International Banking

International Banking
Globalization
 Since 1970, there has 6
been tremendous
5
growth in international
trade 4
0
1979 1986 1989 1992 1995 1998
Globalization
 Even more 400
impressive is the 350
growth in foreign 300
exchange 250
200
150
100
50
0
1979 1989 1995
 Citigroup has over 50% of its assets ($600B)
located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!
 General Motors has an established relationship to buy
auto parts from a Mexican supplier. GM may find it
convenient to have an account with Citibank in
Mexico (Banamex)
 Honda has a manufacturing plant outside of
Columbus, Ohio. It might be convenient for Honda to
open an account with Deutschebank in the US to
finance its US operations.
 Fidelity operates a global bond fund. It may be
convenient for the to have several accounts around
the world to manage the flow of interest payments.
 Facilitation of international transactions
 Managing exchange risk
 Avoiding Regulation (Eurodollars)
 Avoiding Taxes (Offshore Banking)
Types of Banks
US Banks Abroad Foreign Banks in the US
 Branches  Branches
 Edge Act  Agency Offices
Corporations  US Subsidiary
 Foreign Subsidiary
 International Banking
Facility
Eurodollars
 Since WWII, the dollar has become the premier
international currency. Therefore, many foreign
companies and governments hold dollars rather than
their own currency.
 Further, to avoid interest rate restrictions, US banks
began offering dollar denominated accounts at their
foreign branches. These accounts became known as
Eurodollar accounts.
 Euromarkets have expanded into Eurobonds, Euroloans,
Euro Commercial paper. There is currently over $30
Trillion in Eurodeposits around the world.
Exchange Rate Risk
 In addition to information, liquidity, and
interest rate risk, international banks must
also deal with exchange rate risk.
An Example
Assets
Cash Reserves: $2M Liabilities
E2M Transaction Deposits
Securities (3%): $15M Checking (0%): E10M
Loans Savings (2%): E10M
Consumer: Eurodollar Accounts: $10M
Commercial (7%): $5M Loans:
E20 Equity: $8.25M
Real Estate (8%): E3M
Other:
An Example
Dollar Assets: $22M
Euro Assets: E25M * $1.25/E = $31.25M
Total: $53.25M
Dollar Liabilities: $20M

Euro Liabilities: E20M * $1.25/E = $25M
Total: $45M
Equity = $53.25M - $45M = $8.25M

Exchange Rate Risk
 In addition to information, liquidity, and
interest rate risk, international banks must
also deal with exchange rate risk.
 Suppose that the dollar depreciates to
$1.30
An Example
Dollar Assets: $22M
Euro Assets: E25M * $1.30/E = $32.5M
Total: $54.5M
Dollar Liabilities: $20M

Euro Liabilities: E20M * $1.30/E = $26M
Total: $46M
Equity = $54.5M - $46M = $8.5M

Regulating International
Banking
 In the US, monitoring/regulating of US
banks is done by either the Fed, OCC or
FDIC.
 British Banks in England are regulated by
the Bank of England.
 Who regulates British banks in the US or
US Banks in Britain?
Regulating International
Banking
 After 1978 (International Banking Act),
foreign banks were subject to basically the
same laws as US Banks, but were not
subject to as much oversight.
 Prompted by the BCCI scandal in 1991,
the US passed the Foreign Bank
Supervision Act giving the Fed and OCC
greater control over foreign banks.
Bank For International
Settlements
 Established in 1930 to handle German
WWI reparations, the BIS has become a
center for international cooperation.
 Played a central role in the Bretton Woods
Exchange Rate System
 Integral in the Establishment of the Euro
 The BIS is like a central bank for central

banks.
Basle Accords
 In 1988, the G-10 countries established
uniform worldwide standards for:
 Capital Requirements
 Off Balance Sheet Assessments
 Risk Weighting
 Interest rate sensitivity
Problems with International
Regulation
 The key issue is that the banking industry
in Japan and Europe is Fundamentally
different.
Top Ten World Banks
Bank Assets
(Billions)
Citigroup (US) 1,497
JP Morgan + Bank One (US) 1,097
Mizuho Financial Group (Japan) 1,080
Bank of America + First Union (US) 851
UBS (Switzerland) 851
Sumitomo Mitsui (Japan) 844
DeutscheBank (Germany) 795
Mitsubishi Tokyo (Japan) 781
HSBC (UK) 759
BNP Paribas (France) 744
European Banking
 Unlike the US, European Banks are
allowed to engage in securities markets
(universal banking)
 In fact, in Europe, banks are generally
significant shareholders in European
companies.
 Banks rely much more on equity than
deposits.
Japanese Banking
 Japanese industry is organized into industrial
groups (keiretsu)
 Mitsubishi
 Mitsui
 Sumitomo
 Fuyo
 Daiichii
 Kangyo
 Sanwa
Japanese Banking
 These “groups” are both vertically and
horizontally integrated and are comprised
of a very large number of companies:
 Sumitomo has 15 divisions ranging from
electronics to mining to consumer goods.
 Sumitomo controls assets equal to $50T.
Japanese Banking
 Each “group” has its own bank which
handles its finances. This “main” bank
 Owns equity in member firms
 Monitors member firms
 Provides credit for member firms.

International Banking

Uploaded by

Copyright:

Available Formats

International Banking

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

International Banking

Uploaded by

Copyright:

Available Formats

International Banking

Dollar Liabilities: $20M

Equity = $53.25M - $45M = $8.25M

Dollar Liabilities: $20M

Equity = $54.5M - $46M = $8.5M

 The BIS is like a central bank for central

You might also like