International Financing and National Capital Markets Chapter 12

2 I. CORPORATE SOURCES AND USES OF FUNDS I.CORPORATE SOURCES AND USES OF FUNDS I.CORPORATE SOURCES AND USES OF FUNDS A.3 General Sources of Funds: A.3 General Sources of Funds: 1.Internally-generated cash 1.Internally-generated cash 2.Short-term external funds 2.Short-term external funds 3.Long-term external funds 3.Long-term external funds B.Forms of Securities B.Forms of Securities 1.Equity 1.Equity 2.Debt: the most preferred form 2.Debt: the most preferred form

3 CORPORATE SOURCES AND USES OF FUNDS D.Financial Markets v. Financial Intermediaries D.Financial Markets v. Financial Intermediaries 1.Securitization 1.Securitization a. Definition: a. Definition: replacing bank loans with replacing bank loans with securities issued in public securities issued in public markets. markets.

4 CORPORATE SOURCES AND USES OF FUNDS b.Reflects reduction in access costs due to b.Reflects reduction in access costs due to 1.)Technological improvements 1.)Technological improvements 2.)Globalization 2.)Globalization

5 CORPORATE SOURCES AND USES OF FUNDS E.Corporate Governance E.Corporate Governance differences exist and fall into two general categories: differences exist and fall into two general categories: 1.Anglo-Saxon (AS) Model 1.Anglo-Saxon (AS) Model 2.Continental European and Japanese (CEJ) Model 2.Continental European and Japanese (CEJ) Model - example: keiretsus - example: keiretsus

6 The Sony Keiretsu SONY SUPPLIER NO.1 BANK NO. 1 TRANSPORT CO BANK NO. 2 SUPPLIER NO.2

7 CORPORATE SOURCES AND USES OF FUNDS F. Globalization of Financial Markets F. Globalization of Financial Markets -has led to -has led to 1.Global center competition: 1.Global center competition: London v. NY v. Tokyo London v. NY v. Tokyo 2.Regulatory arbitrage 2.Regulatory arbitrage

8 II. NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS A.International Financial Market A.International Financial Market 1.Most important: 1.Most important: a.London a.London b.New York b.New York c.Tokyo c.Tokyo 2.Other Centers for Intermediaries 2.Other Centers for Intermediaries a.Singapore a.Singapore b.Hong Kong b.Hong Kong c.the Bahamas c.the Bahamas d.Shanghai d.Shanghai

9 NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS 3. Prerequisites to be a global financial center 3. Prerequisites to be a global financial center a.political stability a.political stability b.minimal government interventions b.minimal government interventions c.legal infrastructure c.legal infrastructure d.financial infrastructure d.financial infrastructure

10 NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS B.Foreign Access to Domestic Markets B.Foreign Access to Domestic Markets 1. The Foreign Bond Market 1. The Foreign Bond Market a. Extension of domestic market a. Extension of domestic market b. Issues floated by foreign cos. or b. Issues floated by foreign cos. or governments governments c. Examples: c. Examples: Yankee bonds, samurai bonds Yankee bonds, samurai bonds

11 NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS 2.The Foreign Bank Market 2.The Foreign Bank Market a.Extension of domestic markets a.Extension of domestic markets b.Important funding source: b.Important funding source: Japanese banks for U.S. firms Japanese banks for U.S. firms 3.The Foreign Equity Market 3.The Foreign Equity Market a.Cross listing internationally can a.Cross listing internationally can 1.) diversify risk 1.) diversify risk 2.) increase potential demand 2.) increase potential demand 3.) build base of global owners. 3.) build base of global owners.

12 NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS C.Downside of Global Financial Markets C.Downside of Global Financial Markets -abrupt shifts in capital flows -abrupt shifts in capital flows

Chapter 13 The Euromarkets

14 III. THE EUROMARKETS THE EUROMARKETS (Chapter 13) THE EUROMARKETS (Chapter 13) -the most important international financial markets today. -the most important international financial markets today. A.The Eurocurrency Market A.The Eurocurrency Market 1. Composed of eurobanks who accept/ 1. Composed of eurobanks who accept/ maintain deposits of foreign currency maintain deposits of foreign currency 2. Dominant currency: US$ 2. Dominant currency: US$

15 THE EUROMARKETS B.Growth of Eurodollar Market B.Growth of Eurodollar Market caused by restrictive US government caused by restrictive US government policies, especially policies, especially 1.Reserve requirements on deposits 1.Reserve requirements on deposits 2.Special charges and taxes 2.Special charges and taxes 3.Required concessionary loan rates 3.Required concessionary loan rates 4.Interest rate ceilings 4.Interest rate ceilings 5.Rules which restrict bank competition. 5.Rules which restrict bank competition.

16 THE EUROMARKETS C.Eurodollar Creation involves C.Eurodollar Creation involves 1.A chain of deposits 1.A chain of deposits 2.Changing control/usage of deposit 2.Changing control/usage of deposit 3.Eurocurrency loans 3.Eurocurrency loans a.Use London Interbank Offer Rate: LIBOR as basic rate a.Use London Interbank Offer Rate: LIBOR as basic rate b.Six month rollovers b.Six month rollovers c.Risk indicator: size of margin between cost and rate charged. c.Risk indicator: size of margin between cost and rate charged.

17 IV.DEVELOPMENT BANKS A. General Purpose A. General Purpose founded by governments to help finance founded by governments to help finance very large infrastructure projects. very large infrastructure projects.

18 DEVELOPMENT BANKS B.Types of Development Banks B.Types of Development Banks 1.World Bank Group includes 1.World Bank Group includes a. International Bank for Reconstruction and Development a. International Bank for Reconstruction and Development b. International Development Association b. International Development Association c. International Finance Corporation c. International Finance Corporation

19 DEVELOPMENT BANKS B.Types of Development Banks (con’t) B.Types of Development Banks (con’t) 2.Regional Development Banks 2.Regional Development Banks finance industry, agricultural, and infrastructure projects finance industry, agricultural, and infrastructure projects 3.National Development Banks 3.National Development Banks concentrate on a particular industry or region. concentrate on a particular industry or region.