1. The Eurocurrency Market and International Banking
Chapter 6
The Eurocurrency Market and
International Banking

2. Slides prepared by Afaf Moosa
Objectives
To define the Eurocurrency market
To identify Eurocurrencies and Eurocurrency banking centres
To identify reasons for the growth of the Eurocurrency market
(cont.)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

3. Slides prepared by Afaf Moosa
Objectives (cont.)
To identify the main features of Eurobanking
To illustrate the determination of the bid-offer spread and the risk premium in Eurocurrency deposit rates
To describe international banking
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

4. The Eurocurrency market
The market is comprised of banks that accept short-term deposits and make short-term loans in currencies other than that of the country in which they are located
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

5. Slides prepared by Afaf Moosa
Eurocurrencies
US dollar
Euro
Japanese yen
British pound
Swiss franc
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

6. Prerequisites for Eurocurrency centres
Political stability
Favourable environment for international finance
Good telecommunications system
Favourable time zone
High quality of life
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

7. Slides prepared by Afaf Moosa
Eurocurrency centres
European centres: London, Luxembourg, Paris, Zurich and Frankfurt
Centres outside developed countries: the Bahamas, Dubai and Hong Kong
North America and Japan: International Banking Facilities (IBFs) and the Japan Offshore Market (JOM)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

8. Slides prepared by Afaf Moosa
Evolution and growth
The market started in the 1950s.
In 1957, the Bank of England introduced tight controls
In 1958, European currencies were made convertible
(cont.)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

9. Evolution and growth (cont.)
The rise of oil prices in the 1970s produced huge financial surpluses for oil-exporting countries. These surpluses were deposited at Eurobanks
(cont.)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

10. Evolution and growth (cont.)
Eurobanks are efficient because:
they are not subject to regulations, such as Regulation Q, interest equalisation tax
no reserve requirements
economies of scale
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

11. Features of Eurobanking
International banking encompasses Eurobanking
Liabilities are time or call deposits
Eurobanks cannot create deposits by writing claims against themselves
(cont.)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

12. Features of Eurobanking (cont.)
Eurobanks accept deposits and make loans in a variety of currencies
A Eurobank is often a branch of an international bank
There are no formal restrictions on entry
(cont.)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

13. Features of Eurobanking (cont.)
Transactions are large
The geographical spread is very wide
The market is not subject to the regulatory measures of the local authorities
(cont.)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

14. Features of Eurobanking (cont.)
The market is dominated by interbank operations
Participants include multinationals and central banks
Eurobanks do not have to hold reserves against deposits
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

15. Determination of the bid-offer spread in interest rates
The bid rate is determined by the demand by market makers and the supply of price takers
The offer rate is determined by the demand by price takers and the supply of market makers
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

16. Interest rate determinationQ i
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

17. Slides prepared by Afaf Moosa
The risk premium
Only borrowers of high quality can borrow at the offer rate quoted by market makers
Others have to pay a risk premium
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

18. Risk premium associated with low-quality borrowers
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

19. International banking
International banking operations encompass those conducted with non-residents as well as those involving foreign currencies
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

20. Reasons for the emergence of international banking
Meeting the needs of foreign subsidiaries
Participation in the FX market
Circumventing capital controls
Provision of custodial services
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

21. Traditional activities
Export-import finance
Buying and selling foreign exchange
Provision of foreign loans
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

22. Slides prepared by Afaf Moosa
New activities
Dealing in Eurocurrencies
Syndicated Eurocredit
Investment banking
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

23. Innovative activities
Innovative financing
Global money market
Managing the loan portfolios of developing countries
Private banking
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

24. The organisational set-up
Correspondent banks
Representative offices
Bank agencies
Foreign branches, subsidiaries and affiliates
Consortium banks
Global banks
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

25. Slides prepared by Afaf Moosa
Correspondent banks
When a bank has no branch in a particular country it uses a foreign bank located in that country to settle transactions on its behalf
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

26. Representative offices
A representative office is established by a bank in another country with the primary task of providing information about business conditions in that country
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

27. Slides prepared by Afaf Moosa
Bank agencies
A bank agency is similar to an ordinary commercial bank, except that it does not handle ordinary deposits
Its function is to deal in money and FX markets, arrange loans and clear cheques
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

28. Slides prepared by Afaf Moosa
Foreign branches
If the volume of international business of the customers of a bank is large enough, it may be viable to open a branch in another country
Branches are subject to regulation by the home and host governments
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

29. Foreign subsidiaries and affiliates
These are banks established in another country and owned solely or jointly with other parties
Unlike branches, they do not have the name of the bank
The degree of control is greater in the case of a subsidiary
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

30. Slides prepared by Afaf Moosa
Consortium banks
Joint ventures established by large international banks to deal with large companies and governments
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa

31. Slides prepared by Afaf Moosa
Global banks
A global bank takes deposits and offers loans and other banking services in a variety of national markets through local presence
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa
Slides prepared by Afaf Moosa