1. 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.

2. 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

3. Types of International Banking Organizations
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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

4. Types of International Banking Organizations (cont.)
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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)

5. Goals of International Banking Regulation
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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

6. Regulation of Foreign Bank Activity in the U.S.
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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

7. Customer Services Supplied By Banks in International Markets
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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) )

8. Hedging Against Currency Risk Exposure
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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

9. Customer Services Supplied By Banks in International Markets (cont)
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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

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

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

12. Future Problems for International Banks
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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

13. Solutions to Troubled International Loans
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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

14. 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

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

16. The Future of Banking and Financial Services
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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

17. 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?