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UNIT3: INTERNATIONAL FINANCIAL INSITUTIONS

INTERNATIONAL FINANCIAL INSITITIONS:

International financial institutions, also known as IFI are financial institutions established by
two or more countries. International financial institutions are subject to international law.
Such institutions are owned and managed by the national governments, although other
international institutions and other organisational occasionally act as their shareholders.
Shareholders.

IMF-INTERNATIONAL MONATARY FUNDS

What Is the International Monetary Fund (IMF?

 The International Monetary Fund (IMF) is an international organization that promotes


global economic growth and financial stability, encourages international trade, and
reduces poverty.
 The IMF was originally created in 1945 as part of the Bretton Woods agreement, which
attempted to encourage international financial cooperation by introducing a system of
convertible currencies at fixed exchange rates.
 The IMF collects massive amounts of data on national economies, international trade,
and the global economy in aggregate and provides economic forecasts
 One of the IMF's most important functions is to make loans to countries that are
experiencing economic distress to prevent or mitigate financial crises.

History of the IMF

 The IMF was originally created in 1945 as part of the Bretton Woods Agreement, which
attempted to encourage international financial cooperation by introducing a system of
convertible currencies at fixed exchange rates. The dollar was redeemable for gold at $35
per ounce at the time.
 The IMF also acted as a gatekeeper: Countries were not eligible for membership in the
International Bank for Reconstruction and Development (IBRD)—a World
Bank forerunner that the Bretton Woods agreement created in order to fund the
reconstruction of Europe after World War II—unless they were members of the IMF.
 Since the Bretton Woods system collapsed in the 1970s, the IMF has promoted the
system of floating exchange rates, meaning that market forces determine the value of
currencies relative to one another. This system remains in place today.

IMF(International monetary fund’s) Activities

The IMF's primary methods for achieving these goals are monitoring capacity building and
lending.

 Surveillance: The IMF collects massive amounts of data on national


economies, international trade, and the global economy in aggregate. The organization
also provides regularly updated economic forecasts at the national and international
levels. These forecasts are accompanied by lengthy discussions on the effect of fiscal,
monetary, and trade policies on growth prospects and financial stability.

 Capacity Building: The IMF provides technical assistance, training, and policy advice
to member countries through its capacity-building programs. These programs include
training in data collection and analysis, which feed into the IMF's project of monitoring
national and global economies

 Lending: The IMF makes loans to countries that are experiencing economic distress to
prevent or mitigate financial crises. Members contribute the funds for this lending to a
pool based on a quota system.

Where Does the IMF Get Its Money?

The IMF gets its money through quotas and subscriptions from its member countries. These
contributions are based on the size of the country's economy, making the U.S., with the
world's largest economy, the largest contributor.

How Much Are the IMF Grants?

IMF grants are given to charities in Washington D.C. and member countries. The grants are
meant to foster economic independence through education and economic development."
The average grant size is $15,000.

Conclusion: The IMF works to help reduce poverty, encourage trade, and promote financial
stability and economic growth around the world. It accomplishes this by monitoring
capacity building and providing loans. While the IMF is currently working on these goals
with its 190 member nations, the organization has still faced criticism for the possible
negative impacts of its structural adjustment programs.

BANK FOR INTERNATIONAL SETTLEMENTS

Overview:

Headquartered in Basel, Switzerland, the Bank for International Settlements (BIS) is a bank
for central banks. Founded in 1930, the Bank for International Settlements is the oldest
global financial institution and operates under the auspices of international law. But from its
inception to the present day, the role of the BIS has been ever-changing as it adapts to the
dynamic global financial community and its needs

Bank for International Settlements Is a Financial Chameleon

 The BIS was created out of the Hague Agreements of 1930 and took over the job of the
Agent General for Repatriation in Berlin. When established, the BIS was responsible for
the collection, administration and distribution of reparations from Germany—as agreed
upon in the Treaty of Versailles—following World War I. The BIS was also
the trustee for Dawes and Young Loans, which were internationally-issued loans used to
finance these repatriations.
 After World War II, the BIS turned its focus to the defense and implementation of the
World Bank's Bretton Woods System. Between the 1970s and 1980s, the BIS monitored
cross-border capital flows in the wake of the oil and debt crises, which in turn led to the
development of regulatory supervision of internationally active banks
 The BIS has also emerged as an emergency "funder" for nations in trouble, coming to the
aid of countries such as Mexico and Brazil during their debt crises in 1982 and 1998,
respectively.
 The BIS has also functioned as trustee and agent. For example, from 1979 to 1994, the
BIS were the agent for the European Monetary System, which is the administration that
paved the way for a single European currency.

Bank for International Settlements Tackling Challenges

Contributing to international cooperation: As a crucial resource for central banks and


other financial institutions, the BIS produces research and statistics and organizes seminars
and workshops focused on international financial issues.

Example: the Financial Stability Institute (FSI) organizes seminars and lectures on themes
of global financial stability. The governors of member central banks meet at the BIS twice a
month to share their experiences, and these meetings function as the core of central bank
cooperation.

Offering services to committees established and working at the BIS: By offering its
services to various secretariats of financial committees and organizations created under its
patronage, the BIS also functions as an international "think tank" for financial issues.
Committees such as the Markets Committee debate and improve upon fundamental issues
regarding the workings and regulations of the international financial infrastructure.

As the bankers' bank, the BIS serves the financial needs of member central banks. It
provides gold and foreign exchange transactions for them and holds central bank reserves.
The BIS is also a banker and fund manager for other international financial institutions.

Bank Operates

The BIS competes directly with other private financial institutions for global banking
activities. However, it does not hold current accounts for individuals or governments. At
one time, private shareholders, as well as central banks, held shares in the BIS. But in 2001
it was decided that the private shareholders should be compensated and that ownership of
the BIS should be restricted to the central banks

Conclusion: The BIS is a global center for financial and economic interests. As such, it has
been a principal architect in the development of the global financial market. Given the
dynamic nature of social, political, and economic situations around the world, the BIS can
be seen as a stabilizing force, encouraging financial stability and international prosperity in
the face of global change.

INTERNATIONAL BANKING-EURO BANK

What Is a Eurobank?

 A euro bank is a financial institution that accepts deposits and makes loans in foreign
currencies.
 It is not necessary for a "eurobank" to be located in Europe; it can in fact be located
anywhere in the world. For example, an American bank located in New York which
holds deposits and issues loans in Japanese yen (JPY) would be considered a eurobank.
 Eurobanks may operate in their own country, such as the American bank in the example
above, or they may operate in a country outside their home.
 Because they handle multiple currencies transactions, these institutions play a key role in
facilitating global trade.
 Because eurocurrency deposits are less regulated than U.S. banks, they can also afford
easier cross-border transactions and often at more favorable rates.
 Eurobanks cater mainly to governmental and institutional clients and will often form
syndicates to facilitate especially large transactions.
 The currencies held and lent by eurobanks are known as eurocurrencies, Today, the most
widely used eurocurrencies are the U.S. dollar (USD), JPY, British pound (GBP), and
the euro (EUR).
 When eurobanks issue loans denominated in eurocurrencies, these are referred to
as eurocredits, eurocredits are issued to sovereign governments, corporations,
international organizations, and commercial banks.

History of Eurobanks

 At the onset of the Cold War, communist countries, fearing that their U.S.-based assets
would be frozen or seized transferred large amounts of dollars to be held in friendly
banks in Eastern Europe.
 Throughout the 1960s, lawmakers in the U.S. imposed several restrictions and capital
controls that were meant to discourage foreign borrowers from raising capital in U.S.
markets and limit loans from U.S. banks to foreigners.
 These measures further increased the demand for dollar-denominated assets held outside
of the U.S
 The oil shocks of the 1970s also increased the demand for foreign U.S. dollars, as oil
prices were (and still are) a global commodity that is dollar-denominated.
 The substantial growth in international trade that we have witnessed since the 1980s is
due in part to the proliferation of Eurobanks throughout the world. This growth was
further propelled by the development of large and dynamic economies such as those of
China, India, and other emerging economies.

Benefits of euro banks


 One important benefit of eurobanking is that these institutions can often offer lower
interest rates for foreign borrowers of U.S. dollars (and higher interest rates for foreign
lenders of dollars).
 eurobanking helps to facilitate cross-border transactions, with transactors needing access
to deposits of both dollars and local currency in different regions throughout the world.

TYPE OF BANKING OFFICES

The services and operations which an international bank undertakes is a function of the
regulatory environment in which the bank operates and the type of banking facility
established.

 A correspondent bank - Established when two banks maintain a correspondent bank


account with one another. The correspondent banking system provides a means for a
bank’s MNC clients to conduct business worldwide through his local bank or its contacts.
 A representative office- A small service facility staffed by parent bank personnel that is
designed to assist MNC clients of the parent bank in its dealings with the bank’s
correspondents. It is a way for the parent bank to provide its MNC clients with a level of
service greater than that provided through merely a correspondent relationship.
 A foreign branch bank- Operates as a local bank, but legally it is a part of the parent
bank. As such, a branch bank is subject to the banking regulations of its home country
and the country in which it operates. The primary reason a parent bank would establish a
foreign branch is that it can provide a much fuller range of services for its MNC
customers through a branch office than it can through a representative office.
 A subsidiary bank- is a locally incorporated bank that is either wholly-owned or owned
in major part by a foreign subsidiary. An affiliate bank is one that is only partially owned
but not controlled by its foreign parent. Both subsidiary and affiliate banks operate under
the banking laws of the country in which they are incorporated.
 Offshore bank- Offshore banking describes a relationship that a company or individual
has with a financial institution outside the country of their residence. This requires
opening a bank account, making deposits, withdrawals, and transfers from that account—
the exact same way you would with a bank account at home.

Correspondent bank

The term correspondent bank refers to a financial institution that provides services to
another one—usually in another country. It acts as an intermediary or agent,
facilitating wire transfers, conducting business transactions, accepting deposits, and
gathering documents on behalf of another bank. Correspondent banks are most likely to be
used by domestic banks to service transactions that either originate or are completed in
foreign countries. Domestic banks generally use correspondent banks to gain access to
foreign financial markets and to serve international clients without having to open branches
abroad.
Bank works:

Correspondent banks are third-party banks. They act as middlemen between different
financial institutions. As such, they provide Treasury services between sending and
receiving banks, especially those in different countries—such as:

 funds transfer
 settlement
 check clearing
 wire transfers
 currency exchange

Correspondent banks may also act as agents to process local transactions for clients when
they are traveling abroad. At the local level, correspondent banks may accept deposits,
process documentation, and serve as funds transfer agents.

Correspondent banks are a pivotal part of the financial industry as they provide a way for
domestic banks to operate when it isn't feasible for them to open up branches in a different
location—especially in a foreign country.

The correspondent bank will, therefore, charge a fee for this service, which is usually passed
off from the domestic bank to the customer.

A representative office

A representative office is an office established by a company or a legal entity to


conduct marketing and other non-transactional operations, generally in a foreign country
where a branch office or subsidiary is not warranted. Representative offices are generally
easier to establish than a branch or subsidiary, as they are not used for actual "business" (e.g.
sales) and therefore there is less incentive for them to be regulated.

They have been used extensively by foreign investors in emerging markets such
as China, India and Vietnam although they do have restrictions through not being able to
invoice locally for goods or services. Consequently, Representative Offices tend to be
utilized by foreign investors in fields such as sourcing of products, quality control, and
general liaison activities between the Head Office and the Representative Offices overseas.
A representative office is known in France as a bureau de liaison

A foreign branch bank

A foreign bank branch is a type of foreign bank that is obligated to follow the regulations of
both the home and host countries. Because the foreign bank branch has loan limits based on
the total bank capital, they can provide more loans than subsidiary banks. That is because
the foreign bank branch, while possibly small in one market, is technically part of a larger
bank. Hence, it enjoys the capital base of the larger entity.
Foreign bank branches tend to be more effective in countries with high taxes and nations
where it is easy for international firms to enter the market.

Foreign bank branches may face special difficulties during an economic or political crisis.

example, suppose that Bank of America opens a foreign bank branch in Canada. The
branch would be legally obligated to follow both Canadian and American banking
regulations in many cases. In actual practice, foreign bank branches are sometimes
exempted from specific rules in one country or the other.

Advantages of Foreign Bank Branches

Foreign bank branches tend to be more effective in countries with high taxes and nations
where it is easy for international firms to enter the market.

banks are more likely to organize themselves as branches in nations that have higher
corporate taxes. Depending on the country, a branch of a foreign bank may be able to avoid
some of the high taxes faced by domestic firms.

Foreign bank branches are also more likely to operate where they face lower
regulatory barriers to entry. When it is easy to enter the market, a bank does not need to
spend money setting up a subsidiary in the country.

Disadvantages of Foreign Bank Branches

Foreign bank branches may face special difficulties during an economic or political crisis.

foreign bank branches stand to lose money. At worst, they might have to deal with a run on
the bank branch with little support from the foreign government.

A government in crisis is more likely to use its limited resources to support domestic banks.
Foreign banks might be left to bail out their own branches.

This situation is different from a subsidiary bank, which is technically a domestic company
in the foreign country. Subsidiary banks are also sometimes joint ventures with domestic
banks, further increasing the chances that the local government will support them.

A subsidiary bank

A subsidiary bank is a type of foreign entity that is located and incorporated in a foreign
country but is either wholly-owned or owned in a major part by a parent corporation in a
different nation. This particular banking model helps the parent company avoid unfavorable
regulations enforced by the home country. Subsidiary banks don't adhere to regulations that
apply in the home country or nations where the parent company is incorporated. Instead,
they operate under the laws and regulations of the host country.

How the bank works?


A subsidiary bank permits a parent bank to perform certain activities in the host nation.
Within the framework of this model, a parent bank can establish a banking presence
associated with the buying and selling of securities. The platform would benefit a bank in
the U.S.

Example: looking to expand investment banking and trading operations in the United
Kingdom. A parent company must charge a fee consistent with the host country for services
rendered.

Subsidiary banks are typically unable to offer a full suite of retail banking services. The
sheer size of loans a subsidiary bank can originate pale in comparison to a foreign branch
bank.

Offshore bank

An offshore bank is a bank regulated under international banking license (often called
offshore license), which usually prohibits the bank from establishing any business activities
in the jurisdiction of establishment. Due to less regulation and transparency, accounts with
offshore banks were often used to hide undeclared income.

With worldwide increasing measures on CTF (combating the financing of terrorism) and
AML (anti-money laundering) compliance, the offshore banking sector in most jurisdictions
was subject to changing regulations.

An account held in a foreign offshore bank is often described as an offshore account.

an individual or company will maintain an offshore account for the financial and legal
advantages it provides, including but not limited to:

 Strong privacy, including bank secrecy.


 Little or no corporate taxation via tax havens.
 Protection against local, political, or financial instability.

Scope of offshore banking:

Offshore banking constitutes a sizable portion of the international financial system.

Some experts believe that as much as half the world's capital flows through offshore centers.

OFCs are said to have 1.2% of the world's population and hold 26% of the world's wealth,
including 31% of the net profits of United States multinationals.

A group of activists state that £13-20 trillion is held in offshore accounts yet the real figure
could be much higher when taking into account Chinese, Russian and US deployment of
capital internationally.

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