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INTRODUCTION Chapter 1 Business 4039

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Title: INTRODUCTION Chapter 1 Business 4039


1
INTRODUCTIONChapter 1Business 4039
  • International Banking
  • by
  • Jane Hughes and Scott MacDonald

2
Key Concepts
  • Pivotal role of banks
  • Rapid pace of change in markets, technologies and
    non-bank competition
  • Information costs are responsible for emergence
    of financial intermediaries
  • Financial intermediaries deal with
  • Search
  • Verification
  • Monitoring
  • Enforcement costs.

3
Important Terms
  • Financial Intermediary
  • Weiji
  • International banking
  • Liquidity and funding risk
  • Settlement/payment risk
  • Interest rate risk
  • Market or price risk
  • Foreign exchange or currency risk
  • Sovereign risk
  • Operating risk

4
Important Terms Defined
  • Financial Intermediary
  • is a financial institution that acts as a conduit
    between surplus-saving economic units and
    deficit-spending economic units.
  • Weiji
  • is the crisis of change. Inherent in change is
    both danger and opportunity.
  • International banking
  • is when a bank in one country undertakes
    activities that involve it in some form of
    business (loans, advice, securities issuance) in
    another country.

5
Important Terms Defined
  • Liquidity and funding risk
  • The threat of insufficient liquidity on the part
    of the bank for normal operating requirements
  • Settlement/payment risk
  • Is created when one party to a deal pays money or
    delivers assets before receiving its own cash or
    assets, hence exposing itself to a potential loss
    and interest rate risk.
  • Interest rate risk
  • The risk that arises from mismatches in both the
    volume and maturity of interest-sensitive assets,
    liabilities and off-balance sheet items
  • Market or price risk
  • The exposure of banks to losses due to market or
    price fluctuations in well-defined markets
  • Foreign exchange or currency risk
  • The exposure of banks to fluctuations in foreign
    exchange rates that affect positions held in a
    particular currency for a customer or the bank.
  • Sovereign risk
  • In which the political or economic conditions in
    a particular country threaten to interrupt
    repayment of loans or other debt obligations
  • Operating risk
  • Arising from losses caused by fraud, failure of
    internal control, or unexpected expenses, as in
    the case of lawsuits.

6
Question 1
  • What is a systematic banking crisis?

7
Question 1 - answer
  • What is a systematic banking crisis?
  • A systematic crisis is one in which large chunks
    of banking capital in a country are wiped out.
  • Can you give an example of such a crisis?

8
Question 1 - answer
  • Can you give an example of such a crisis?
  • See table 2.2 page 21for selected crisis from
    1875-1914
  • Is there a pattern here?
  • Turkey foreign borrowing that couldnt be
    sustaineddebt default
  • Peru collapse of a main industry that generated
    foreign revenues together with deficits debt
    default
  • Egypt foreign borrowing to fuel consumption
    debt default

9
Question 2
  • What is banking capital?

10
Question 2 - answer
  • What is banking capital?
  • It is the owners equity of a bank including the
    capital account(s) and retained earnings.

11
Question 3
  • What is universal banking?

12
Question 3 - answer
  • What is universal banking?
  • Universal banking refers to banks that under the
    law affecting the nature of their operations,
    that functions as a deposit-taking/lending
    institution as well as offering a wide range of
    other services including
  • Securities underwriting
  • Project finance
  • Insurance
  • Advisory services on mergers and acquisitions and
    privatization.

13
Question 4 - answer
  • What is the Glass-Steagall Act and why was it
    important?

14
Question 4 - answer
  • What is the Glass-Steagall Act and why was it
    important?
  • The Glass-Steagall Act in the U.S. (which was
    repealed in 1999) prohibited banks from engaging
    in investment banking (underwriting).
  • In Canada, the Bank Act was changed in 1980 to
    allow banks to acquire underwriting firms.
  • These changes are part of the deregulation of the
    financial services industry that started in the
    early 1980s and continues today.

15
Question 5 - answer
  • How did the system of international banking
    evolve, starting with the Italians and eventually
    ending up with the Americans as the dominant
    forcegt
  • What is the structure of international banking
    today?
  • Are U.S. banking institutions still dominant, or
    have banks from other countries become
    competitive?

16
Question 5 - answer
  • How did the system of international banking
    evolve, starting with the Italians and eventually
    ending up with the Americans as the dominant
    forcegt
  • What is the structure of international banking
    today?
  • Are U.S. banking institutions still dominant, or
    have banks from other countries become
    competitive?
  • Sal

17
Question 6 - answer
  • International banking has gone through several
    crises. What has been the cause of these crises,
    such as in the cases of Latin America in the
    1980s or of Asia in the late 1990s.?
  • Debt
  • When a country takes on too much debt, servicing
    that debt can consume the resources of the
    country to the point where adverse effects can
    impact, the environment, their economy and their
    people.
  • At some point, default on that debt can occurand
    a crisis ensue.

18
Question 6 - answer
  • International banking has gone through several
    crises. What has been the cause of these crises,
    such as in the cases of Latin America in the
    1980s or of Asia in the late 1990s.?
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