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 by Yee-Tien (Ted) Fu International Banking

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin  Learning Objectives   To understand the importance of large multinational banks in both domestic and foreign markets.  To explore how multinational banks operate around the globe and to identify the financial services that they offer.  To see how and why international banking is closely regulated in many areas of the world.

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin The Scope of International Banking Activities  The facilities operated by multinational banking corporations include:  international departments in their home offices  full-service branch offices in foreign markets  shell branches on offshore islands  representative offices  Edge Act and Agreement corporations  international banking facilities (IBFs)  agency offices

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin The Scope of International Banking Activities  The kind of facility adopted by a multinational bank depends on government regulations, as well as the bank’s size, goals, and location.

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Services Offered by International Banks  Multinational banks offer a wide variety of international financial services to customers:  issuing letters of credit for importers  buying and selling foreign currencies  accepting Eurocurrency deposits and making Eurocurrency loans  marketing and underwriting domestic and Eurocurrency bonds, notes, and equity shares  securitizing loans  advising and assisting foreign investments

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Services Offered by International Banks  Some of the world’s largest banking firms attempt to offer their customers “one-stop shopping” and become “universal banks.”  Universal banking combines traditional banking, insurance, securities trading, and even real estate brokering under one corporate umbrella.

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Foreign Banks in the United States $ billions Total assets held by commercial banks in the U.S. Assets held by domestically owned banks Assets held by U.S. offices of foreign banks 5.3% 11.9% 16.1% 21.4% 21.7% 19.9% Data Source: Board of Governors of the Federal Reserve System

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Foreign Banks in the United States  There was pressure on Congress for more extensive regulation of foreign banks, so as to be fair to domestic banks, and to ensure the effectiveness of domestic monetary policy.  Bank Holding Company Act Amendments (1970)  International Banking Act (1978)  Depository Institutions Deregulation and Monetary Control Act (1980)  Foreign Bank Supervision Enhancement Act (1991)

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Regulation of the International Banking Activities of U.S. Banks  The Federal Reserve Board is the chief regulatory agency for U.S. international banking activities, especially where Fed member banks are involved.  Since it is difficult to separate a bank’s foreign operations from its domestic activities, the protection of domestic deposits and the stability of the domestic banking system is of prime concern to the Fed.

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin The Future of International Banking  The future of international banking is clouded at this time due to the many cross-currents of economics and politics that pervade our world.  Considering political and currency risk, lending funds in the international arena is riskier, on average, than domestic lending.  Not surprisingly, surveys of U.S. banks show that loans to distant nations are mainly short term, and many are made to banks themselves.

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin The Future of International Banking  A persistent problem in international banking is the preservation of public confidence in the banking system.  Essentially, this means protecting the major multinationals against failure.  International Lending and Supervision Act (1983)  Basle Agreement (1988) (11 countries)

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin The Future of International Banking  Deregulation: There is a growing trend toward relying more on the private marketplace and less on government rule-making in order to regulate global banking.  At the same time, regulatory cooperation and harmonization of banking regulations across nations is necessary to ensure a minimum level of public scrutiny.

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Prospects and Issues for the 21st Century  Limited by capital and the availability of experienced management, the future growth of international banking should be more gradual and loan quality more of a factor.  The actions of regulatory authorities and competition from nonbank firms can also affect the future development of international banking.

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Money and Capital Markets in Cyberspace  More information about international banking can be found at:     

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Chapter Review  The Scope of International Banking Activities  Multinational Banking Corporations  Types of Facilities Operated by Banks Abroad  Services Offered by International Banks  Universal Banking Services and One-Stop Shopping  Foreign Banks in the United States  Recent Growth of Foreign Banks in the U.S.  Federal Regulation of Foreign Bank Activity

 2003 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin Chapter Review  Regulation of the International Banking Activities of U.S. Banks  The Future of International Banking  The Risks of International Banking  Public Confidence and Bank Failures  The Spread of Deregulation: How Fast Should We Go?  Prospects and Issues for the 21st Century