Guy Hargreaves ACF-104 Wechat: Guyhargreaves

Recap of yesterday Understand the tools used to manage the various balance sheet risks Understand the credit analysis and approval process within commercial banks Review of Central Bank roles and goals in commercial bank regulation Review the pros and cons of existing and new regulations around balance sheet risk management 2

Goals of today Understand how local banking systems interact to form the international banking system Describe the key differences in structure between international, regional and local commercial banks Identify the weaknesses in the international banking systems and efforts made to strengthen it 4

International banking structure Really just a series of locally regulated banks all owned by the same company located in countries all over the globe Each local bank is either a “branch” or a “subsidiary” of the “Head Office” bank Each branch the same legal entity as the head office but located at a different address ie another country Each subsidiary is a separate company owned by the head office bank 5

Branch versus subsidiary Because commercial bank branches are the same legal entity as the head office they don’t need to be separately capitalised Each branch shares the same capital and is exactly as strong as the head office If a customer deals with a branch it is legally the same as dealing with head office Subsidiaries need to either have their own capital or they need to be fully guaranteed by the head office Because head office can let a subsidiary fail customers of a subsidiary require head office guarantees usually 6

International bank regulation Usually commercial banks are regulated by the Central Bank or banking regulator in the country of the head office Eg Citibank would have branches in China but is regulated by the Federal Reserve because it is a US based bank However local bank regulators want to also regulate each branch or subsidiary because they do not want failure of a bank in its head office country to impact on the local banking system => very complicated regulation for International commercial banks 7

International bank regulation Usually commercial banks are regulated by the Central Bank or banking regulator in the country of the head office Eg Citibank would have branches in China but is regulated by the Federal Reserve because it is a US based bank However local bank regulators want to also regulate each branch or subsidiary because they do not want failure of a bank in its head office country to impact on the local banking system => very complicated regulation for International commercial banks 8

International payments SWIFT connects local payment systems which simply operate as normal When an international payment is instructed banks simply transfer funds between themselves in the local currency If an FX transaction is required banks will handle that as part of the overall payment Because international commercial banks can use their local branches to make payments they are generally more efficient at handling international payments 9

International bank departments International banks have mostly the same departments as local or regional banks Likely to have specialists who coordinate multinational customer business across the globe Country Risk and Operations departments are usually much larger Legal and regulatory functions are more complicated 10

International versus local banks International banks are more costly and complex to manage Good communication across the globe is vital Sometimes hard to see what customers are doing in different countries Local banks are smaller and less complex Less diversified and can be riskier Reliant on the economy of one country instead of many Easier to understand and regulate 11

International bank risk International banks have the same credit and market risk functions as local banks However with more financial markets businesses and corporate bankers operating across the globe, international banks often take on a wider array of risks Because international banks tend to be larger they need more capital and become systemically important banks This means they require even more capital! 12