1. 1 INTERNATIONAL BANKING

2. I.The Structure of the International Capital Market –The most important players are: Commercial banks Corporations Nonbank financial institutions Central banks and other government agencies 2

3. INTERNATIONAL BANKING II.Offshore Banking The business that banks’ foreign offices conduct outside of their home countries Banks operate offshore through any of three types of institution: –Agency office –Subsidiary bank –Foreign branch 3

4. EUROBANKING –Eurodollars Dollar deposits located outside the U.S. –Eurobanks Banks that accept deposits denominated in Eurocurrencies –Eurocurrency trading has grown for three reasons: Growth in world trade Evasion of financial regulations like reserve requirements Political concerns 4

5. EUROBANKING The Growth of Eurocurrency Trading –London is the leading center of Eurocurrency trading. 5

6. EUROBANKING –The early growth in the Eurodollar market was due to: Growing volume of international trade Cold War Federal Reserve regulations on U.S. banks (e.g., the Fed’s Regulation Q) Move to floating exchange rates in 1973 Reluctance of Arab OPEC members 6

7. INTERNATIONAL BANKING SERVICES A.Working Capital - LCs B.Letters of Credit C. Local Currency Financing D. Financial Services E. Creation of U.S. International Banking IBF Facilities

8. IBFs –International banking facilities (IBFs) Banks that accept time deposits and make loans to foreign customers. They are not subject to reserve requirements or interest rate ceilings. They are exempt from state and local taxes. 8

9. INTERNATIONAL BANKING II. BANKING STRUCTURE A. Expansion Overseas 1. Original Motivation 2. Foreign Branches a. Advantages b. Disadvantages 3. Associations 4. Representative Offices

10. INTERNATIONAL BANKING B. Edge Act and Agreement Corporations 1. 1919 Amendment 2. Use of Edge Act Banks C. Multinational Services D. Multinational Banking Groups

11. INTERNATIONAL BANKING III. FINANCING VEHICLES to meet demand for short- and medium- term financing. A. Financing Innovations B. Parent Guarantees C. Syndication D. Cash Management: Centralization

12. COMMERCIAL BANKS I. BASIC BANKING FUNCTIONS ABROAD A. Functions II. LENDING A. Organization B. Analyzing and Making Loans

13. COMMMERCIAL BANKS C. Types of Credit 1. Unsecured Line 2. Lines for Opening L/C’s 3. Refinancing sight payments 4. Financing foreign receivables 5. Purchasing foreign currency drafts

14. COMMERCIAL BANKING III. INTERNATIONAL OPERATIONS A. International Payments 1. Nostro Accounts 2. Vostro Accounts 3. Dollar payments 4. Foreign exchange futures contract 5. Term Loan

15. COMMERCIAL BANKS 6. Revolving credit 7. Importer/exporter information 8. Introductions IV. BRANCH BANKING A. Major U.S. Restrictions 1. McFadden Act, 1927 2. Glass-Steagall Act, 1933 3. Bank Holding Act, 1956

16. COMMERCIAL BANKING V. CORRESPONDENT BANKING A. The Importance of International Business to Small Banks 1. Definition 2. Letters of Credit 3. Disadvantages

17. COMMERCIAL BANKING 1. Small banks

18. Slide 21-18Copyright © 2003 Pearson Education, Inc. Difficulties in Regulating International Banking –Deposit insurance is essentially absent in international banking. –The absence of reserve requirements reduces the stability of the banking system. Regulating International Banking

19. Difficulties in Regulating International Banking –Bank examination to enforce capital requirements and asset restrictions becomes more difficult in an international setting. –There is uncertainty over which central bank is responsible for providing LLR assistance in international banking. 19

20. Slide 21-20Copyright © 2003 Pearson Education, Inc. International Regulatory Cooperation –Offshore banking is largely unprotected by the safeguards national governments have imposed to prevent domestic bank failures. Regulating International Banking

21. BASEL –Basel Committee It is a group of central bank heads from 11 industrialized countries. It enhances regulatory cooperation in the international area. Its 1975 Concordat allocated national responsibility for monitoring banking institutions and provided for information exchange. 21