Chapter 6 Banking and Money Markets Management 3460 Institutions and Practices in International Finance Fall 2003 Greg Flanagan.

Slides:



Advertisements
Similar presentations
Commercial Bank Operations
Advertisements

CHAPTER 12 INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS.
Correspondent Banking and Interbank Accounts
Summary of Previous Lecture In our previous lecture about Short Term Financing we covered the following topics. sources and types of spontaneous financing.
Part 6 Financing the Enterprise © 2015 McGraw-Hill Education.
Outline Introduction to the international capital market The players of the ICM Growth of the ICM Offshore banking and offshore currency trading Growth.
The Eurocurrency Market and International Banking
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fourth Edition.
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fifth Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
The Money Markets Dr. Lakshmi Kalyanaraman1. Characteristics Sold in large denominations Have low default risk Mature in one year or less from their original.
Money in the Economy Mmmmmmm, money!. Monetary Policy A tool of macroeconomic policy under the control of the Federal Reserve that seeks to attain stable.
International Business Environments & Operations
Chapter Eight The Money Markets Copyright © 2004 Pearson Education Canada Inc. Slide 8–3 The Money Markets Money Markets Defined 1.Money market securities.
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
Irwin/McGraw-Hill Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 6-0 INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second.
International Banking. Globalization Since 1970, there has been tremendous growth in international trade Since 1970, there has been tremendous growth.
Irwin/McGraw-Hill 1 Loan Sales and Other Credit Risk Management Techniques Chapter 27 Financial Institutions Management, 3/e By Anthony Saunders.
International Banking and Money Market
Chapter Six Outline International Banking Services
1 INTERNATIONAL BANKING. I.The Structure of the International Capital Market –The most important players are: Commercial banks Corporations Nonbank financial.
International Banking and Money Markets
International Finance
CHAPTER TWENTY International Banking Service Options The purpose of this chapter is to learn what services international banks offer their customers and.
Global Financial Services Outline –Why and how U.S. banks engage in international banking –Foreign banks in the U.S. –International lending –Foreign exchange.
Page 1 International Finance Lecture 4. Page 2 International Finance Course topics –Foundations of International Financial Management –World Financial.
International Banking, Money Market. International Banking and Money Market Objective: This chapter serves to begin our discussion of world financial.
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. 6-0 International Banking and Money Market.
Chapter 24 International Banking McGraw-Hill/Irwin Money and Capital Markets, 9/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
Irwin/McGraw-Hill Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 6-0 INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second.
1 Chapter 6 Financial Markets, Instruments, and Participants ©2000 South-Western College Publishing.
Introduction to Financial and Capital Markets Stock Market Financial Futures Market Foreign Exchange Market Bond Market Eurocurrency Market Money Market.
Copyright© 2006 John Wiley & Sons, Inc.1 Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Finance THE BANKING SYSTEM. Finance Lecture outline  The types and functions of banking  Central banking  Commercial and investment.
The International Financial System
CHAPTER 12 INTERNATIONAL MARKETS. Copyright© 2003 John Wiley and Sons, Inc. Foreign Exchange Rates Foreign trade and funds flow must involve a conversion.
The Eurocurrency Market and International Banking
15-1 CHAPTER 15 INTERNATIONAL BANKING American International Banking l International banking dates back to the rise of international trade. l Great.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTER 12 & 13 INTERNATIONAL EXCHANGE AND CREDIT MARKETS.
CHAPTER TWO ORGANIZATION OF US BANKS. As with other businesses, banks are strongly affected by needs and interest of customers. It was until after the.
Chapter 7 Commercial bank financial statement Salwa Elshorafa 2009 © 2005 Pearson Education Canada Inc.
Sourcing of Debt Lecture notes for Chapter Thirteen Eiteman, Stonehill, & Moffett October 14, 20151Chapter 13 - debt financing.
International business, 5 th edition chapter 8 foreign exchange and international financial markets.
FOREIGN EXCHANGE AND INTERNATIONAL FINANCIAL MARKETS.
International Financial Markets. © Prentice Hall, 2006International Business 3e Chapter Chapter Preview Discuss the international capital market.
The Foreign Exchange Market & The Global Capital Market.
Copyright© 2003 John Wiley and Sons, Inc. Power Point Slides for: Financial Institutions, Markets, and Money, 8 th Edition Authors: Kidwell, Blackwell,
International Financial Market Sources of Capital International Market: business operation External Market: –A. Domestic Market: domestic funds for domestic.
Chapter 9 International Financial Markets. © Prentice Hall, 2008International Business 4e Chapter Chapter Preview Discuss the international capital.
International Business Finance. Foreign Exchange Markets Participants:- –Banks and other financial institutions –Brokers – intermediaries/ confidential.
Money and Capital Markets 26 C h a p t e r Eighth Edition Financial Institutions and Instruments in a Global Marketplace Peter S. Rose McGraw Hill / IrwinSlides.
INTERNATIONAL BANKING
Short-Term Financing 20 Chapter South-Western/Thomson Learning © 2003.
Chapter Thirteen Managing Non-deposit Liabilities Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Copyright © 2012 by the McGraw-Hill Companies, Inc. All rights reserved. International Banking and Money Market Chapter Eleven.
Chapter Objectives: Chapter Objectives: This chapter introduces the world financial markets and institutions. This chapter introduces the world financial.
International Financial Markets Chapter Objectives Discuss the purposes, development, and financial centers of the international capital market.
Federal Reserve Chapter 16 Section 2 Federal Reserve Functions.
11 International Banking and Money Market Chapter Objective:
INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS
International Banking
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
Commercial Bank Operations
CHAPTER TWENTY International Banking Service Options
CHAPTER TEN Liquidity And Reserve Management: Strategies And Policies
Chapter 5 Domestic and International Money Markets
International Money & Finance Chapter 5: The Eurocurrency Market
International Banking and Money Market
Presentation transcript:

Chapter 6 Banking and Money Markets Management 3460 Institutions and Practices in International Finance Fall 2003 Greg Flanagan

Oct 23, Chapter Objectives The student will be able to: Describe the banking system The IMF Central banks The Bank of International Settlements (BIS) Commercial banks—domestic International banking services

Oct 23, The student will be able to: List and discuss the different international banking services. List and discuss the reasons for international banking services. Explain capital adequacy and the reasons for it. Explain the calculation of Value at Risk (VAR)

Oct 23, The student will be able to: Explain the international money market Describe the creation of eurocurency. Explain the supply and demand of loanable funds. Differentiate theInterbank offered rates: LIBOR; SIBOR; PIBOR; EURIBOR. Eurocredits, Euronotes, Euro commercial paper.

Oct 23, Banking System The World Bank “Not a bank, but rather a specialized agency.” The IMF promoting international monetary cooperation; facilitating the expansion and balanced growth of international trade; promoting exchange stability; assisting in the establishment of a multilateral system of payments; and making its resources available (under adequate safeguards) to members experiencing balance of payments difficulties

Oct 23, Banking System More generally, the IMF is responsible for ensuring the stability of the international monetary and financial system—the system of international payments and exchange rates among national currencies IMF VideosVideos

Oct 23, Banking System Bank of International SettlementsBank of International Settlements BIS Central Banks Bank of Canada FX market intervention Foreign exchange reserves stood at US$37.2 billion at the end of 2002, up from US$34.2 billion at the end of 2001, primarily owing to a revaluation resulting from the appreciation of the euro against the U.S. dollar. Commercial banks—domestic

Oct 23, Banking System Domestic commercial banks supervised by central bank provide retail services and products invest hold deposits make loans

Oct 23, Banking System Assets Liabilities Deposits: Loans: +$1000 Cash: +$1000 +$900 $1000 Balance 10% reserves $1900 Balance $100 -$900 Bank A A single bank only lends out its excess reserves.

Oct 23, Banking System +$900 Assets Liabilities Deposits: Loans: Cash: +$900 +$810 $900 Balance 10% reserves $1710 Balance $90 -$810 And so on to Bank C and Bank D…. Bank B

Oct 23, Banking System +$1000 Assets Liabilities Deposits: Loans: Cash: +$1000 +$9,000 $10,000 Balance 10% reserves All Commercial Banks Money has been created!

Oct 23, Banking System International Banks do everything domestic banks do and: Arrange trade financing. Arrange foreign exchange. Offer hedging services for foreign currency receivables and payables through forward and option contracts. Offer investment banking services (where allowed).

Oct 23, The World’s 50 Largest Banks Bank Country Equity Assets Net Income

Oct 23, The World’s 50 Largest Banks Bank Country Equity Assets Net Income

Oct 23, The World’s 50 Largest Banks Bank Country Equity Assets Net Income

Oct 23, Reasons for International Banking Prestige Regulatory Advantage Wholesale Defensive Strategy Retail Defensive Strategy Transactions Costs Growth Risk Reduction Greater stability of earnings due to diversification

Oct 23, Types of International Banking Offices Correspondent Bank Representative Offices Foreign Branches Subsidiary and Affiliate Banks Edge Act Banks Offshore Banking Centers International Banking Facilities

Oct 23, Correspondent Bank A correspondent banking relationship exists when two banks maintain deposits with each other. Correspondent banking allows a bank’s MNC client to conduct business worldwide through his local bank or its correspondents.

Oct 23, Representative Offices A representative office is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank’s correspondents. Representative offices also assist with information about local business customs, and credit evaluation of the MNC’s local customers.

Oct 23, Foreign Branches A foreign branch bank operates like a local bank, but is legally part of the the parent. Subject to both the banking regulations of home country and foreign country. Can provide a much fuller range of services than a representative office. Branch Banks are the most popular way for domestic banks to expand overseas.

Oct 23, Subsidiary and Affiliate Banks A subsidiary bank is a locally incorporated bank wholly or partly owned by a foreign parent. An affiliate bank is one that is partly owned but not controlled by the parent. U.S. parent banks like foreign subsidiaries because they allow U.S. banks to underwrite securities.

Oct 23, Edge Act Banks Edge Act banks are federally chartered subsidiaries of U.S. banks that are physically located in the U.S. that are allowed to engage in a full range of international banking activities. The Edge Act was a 1919 amendment to Section 25 of the 1914 Federal Reserve Act.

Oct 23, Offshore Banking Centers An offshore banking center is a country whose banking system is organized to permit external accounts beyond the normal scope of local economic activity. The host country usually grants complete freedom from host-country governmental banking regulations.

Oct 23, Offshore Banking Centers The IMF recognizes as major offshore banking centers the Bahamas Bahrain the Cayman Islands Hong Kong the Netherlands Antilles Panama Singapore

Oct 23, “Shell” Branches Shell branches need to be nothing more than a post office box. The actual business is done by the parent bank at the parent bank. The purpose was to allow U.S. banks to compete internationally without the expense of setting up operations “for real”.

Oct 23, International Banking Facilities An international banking facility is a separate set of accounts that are segregated on the parents books. An international banking facility is not a unique physical or legal identity. Any U.S. bank can have one. International banking facilities have captured a lot of the Eurodollar business that was previously handled offshore.

Oct 23, Capital Adequacy Standards Bank capital adequacy refers to the amount of equity capital and other securities a bank holds as reserves. There are various standards and international agreements regarding how much bank capital is “enough” to ensure the safety and soundness of the banking system.

Oct 23, Capital Adequacy Standards Traditional bank capital standards may be enough to protect depositors from traditional credit risk, they may not be sufficient protection from derivative risk. i.e. Barings Bank, collapsed in 1995 from derivative losses, but looked OK on paper relative to capital adequacy standards. Value-at-Risk (VAR)

Oct 23, Value-at-Risk (VAR) BIS Basle Accord VAR = Portfolio Value X Daily Standard Deviation of return X Confidence Interval factor X SQRT(time horizon) Portfolio Value is known 99% Confidence Interval factor = SQRT 10 day horizon = Daily Standard Deviation of return needs to be estimated

Oct 23, Value-at-Risk (VAR) Example: Portfolio value = $500M Daily Standard Deviation of return estimated at.67% $500M X.0067 X X = $24.64M The probability of loss greater than this is1%

Oct 23, Money Markets Q* Interest rate Loanable funds (Eurocurrency) Demand Supply i* S2S2 i** Q**

Oct 23, International Money Market Eurocurrency is a time deposit in an international bank located in a country different than the country that issued the currency. i.e. Eurodollars are US$-denominated time deposits in banks located abroad. Euroyen are yen-denominated time deposits in banks located outside of Japan. The foreign bank doesn’t have to be located in Europe.

Oct 23, Eurocurrency Market Most Eurocurrency transactions are interbank transactions in the amount of $1,000,000 and up. Common reference rates include LIBOR the London Interbank Offered Rate PIBOR the Paris Interbank Offered Rate SIBOR the Singapore Interbank Offered Rate

Oct 23, Eurocurrency Market A new reference rate for the new euro currency EURIBOR the rate at which interbank time deposits of € are offered by one prime bank to another.

Oct 23, Eurocredits Eurocredits are short- to medium-term loans of Eurocurrency. The loans are denominated in currencies other than the home currency of the Eurobank. Often the loans are too large for one bank to underwrite; a number of banks form a syndicate to share the risk of the loan. Eurocredits feature an adjustable rate. On Eurocredits originating in London the base rate is LIBOR.

Oct 23, Forward Rate Agreements An interbank contract that involves two parties, a buyer and a seller. The buyer agrees to pay the seller the increased interest cost on a notational amount if interest rates fall below an agreed rate. The seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate.

Oct 23, Forward Rate Agreements: Uses Forward Rate Agreements can be used to: Hedge assets that a bank currently owns against interest rate risk. Speculate on the future course of interest rates.

Oct 23, Forward Rate Agreements Bank wishes to hedge a deposit cost over a time period against a loan return over a different time period. The Bank will sell a forward rate agreement. Settlement rate–SR Agreement rate–AR The payment equals Note Amount X (SR-AR) X days/ (SR X days/360)

Oct 23, Forward Rate Agreements Example: A bank has a loan out at 4.5% and is paying deposits at a lower rate—the spread. Note = $1,000,000 Agreement rate = 4.5%; Settlement rate = 5%; the forward rate period = 91days (three months) $1,000,000 X ( ) X 91/ (.05 X 91/360) $1,000,000 X.005 X = $1, Bank pays this as the SR > AR

Oct 23, Euronotes Euronotes are short-term notes underwritten by a group of international investment banks or international commercial banks. They are sold at a discount from face value and pay back the full face value at maturity. Maturity is typically three to six months.

Oct 23, Euro-Medium-Term Notes Typically fixed rate notes issued by a corporation. Maturities range from less than a year to about ten years. Euro-MTNs is partially sold on a continuous basis –this allows the borrower to raise funds as they are needed.

Oct 23, Eurocommercial Paper Unsecured short-term promissory notes issued by corporations and banks. Placed directly with the public through a dealer. Maturities typically range from one month to six months. Eurocommercial paper, while typically U.S. dollar denominated, is often of lower quality than U.S. commercial paper—as a result yields are higher.