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 |  Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace, 8/e Peter Rose,
Texas A & M University
International Banking
Chapter SummaryInternational banking firms—multinational banking companies that reach across national
boundaries—offer financial services around the globe today. Their growth has proceeded
at a pace mirroring the growth of international trade and global capital flows as international
banks typically follow their largest customers overseas.
- International banks operate many different kinds of facilities to provide services across national
boundaries today. Among the best-known of these facilities are (a) international
banking departments, usually located within the headquarters of a single bank: (b) shell
branches in offshore island locations, designed to minimize the burden of regulation in
raising funds; (c) representative offices, which funnel service requests to the banks’ central
facilties; (d) Edge Act and Agreement corporations, which avoid or minimize some
domestic regulatory restrictions; (e) international banking facilities (IBFs) that keep computerized
records of offshore transactions; (f) full-service branches that offer most of the
services available from the main bank office; and (g) agency offices, which assist customers
with special transactions, including record keeping and cash-management services.
- Among the leading financial services provided by international banks are (a) letters of
credit to help finance international trade; (b) buying and selling of foreign currencies for
the bank and its customers; (c) issuing bankers’ acceptances to facilitate trade financing
or the purchase of currencies; (d) accepting Eurocurrency deposits and making Eurocurrency
loans; (e) marketing and underwriting security sales to help customers raise new funds; (f) securitizing loans to help the bank and its customers generate new work-ing
capital and reduce balance-sheet risk; (g) cash management services to provide liquidity
for customers as spending power is needed; (h) advisory services regarding
potential foreign investments and foreign markets that bank customers might be interested
in; and (i) miscellaneous other financially oriented services.
- Foreign banks have come to represent a substantial share of all banking assets in the
United States and account for a relatively large market share of business loans made
within the American banking system. Foreign bank growth inside the United States has
occurred, in part, due to foreign-bank customers entering the United States, the needs of
foreign businesses to carry out security sales and other transactions within the United
States in order to obtain capital and liquidity, and the continuing search of many bank
customers for safety in the face of international risks. Abank that can cross national borders
offers its customers the chance to enter new markets and diversify their business
operations, thereby expanding potential revenues and reducing risk exposure.
- Government regulation of foreign bank activities has expanded considerably in recent
years, subjecting foreign banks to most of the same rules and regulations that domestic
banks face, including cash reserve requirements and capital requirements. In the United
States recently passed federal laws have led to close supervision and regulation of foreign
banks. One prime example is the Foreign Bank Supervision Enhancement Act
passed in 1991. Under the terms of this law the Federal Reserve Board was appointed
the principal supervisor of foreign bank activities in the United States and must give its
approval of the expansion of foreign banking facilities inside U.S. borders. Moreover,
the Federal Reserve can close a foreign-owned bank office if, in the Fed’s opinion, it is
not adequately supervised by its home country. The Federal Reserve is also the chief supervisor
of U.S. banks' operations in overseas markets.
- The future of international banking presents significant risks today due to possible political
and economic changes abroad and unanticipated movements in interest rates and
currency prices. International banks also face greater lending risk because overseas
loans, on average, are more risky than domestic loans due, in part, to the relative lack of
information on the condition of foreign borrowers. In recent years, however, international
banks have developed country risk profiles and other advanced tools to help lower
the risks inherent in international lending.
- If international banks are to survive and prosper in the future, they must retain the public's
confidence and control the incidence of excessive risk taking. One of the most important
ways to accomplish this goal in recent years has been to impose common capital
requirements on all banks in leading industrialized countries (through the Basle Agreement
on Bank Capital Standards, signed by all participating industrialized nations in
1988). These common regulatory standards—a product of unique cooperation among
many nations—have been changed and modified frequently in recent years to broaden
the kinds of risk measurement and risk protection that international banks use.
- Today there is less emphasis in international bank regulation upon rigid standards and,
instead, greater use of risk control models created by each bank to deal with its own
unique risk exposures. Moreover, international banking rules are focusing today more
and more on the private marketplace to impose discipline on bank behavior and risk
taking. For example, international banks choosing to take on greater risk often find that
the free market forces them to pay more for the capital they must raise in order to carry
on their daily operations.
- International banking is likely to benefit in future years from greater deregulation as
governments move to liberalize the rules limiting future bank expansion into new markets
and allow private markets, rather than government dictum, to play a far greater role
in shaping the services and the performance of international banking corporations.
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2003 McGraw-Hill Higher Education