International Banking

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International Banking

• By
• George Vlachos
• Wayne State University

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Chapter 1

• Evolution of International Banking

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Evolution of International Banking

• Every country was once a developing country
  Regardless of great resources and skills of their
  people most nations depended initially on foreign
  money and bankers to help finance their trade
• By late middle ages the expanding European trade
  encouraged by the crusades had produced the first
  international banks
• The wool workers in Florence, who imported bales
  of wool from England and Spain were financed by
  Florentine merchants whose savings helped finance
  the Renaissance

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Evolution of Intl Banking

• Rise of Intl Banking as an escape from the
  limitations of domestic regulation
• Creation of Eurodollar market
• Floating Exchange rates
• Oil shock of 1973

• The roaring 1920s
• Crash
• Bank Failures
• Economic Depression
• Glass-Steagall Act of 1933
• FDIC
• Rebuilding the System
• Bretton Woods-IMF, WB

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Evolution of Intl Banking

• Petrodollar recycling to 3rd World countries
• Inflation
• Fed controls MS-1979
• Volatility of interest/ forex rates
• Pension fund invstmts
• Eurobonds

• Foreign Direct Invsmt
• Bull markets, MAs
• Securitization
• Japanese fin. power
• Globalization of mkts
• Big Bang (1983-1986)
• Privatizations
• The crash of 1987

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INTL BANKING TRENDS

I. RECENT PATTERNS rapid growth in risk and
complexity over the last 2 decades 1. The Era
of Growth (Causes) a. Growth in international
business b. Energy Crisis of 1973 c. Loans to
developing economies
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INTERNATIONAL BANKING TRENDS
2. International Banking Crisis(1982) a. Ener
gy Crisis (1973) OPEC nations
accumulated huge (petro) dollar
balances b. Loans went to developing nation
s. c. OPEC funds dried up (1982) d. Interest
rates began to rise e. Mexico August,
1982 announced its inability to make
loan payments f. By spring, 1983 25
developing nations also defaulted - banking
crisis!
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INTERNATIONAL BANKING TRENDS
B. International Bank Regulations 1. Needed
well-defined supervisory structure 2. Basle
Agreement (1992) set risk-based banking
standards a. Banks must have minimum 8
ratio of equity to assets
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INTERNATIONAL BANKING TRENDS
b. Capital adequacy standards revised to
incorporate market risk c. Banks must focus
more on profit growth C. Japanese
International Bank Expansion 1. Recent
expansion overseas 2. Lately, retrenchment due
to new Basle Agreement standards.
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Expansion of Activities Across National
Boundaries

• One clear trend in the evolution of financial
  institutions and markets is the expansion of
  activities across national boundaries.

• Technology has made it possible to
• conduct business around the world with
  relative ease and minimal cost.
• Producers recognize that export markets are as
  important as domestic markets, and that the range
  of competitors includes both domestic and foreign
  operations.

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Foreign Bank Activities in the United States

• With the recent trend, financial institutions
  have expanded their operations internationally
  and begun to compete with others in foreign
  markets in addition to domestic markets.
• GLOBAL BANKING ACTIVITIES
• Involve both traditional commercial banking and
  investment banking operations.
• Large commercial banks accept deposits make
  loans provide letters of credit trade bonds and
  foreign exchange and underwrite debt and equity
  securities in dollars and other currencies.

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The Largest Commercial Banks in the World. (End
of 1997)

• Restrictive branching laws in the U.S. had as a
  result that U.S. banks were not ranked among the
  largest (by assets)
• in 1991, 10 of the largest 15 banks (by assets)
  had their main offices in Japan, the other 5 were
  in Western Europe
• by the end of 1997, only 7 of the largest 15 were
  in Japan
• The relaxation of branching restrictions in the
  U.S. has resulted in larger mergers - producing
  very large U.S. banks for the first time
• By the beginning of 1998, 5 of the top 10 spots
  belong to U.S. financial services companies

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Universal Banking Model

• Universal banking is the conduct of a variety of
  financial services such as
• trading of financial instruments foreign
  exchange activities underwriting new debt and
  equity issues investment management, insurance
  as well as extension of credit and deposit
  gathering
• Universal banks have long dominated banking in
  most of continental Europe. Universal banks
  engage in everything from insurance to investment
  banking and retail banking
• similar to U.S. banks prior to the enactment of
  the Banking Act of 1933 and Glass-Steagall
  provisions

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Advantages of Universal BankingRisk
Diversification and Expanded Business
Opportunities

• A universal bank can spread its costs over a
  broader base of activities and generate more
  revenues by offering a bundle of products.
  Diversification, in turn, reduces risk.
• insurance companies, investment banks and other
  suppliers of financial services are moving toward
  building financial conglomerates
• Technology firms (such as Microsoft) are
  hammering away at banks' networks-building the
  electronic gateways into financial services.
• Banks have the lead but the world is gaining
  fast.

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Disadvantages of Universal BankingInherent
Conflict of Interest

• There is an inherent conflict of interest
• A universal bank might use pressure tactics to
  coerce a corporation into using its underwriting
  services or buy insurance from its subsidiary by
  threatening to cut off credit facilities.
• It could force a borrower in financial
  difficulties to issue risky securities in order
  to pay off loans.
• A universal bank could also abuse confidential
  information supplied by a company issuing
  securities as well.