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International Banking. Globalization. Since 1970, there has been tremendous growth in international trade. Globalization. Even more impressive is the growth in foreign exchange. International Banking.
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Globalization • Since 1970, there has been tremendous growth in international trade
Globalization • Even more impressive is the growth in foreign exchange
International Banking • 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!
International Banking • 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)
International Banking • 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! • 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.
International Banking • 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! • 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.
International Banking • Facilitation of international transactions • Managing exchange risk • Avoiding Regulation (Eurodollars) • Avoiding Taxes (Offshore Banking)
US Banks Abroad Branches Edge Act Corporations Foreign Subsidiary International Banking Facility Foreign Banks in the US Branches Agency Offices US Subsidiary Types of Banks
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.
Assets Cash Reserves: $2M E2M Securities (3%): $15M Loans Consumer: Commercial (7%): $5M E20 Real Estate (8%): E3M Other: Liabilities Transaction Deposits Checking (0%): E10M Savings (2%): E10M Eurodollar Accounts: $10M Loans: Equity: $8.25M An Example
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.
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.
