supplied By Banks in International Markets 20-7 Customer Services Supplied By Banks in International Markets Making Foreign Currency Available to Customers Hedging Against Foreign Currency Risk Exposure If Net Exposure > 0, the bank is long on currency i and if Net Exposure < 0, the bank is short currency i. What happens when the currency depreciates/appreciates and the banks is long/short? Gain/Loss in a Position With Currency i= Net Exposure *(spot exchange rate (t)-spot exchange rate (t-1) )

Hedging Against Currency Risk Exposure 20-8 Hedging Against Currency Risk Exposure Forward Contracts A customer works through a bank to negotiate a contract calling for the delivery of a particular currency at a stipulated price on a specific future date Currency Futures Contracts Contracts promise delivery of stipulated currencies at a specified price on or before a terminal date (long hedges and short hedges) Currency Options Right but not an obligation to deliver of take delivery of a designated FOREX futures contracts at a set price any time before the option expires Currency Swaps Contract between two parties to exchange one currency for another and help reduce the risk of loss as currency prices change

Customer Services Supplied By Banks in International Markets (cont) 20-9 Customer Services Supplied By Banks in International Markets (cont) 3. Supplying Customers with Short and Long Term Credit and Credit Guarantees 4. Supplying Payment and Thrift Instruments 5. Underwriting Customer Note and Bond Issues in the Eurobond Market 6. Protecting Customers Against Interest Rate Risk 7. Helping Customers Market Their Products Through an Export Trading Company

Ways of Supplying Customers with Credit 20-10 Ways of Supplying Customers with Credit Note Issuance Facilities Eurocommercial Paper (ECP) Depository Receipts (DR)

Payment and Thrift Instruments 20-11 Payment and Thrift Instruments Payment Services Sight Drafts Time Drafts Thrift services Tap CDs Tranche CDs Floating Rate CDs Floating Rate Notes

Future Problems for International Banks 20-12 Future Problems for International Banks Growing Customer Use of Securities Markets to Raise Funds Developing Better Methods to Estimate Risk in International Lending Adjusting to New Market Opportunities Created By Deregulation and New International Agreements

Solutions to Troubled International Loans 20-13 Solutions to Troubled International Loans They May be Restructured They Can be Sold in the Secondary Market They Can be Written Off, Either a Portion or in its Entirety

International Loan Risk Evaluation Systems 20-14 International Loan Risk Evaluation Systems The Checklist Approach The Delphi Method Advanced Statistical Methods Published Country-Risk Indicators Euromoney Magazine Institutional Investor Index International Country Risk Guide

New Opportunities Opportunities Created By NAFTA and CAFTA 20-15 New Opportunities Opportunities Created By NAFTA and CAFTA Opportunities in the Expanding European Community Opportunities in Asia as Barriers Erode

The Future of Banking and Financial Services 20-16 The Future of Banking and Financial Services Convergence Consolidation Survival of Community Financial-Service Institutions Reaching the Mass Media Invasion by Industrial and Retailing Companies The Wal-Mart Challenge

20-17 Quick Quiz What organizational forms do international banks use to reach their customers? What are the principal goals of international banking regulation? Describe the principal customer services supplied by international banks serving foreign markets. What types of risk exposure do international banks strive to control? What types of tools have these banks developed to help protect themselves and their customers against various risks?