1. International Finance
Chapter 6
International Banking and the International Money Markets

2. International Banks Can be distinguished from domestic banks by the:
Services they offer
The deposits they attract
The loans they make

3. International Banks: Services
Financing cross border trade (exports)
Letters of credit; bankers’ acceptances
Offering foreign exchange services
Buying and selling foreign exchange for clients
Offering hedging contracts
Offering interest rate and currency swap financing.
Consulting services to global firms
Hedging strategies; international cash management.
Underwriting eurobonds, foreign bonds, equity issues for global firms.

4. International Banking: Deposits
May or may not be involved in accepting domestic deposits.
China will currently not allow foreign banks to engage in this activity.
Participate in eurocurrency deposit market.
Accepting “offshore” deposits

5. International Banking: Loans
Lenders of “eurocurrency” deposits
Participation in syndicated loans to large multinational firms and sovereign entities.
Allows for the pooling of resources and the sharing of risk!

6. Who are these International Banks: Ranked by Asset Size, 2002
1 Mizuho Holdings (Japan)*
2 Citigroup (United States)
3 Deutsche Bank (Germany)
4 Sumitomo Mitsui Banking Corp (Japan)
5 UBS (Switzerland)
*formed by the 2002 merger of Dai-Ichi Kangyo, Fuji Bank and The Industrial Bank of Japan.

7. Who are these International Banks: Ranked by Asset Size, 2002
6 BNP (France)
7 JP Morgan Chase (United States)
8 HSBC (United Kingdom)
9 Bayerische Hypo-und Vereinsbank- (Germany)
10 Bank of America (United States)
11 ING (Netherlands)
12 Credit Suisse (Switzerland)
13 Bank of Tokyo – Mitsubishi (Japan)
14 ABN AMRO (Netherlands)

8. Who are these International Banks: Ranked by Asset Size, 2002
15 Industrial & Commercial Bank of China (China)
16 Royal Bank of Scotland (United Kingdom)
17 Barclays Bank (United Kingdom)
18 Crédit Agricole (France)
19 Norinchukin Bank (Japan)
20 Morgan Stanley Dean Witter (United States)
21 Société Générale (France)

9. Who are these International Banks: Ranked by Asset Size, 2002
Of the largest 50 commercial banks:
9 are American
6 are Japanese and United Kingdom
5 are French and German
4 are Chinese
3 are Dutch

10. Why do Banks Establish International Operations?
Low Marginal Costs in doing so
Apply home knowledge to foreign market
Knowledge Advantage
Overseas operations can utilize the parent’s knowledge to compete in foreign market
Home Information Source
Providing local (foreign) firms with information about parent’s home market
Prestige
Global banks can attract clients abroad

11. Why do Banks Establish International Operations?
Regulation Advantage
Global banks may not face the same regulations as domestic banks (e.g., reserve requirements on eurocurrency deposits).
Wholesale and Retail Defensive Strategy
Following corporate clients overseas
Providing retail customer overseas services
Circumventing Government Restrictions
Wanting to do business in RMB

12. Why do Banks Establish International Operations?
Growth
Home market may be saturated
Risk Reduction
Greater stability of consolidated earnings.

13. Citigroup
Financial services firm combining banking, insurance, and investments under one global organization.
“Universal or full service bank”
Located in over 100 countries
Go to home page and view countries and product lines

14. Services Offered by International Banks
The services offered by global banks are a function of:
The regulatory environment.
What will governments allow?
Developing countries still somewhat restrictive regarding foreign banks.
The type of banking office established.

15. Types of International Banking Offices
Correspondent Bank
No physical presence overseas
Correspondent relationships with banks in foreign markets
Allows bank to service core clients with little cost.
Reciprocal deposit accounts
Facilities foreign exchange conversion
Facilities trade financing (clearing bankers acceptances)

16. Types of International Banking Offices
Representative Office
Small service facility staffed by parent bank personnel
Cannot make loans or accept deposits
Useful strategy if bank has many important clients in foreign country
There to assist core clients with
Country and economic information
Credit evaluations on local firms

17. Types of International Banking Offices
Foreign Branch Office
Most popular form of U.S. bank expansion abroad.
Legally part of the parent bank
Subject to regulations at home and in foreign market.
Branch lending limits are based on parent capital (not branch office)
Can provide larger loans
Allows for fast clearing of checks within the bank

18. Types of International Banking Offices
Subsidiary Bank
Locally incorporated (in foreign country) bank.
Either wholly owned by parent, or joint venture
Non-controlling subsidiary is referred to as an “affiliate bank.”
Operate under the banking laws of the country in which they are incorporated.
Desirable before the abolition of Glass Steagell Act!

19. Types of International Banking Offices
Offshore Banking Centers
Organized branches or subsidiaries in recognized offshore countries.
A country whose banking system allows for “external” banking activity.
Accepting deposits and making loans in currencies other than the home currency of the offshore country.
IMF recognizes the following as offshore countries:
Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, and Singapore.
Minimal host country regulations, low taxes, favorable time zone, banking secrecy laws all promoting external banking transactions!

20. The International Money Market
The core of the international money market is the eurocurrency market.
A time deposit in a particular currency with is other than the national currency of the country in which it is deposited.
For Example, a U.S. dollar deposit in banks in Hong Kong or Singapore!!!
Banks accepting deposits can be host (offshore) banks, or foreign banks (including U.S. banks).

21. Euro Prefix
The term “euro” is used to denote an offshore currency deposit, e.g.,
Eurodollars, euroyen, europounds, euroeuros!
Does not mean the currencies are being deposited in Europe.
Sub-set in Asia, called the Asian dollar market.
Do not confuse with the single European currency, the “Euro.”
Banks accepting these deposits are commonly referred to as Eurobanks.

22. Eurocurrency Market
The eurocurrency market is a external market than runs alongside a country’s domestic banking market.
The market is two tiered:
Wholesale (interbank) market where global banks trade among themselves.
Interbank Offer Rate: The rate charged by banks with excess currency deposits to lend to other banks.
Interbank Bid Rate: The rate at which a bank will accept deposits from another bank.
Offer rates higher than bid rates by about 1/8%
Major rates come out of London, thus London Interbank Offer and Bid rates are important to the market.

23. Interbank LIBOR Rates LIBOR Rates, Jun 14 2004 Country Over night
US$ Libor %
Euro Libor %
£ Libor %
Yen Libor %
Source: The FT

24. Importance of LIBOR Rates
Used to calculate forward rates on currencies.
Used by global banks in “scaling” lending rates to corporate and sovereign entity borrowers:
Lending rate = LIBOR + X (basis points)
Where X basis points is an estimation of the particular risk associated with the borrower.

25. Libor Loans
Libor loans are generally negotiated on a “roll-over” basis:
Every three to six months the loan is rolled over at the new LIBOR rate
Avoids Eurobanks paying more for their deposits than the returns on their loans.
Maintains a positive margin on euroloans.

26. Roll Over Loan Example Six months periods years Today 1 2 3 4 5 6 etc.
Loan is re-rated at LIBOR every six months, with
interest payments made on those Roll-over dates