Brief Overview - International Banking and International Finance in today’s Covid19 pandemic driven VUCA world

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Brief Overview - International Banking and
International Finance in todays Covid19 pandemic
driven VUCA world

• Ramesh Kumar Nanjundaiya
• Sunnyvale, CA 94086
• April 25,2020

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Bretton Woods Conference

• The Bretton Woods Institutions are the World Bank
  and the International Monetary Fund (IMF). They
  were set up at a meeting of 43 countries in
  Bretton Woods, New Hampshire, USA in July 1944.
  WW2 had not ended fully.
• Their aims were to help rebuild the shattered
  postwar economy (after WW2-1939 to1945) and to
  promote international economic cooperation. The
  original Bretton Woods agreement also included
  plans for an International Trade Organisation
  (ITO) but was only created when the World Trade
  Organisation (WTO) was created in the early
  1990s.
• Before Bretton Woods most countries followed gold
  standard. After this, each member would redeem
  its currency for US dollar. Why dollars because
  the US held 75 of the worlds supply of gold. No
  other country had this position.

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International Banking

• Main Functions
• 1. Funds across a countrys borders
• 2. Financing Imports and Exports
• 3. FOREX rate determination
• 4. International Capital Markets (stocks and
• bonds), debt flows, interest rate
  differential,
• offshore banking
• 5. ALCO management- Manage interest rate risk,
• to avoid mismatch of assets and liabilities.
• 6. FOREX Foreign Exchange. Biggest
• international banking activity.

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International Banks and International Finance

• Globalization of finance. - is an aggregate
  concept that refers to increasing global linkages
  created through cross- border financial flows.
• International Banks are also called as
  Correspondent Banks, Foreign Branch Bank,
  Subsidiaries and Affiliates, Edge Act Banks,
  Offshore Banking Center.
• Example A "Swiss bank account," commonly
  referred to in Hollywood movies, is an example of
  an offshore banking center's services.
• Example Petrodollars are oil revenues
  denominated in U.S. dollars. They are the primary
  source of revenue for many oil-exporting members
  of OPEC, as well as other oil exporters in the
  Middle East, Norway, and Russia.

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International Banking is all about navigation in
the VUCA world.

• The deeper meaning of each element of VUCA serves
  to enhance the strategic significance of VUCA
  foresight and insight as well as the behaviour of
  groups and individuals and organizations. It
  discusses systemic failures and behavioural
  failures, which are characteristic of
  organisational failure.
• V Volatility the nature and dynamics of
  change, and the nature and speed of change forces
  and change catalysts.
• U Uncertainty the lack of predictability, the
  prospects for surprise, and the sense of
  awareness and understanding of issues and events.
• C Complexity the multiplex of forces, the
  confounding of issues, no cause-and-effect chain
  and confusion that surrounds organization.
• A Ambiguity the haziness of reality, the
  potential for misreads, and the mixed meanings of
  conditions cause-and-effect confusion.
• PLUS to be added major global confusion- Global
  Covid19 pandemic?

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International Banking 24/7/365....

• International banking is a facilitator for
  international trade and provides Flexibility,
  accessibility, international transactions and
  account maintenance.
• Notwithstanding the Covid19 pandemic,
  international trade is an ongoing activity and
  cannot be reduced but increases year on year.
• If therefore your business wishes to expand
  internationally due to large volume of potential
  imports and exports activities, for financially
  sound acquisition overseas, a supply chain shift
  or an opportunity to tap into emerging economies,
  you need the expertise of International Banking.

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Tools to survive in todays international
markets

• International cash management,
• Trade finance including guarantees-bonding
• Working capital financing
• Foreign exchange solutions - FOREX.
• An international bank is one which should support
  a business through every stage of its clients
  international business life cycle, customizing
  solutions to navigate the complexities of global
  payment flows and international market nuances.

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FOREX foreign exchange

• Forex (FX) is the marketplace where various
  national currencies are traded. The forex market
  is the largest, most liquid market in the world,
  with trillions of dollars changing hands every
  day.
• There is no centralized location, rather the
  forex market is an electronic network of banks,
  brokers, institutions, and individual traders
  (mostly trading through brokers or banks).
• Many entities, from financial institutions to
  individual investors, have currency needs, and
  may also speculate on the direction of a
  particular pair of currencies movement. They post
  their orders to buy and sell currencies on the
  network so they can interact with other currency
  orders from other parties.
• The forex market is open 24 hours a day, five
  days a week, except for holidays. Currencies may
  still trade on a holiday if at least the
  country/global market is open for business.

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FOREX Elements

• Introduction Meaning Elements Importance
  Evolution of Exchange Rate System initially the
  central bank of the country.
• International Monetary System Gold Standard
• Types of Exchange Rates Fluctuations in
  Foreign. Fixed rare floating rate - pegging
• Exchange Rates. Changes in pips 100 pips
• Need for stable foreign Exchange
• Determination of exchange rate market demand
  and supply.
• Value date and good value transactions....

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Daily Volume FOREX

• A 24 hours of global FOREX business comprises
  roughly of an amount of 6.6 trillion - (data
  April 2019).
• Break-down is as follows
• 2 trillion in spot transactions
• 1 trillion in outright forwards
• 3.2 trillion in foreign exchange swaps
• 108 billion currency swaps
• 294 billion in options and other products

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Derivative

• In finance, a derivative is a contract that
  derives its value from the performance of an
  underlying entity.
• This underlying entity can be an asset, index, or
  interest rate, and is often simply called the
  "underlying".
• Derivatives can be used for a number of purposes,
  including insuring against price movements
  (hedging), increasing exposure to price movements
  for speculation or getting access to otherwise
  hard-to-trade assets or markets.
• Some of the more common derivatives include
  forwards, futures, options, swaps, and variations
  of these such as synthetic collateralized debt
  obligations and credit default swaps.
• Most derivatives are traded over-the-counter
  (off-exchange) or on an exchange such as the
  Chicago Mercantile Exchange.

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International Finance

• International Banking or International Finance is
  also about having knowledge about local markets
  across the globe.
• A business that is stepping into overseas markets
  needs financial tools and services as foreign
  exchange, arranging global trade mechanism via
  letters of credit, merchant services and
  international financing.
• This is to help business clientele with
  optimizing payments to improve transparency and
  manage operating as well as counterparty risks.
•  

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International Finance contd..

• International finance is a study that deals with
  the economic interactions between multiple
  countries, rather than narrowly focusing on
  individual markets.
• In diplomacy this is called multilateralism.
• When only two specific countries enter into trade
  and investment relations, this is called
  bilateralism.

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Is IMF doing International Finance

• Yes Since then the world has changed
  dramatically, bringing extensive prosperity and
  lifting millions out of poverty. In many ways the
  IMF's main purpose is to provide financial
  stability globally.
• Today the IMF continues to
• Provide a forum for cooperation on international
  monetary problems
• Facilitate the growth of international trade,
  thus promoting job creation, economic growth, and
  poverty reduction
• Promote exchange rate stability and an open
  system of international payments and
• Lend countries foreign exchange when needed, on a
  temporary basis and under adequate safeguards, to
  help them address balance of payments problems.
  Also help countries in their import and export
  activities.

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Guarantees Facility - Non funded business -
Guarantee commission 1 pa.

• Banks issue different types of guarantees
  including bid (tender),advance payment,
  performance bond, deferred payment guarantees,
  retention bond and financial guarantees.
• Guarantees or bonding facility are used for
  different reasons instead of cash. Often, they
  are included in arrangements between a small firm
  and a large organization issued by local and
  international banks. Banks also issue payment
  guarantees as well on a fully secured basis.

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Financing Your Exports

• International Banking helps you in using the
  right and timely financing tools to increase your
  working capital and win sales against foreign
  competitors.
• Getting paid for the transfer of goods is the end
  goal in an export transaction and the seller must
  choose a financing option that minimizes payment
  risk while also meeting the buyers needs.
• There are many payment methods that can assist
  you in financing your export operation both
  pre-and post-export. Commercial LCs, Standby LCs,
  Open account, revolving LCs, non LC documentation
  presentation via banks methods.

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Commercial Letters of Credit (LCs)

• Protects exporters against non-payment if the
  exporter meets the terms in the LC mitigates
  cross-border risks
• Leverages the banks compliance and control
  mechanisms
• Manages payment and document exchange, governed
  by global standards
• Offers flexible financing options
• Banks deal in documents only not goods
• LC commission 1 to 1.25 pa. (recovered on
  quarterly rests)

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Open Account Imports and Exports transactions

• Risk of non-payment is entirely on seller full
  counterparty, country, currency and cross-border
  risks 
• Compliance, control and anti-money laundering
  issues managed by seller
• No third-party oversight or guarantees
• Simple, streamlined and inexpensive

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Meaning of Export LC

• A flexible and secure financing option in which
  the issuing bank (importers bank) is liable for
  payment even if the importer defaults. The terms
  and conditions of the letter of credit can be
  tailored to the needs of the exporter, thereby
  reducing risk while still having a fair and
  legally binding contract in place.
• Exporters can pass financing costs on to their
  buyers and receive payment sooner than an open
  accountonce the terms of the letter of credit
  have been metwhich can help to improve cash flow
  and shorten the days sales outstanding (DSO).
  Exports documents under LC can be negotiated and
  discounted. By the exporters bank in the
  exporters country.

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Example - Paperless Banking due to Covid 19

• Emirates NBD's smart TRADE portal offers Emirates
  NBD Transaction Banking clients a comprehensive
  range of functionalities, allowing them to submit
  requests for LC or trade loans completely online,
  thus benefitting from a shorter turnaround time.
• The bank has recently revamped the platform to
  make it easier for clients to obtain trust
  receipt financing by allowing them to submit a
  request instantly online instead of visiting a
  bank branch.
• Customers also receive real time updates on the
  status of their transactions through email and
  SMS notifications.

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The Libor scandal (Libor rigging) of 2008-09

• Fraud connected to the Libor (London Inter-bank
  Offered Rate).
• Libor is an average interest rate calculated
  through submissions of interest rates by major
  banks across the world.
• The scandal arose when it was discovered that
  banks were falsely inflating or deflating their
  rates so as to profit from trades, or to give the
  impression that they were more creditworthy than
  they were.
• Libor underpins approximately 350 trillion in
  derivatives. Because Libor is used in US
  derivatives markets. An attempt to manipulate
  Libor is an attempt to manipulate US derivatives
  markets and thus a violation of American law.
• Mortgages, student loans, financial derivatives,
  and other financial products often rely on Libor
  as a reference rate.

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International Capital Markets

• One of the main purposes of capital markets is to
  create economies of scale and promote economic
  efficiency.
• On the international level, it denotes ease of
  buying and selling securities and seamlessly
  converting it into cash when necessary. It aids
  in immobilizing idle savings and channels it into
  a direction of more productive investment.
• They balance the supply and demand of funds
  driving financial security, thereby, ensuring
  optimal use of resources, which further helps in
  capital formation and development of the economy.