International Banking and Forex

Chapter 1: Introduction to
International Banking
Bank
 A bank is a financial institution that accepts deposits from the public and
simultaneously providing loans.
Banks as Financial Intermediaries
Modern functions of banks as financial intermediaries

 Banks helps in development of trade

 Banks promotes investments
 Merchant Banking Activities
 Financial Markets activities of banks:
 Money market
 Capital market
 Foreign Exchange Market
 Government Securities Market
Cross border trades
 The buying and selling of goods and services between businesses in neighbouring
countries, with the seller being in one country and the buyer in the other country,
are known as Cross border trades. For example, a company in the United States
selling to a company in India.
Import Export
Currencies involved?
Global Trends and Development in
International Banking
Deregulation / Disintermediation Internationalization
Liberalization

Trends

Globalization Securitization Innovation

1. Globalization
 Globalization is the process of interaction and integration among people,
companies, and governments worldwide. The increase in global interactions has
caused a growth in international trade and the exchange of ideas and culture.
 The development of the Eurocurrency and Eurobond markets in 1960s represents
the trend towards a global integration of financial markets.
 But international and domestic markets increasingly integrated 1981-86.
 Globalization is currently happening to all international financial markets.
 The foreign exchange market was the first to globalize in the mid 1970s followed
by integration of bond market in 1980 and equity markets.
Causes of Globalization
 Deregulation Abroad
 Greater institutionalization abroad
 Success of Euro markets
 Integration of markets
 Technology and Know how
Consequences of Globalization
 Increased cross border investment
 Wider Range of Alternatives for Clients
 Management Complexities
 Need for Larger firms
 Greater commitment to overseas firms
 Greater risk exposure
Industry Consolidation and Convergence
 Industry Consolidation is a situation in which separate companies become one
and Convergence is the coming together of 2 different entities.
 Convergence is the merger of industry segments most notably the coming
together of the banking, insurance and investment management sectors.
 During the 1990-96, around 80 of the top 200 banks in the world entered into
alliance or got merged.
 Hong Kong Bank with Midland Bank
 Swiss Bank Corp with SG Warburg
 Bank of Tokyo with Mitsubishi bank
Reasons for Consolidation
 Economies of Scale
 Pressure to cut costs
 To extend provisions of banking services
 Information Technology
 Size
 All financial services under one roof
2. Securitisation
 Securitization is the process of taking an illiquid asset or group of assets and,
through financial engineering, transforming it (or them) into a security.
 In the narrower sense as the pooling of loans that bring in regular payments and
interest, mortgages, leases and car loans; for instance – that can be sold off as
income bearing bonds or shares.
3. Innovation
 The action or
process of
innovating.
4. Liberalization
 Liberalization – Liberalization is the process or means of the elimination of the
control of the state over economic activities. It provides greater autonomy to the
business enterprises in decision-making and eliminates government
interference. 
Liberalization Vs Deregulation
 Liberalization is the process of relaxation from government control. It is a very
important economic term. Technically, it means the reductions in applied
restrictions of the government on international trade and capital. Liberalization is
also used in tandem with another term − Deregulation.
 Deregulation is the disappearance of state restrictions on both domestic and
international business. However, in principle, the two terms are distinct because
liberalized markets are often subject to government regulations for various
reasons, such as consumer protection. But in practice, both terms generally refer
to the removal of state intervention in markets.
5. Disintermediation
 Disintermediation is when you remove middlemen (intermediation) from a
supply chain or decision-making process.
 In financial terms, it is the removal of banks, brokers, or other intermediaries to
invest directly.
 Disintermediation can reduce cost and increase efficiency, but it usually requires
more due diligence work.
6. Internationalization
 Internationalization describes the process of designing products to meet the
needs of users in many countries or designing them so they can be easily
modified, to achieve this goal. Internationalization might mean designing a
website so that when it's translated from English to Spanish, the aesthetic layout
still works properly.
Why do banks go global?
 Multinational banks (MNBs), by definition, are those that physically operate in
more than one country. For instance, Citibank operates offices in more than 90
countries around the world.
 In contrast, international banks engage in cross-border operations and do not
set up operations in other countries. A Bank of America loan to a bank in Poland
is considered international banking.
Growth of Multi-national Banks
 MNBs have experienced rapid growth in the past few years. Access to new
markets in Central and Eastern Europe and financial deregulation elsewhere has
helped to accelerate the growth of MNB operations.
 The most rapid growth of MNB loans has been in Eastern Europe, thanks to the
opening of the former East Bloc countries. Latin America has also experienced a
rapid increase in MNB loans over the years, following financial deregulation and
bank privatizations.
 As a result of deregulation and growing financial integration, cross-border
mergers and takeovers of banks grew from 320 in the 1980s to 2,000 in the 1990s
(World Bank 2002).
 By the end of the 1990s, foreign banks controlled more than half of the banking
system in many countries in Eastern Europe and Latin America.
Operations’ Expansion of MNBs
MNBs tend to expand their global operations for two reasons:
 First, MNBs follow their clients. Since MNBs operate in a wide array of countries and regions,
multinational corporations (MNCs) become their natural clients. When MNCs establish new
operations, MNBs often follow.

 Second, the concentration on a small number of large clients in combination with superior
technology and know-how makes MNB operations very profitable.

 For instance, even in the midst of high inflation and economic turmoil in Brazil in 1983, MNBs
operated very profitably, with Citibank earning 20% of its worldwide income in Brazil that year.
In Korea, MNBs averaged 75-80% returns on equity, whereas domestic banks earned only an
average of 15-20% between 1972 and 1979. In 1991, MNB profits in Korea rose by 37%
compared to 12.9% for domestic banks, leaving MNBs with a share of 68% of all net bank
earnings, up from 61% in 1990.
Who are MNB Clients?
 In their operations, MNBs focus on a select range of activities for a small circle of
clients. MNBs tend to provide services that other banks are either less familiar
with or do not offer, such as foreign currency loans, acceptances and guarantees
related to international trade, or syndicated loans.

 As a result, MNB clients are usually MNCs or large domestic corporations

engaged in international transactions. In addition, MNBs also provide services for
high-income earners, or what is referred to as high net-worth individuals.
Multi-National Banks vs Domestic Banks

 In practice, however, research finds that increased competition from MNBs leads
domestic banks to reduce their loan exposure. Prime examples of this connection
between more MNBs and less credit can be found in the economies of Central
and Eastern Europe. In these areas MNBs have quickly gained significant market
shares, while the credit supply, especially to smaller companies, has been
stagnant or declining. The same result also holds true for a broad sample of
economies in other parts of the world.
 The reason that domestic banks lower their credit exposure is because MNBs
“cherry pick” the best customers, leaving domestic banks with borrowers of
lesser quality. As a result, both the costs and credit risks at domestic banks
increase, while low-risk, low-cost customers move to MNBs.
Multi-National Banks vs Domestic Banks

 This puts domestic banks in a bind. Thanks to increased international

competition, the domestic banks inevitably need more capital to fund new
technologies, to train existing workers, and to hire new banking experts.

 Greater international competition also means that domestic banks lose lending
opportunities to MNCs and large domestic corporations – the most secure stream
of income from loans – thereby making it harder for domestic banks to get the
capital necessary to compete with MNBs.
 Finally, despite an image of soundness and stability, there is some evidence that
MNBs may foster the speculative bubbles that eventually lead to financial crises
while transmitting these crises to otherwise stable countries. For example,
Japanese MNBs speculated in real estate in Thailand in the early 1990s in an
attempt to recover the losses incurred in Japan in the late 1980s, directly
contributing to the financial crisis in Thailand in 1997. A crisis in one country may
induce MNBs to cut back on their local asset portfolios in another country (or to
pull out altogether) to compensate for deteriorating balance sheets in other
regions, thereby spreading financial instability (World Bank 2002). Thus, there is
no clear evidence that MNBs finance necessarily sounder projects than domestic
banks.
Meaning Of International Banking
 International banking is just like any other banking service, but it takes place
across different nations or internationally. To put in another way, international
banking is an arrangement of financial service by a residential bank of one
country to the residents of another country. Mostly multinational companies and
individuals use this banking facility for transacting.
 Suppose Microsoft, an American company is functioning in London. It is in need
of funds to meet its working capital requirements. In such scenario, Microsoft can
avail the banking services in form of loans, overdraft or any other financial service
through banks in London. Here, the residential bank of London shall be giving its
services to an American company. Therefore, the transaction between them can
be said to be part of international banking facility.
Meaning Of International Banking
Features And Benefits Of International
Banking
 FLEXIBILITY - International banking facility provides flexibility to the
multinational companies to deal in multiple currencies. The major currencies that
multinational companies or individuals can deal with include euro, dollar, pounds,
sterling, and rupee. The companies having headquarters in other countries can
manage their bank accounts and avail financial services in other countries
through international banking without any hassle.

 ACCESSIBILITY - International banking provides accessibility and ease of doing

business to the companies from different countries. An individual or MNC can use
their money anywhere around the world. This gives them a freedom to transact
and use their money to meet any requirement of funds in any part of the world.
Features And Benefits Of International
Banking
 INTERNATIONAL TRANSACTIONS - International banking allows the business
to make international bill payments. The currency conversion facility allows the
companies to pay and receive money easily. Also, the benefits like overdraft
facility, loans, deposits, etc. are available every time for overseas transactions.

 ACCOUNTS MAINTENANCE - A multinational company can maintain the

records of global accounts in a fair manner with the help of international banking.
All the transactions of the company are recorded in the books of the banks across
the globe. By compiling the data and figures, the accounts of the company can be
maintained. 
CONCLUSION
 Globalization and growing economies around the world have led to the
development of international banking facility. The world is now a marketplace
and each business wants to exploit it. Geographical boundaries are no more a
concern. With access to technology, banking facilities have grown vastly.

 One prime example of it is international banking. In the years to come, such

banks would see higher growth and higher profitability. Big business houses are
expanding themselves at a rapid pace. To maintain the growth, these businesses
will need the financial services of international banking. Therefore, the demand
for international banking facilities will increase.
Financial Center
 A financial center is an area where there is a high concentration of financial
institutions. The area may be a city, county, or somewhere larger.

 Financial centers have the best commercial and communications infrastructure

where people conduct huge volumes of international and domestic trading
transactions. The world’s most important financial centers are New York, London,
and Tokyo.
Offshore Banking
 An offshore bank is a bank located outside the country of residence of the
depositor, typically in a low tax jurisdiction (or tax haven) that provides financial
and legal advantages.
 These advantages typically include:
 Greater privacy.
 Low or no taxation (i.e. Tax havens).
 Easy access to deposits (at least in terms of regulation).
 Protection against local, political, or financial instability.
 Offshore banking has often been associated with the underground economy and
organized crime, via tax evasion and money laundering.
Advantages of Offshore Banking
 Offshore banks can sometimes provide access to politically and economically stable
jurisdictions. This will be an advantage for residents in areas where there is a risk of
political turmoil, who fear their assets may be frozen, seized or disappear.
 Some offshore banks may operate with a lower cost base and can provide higher interest
rates than the legal rate in the home country due to lower overheads and a lack of
government intervention.
 Interest is generally paid by offshore banks without tax being deducted. This is an
advantage to individuals who do not pay tax on worldwide income, or who do not pay tax
until the tax return is agreed, or who feel that they can illegally evade tax by hiding the
interest income.
 Some offshore banks offer banking services that may not be available from domestic
banks such as anonymous bank accounts, higher or lower rate loans based on risk and
investment opportunities not available elsewhere.
Disadvantages of Offshore Banking
 Offshore bank accounts are sometimes less financially secure. In a banking crisis which
swept the world in 2008, some savers lost funds that were not insured by the country in
which they were deposited. Those who had deposited with the same banks onshore
received all of their money back. Thus, banking offshore is historically riskier than
banking onshore.
 Offshore banking has been associated in the past with the underground economy and
organized crime, through money laundering. Following September 11, 2001, offshore
banks and tax havens, along with clearing houses, have been accused of helping various
organized crime gangs, terrorist groups, and other state or non-state actors. However,
offshore banking is a legitimate financial exercise undertaken by many expatriate and
international workers.
 Offshore jurisdictions are often remote, and therefore costly to visit, so physical access
and access to information can be difficult.
Special Economic Zone (SEZ)
 A special economic zone (SEZ) is an area in a country that is subject to different
economic regulations than other regions within the same country.
 The economic regulations of special economic zones (SEZs) tend to be conducive
to—and attract—foreign direct investment (FDI).
 Special economic zones (SEZs) are typically created in order to facilitate rapid
economic growth by leveraging tax incentives to attract foreign investment and
spark technological advancement.
 While many countries have set up special economic zones (SEZs), China has been
the most successful in using SEZs to attract foreign capital.
Correspondent Banking
 A correspondent bank is an authorized financial institution that provides services
on behalf of another financial institution. 
 Correspondent bank services may include funds transfer, settlement, check
clearing, and wire transfers.
 The accounts held between correspondent banks and the banks to which they
are providing services are referred to as Nostro and Vostro accounts.
 Domestic banks can serve their international clients and gain access to foreign
financial markets by using correspondent banks rather than setting up branches
overseas.
 Jeff has a heating and air conditioning company. He wants to purchase parts from
a supplier in Mexico. Jeff goes to his local credit union to make the wire transfer
to the supplier’s bank. Since the credit union doesn’t have an agreement with
supplier’s bank, the banker at the credit union uses the SWIFT network to find a
correspondent bank that both the credit union and the bank in Mexico have
agreements with. The credit union transfers the money, including the $50 fee,
from Jeff’s account to the correspondent bank. The correspondent bank
withdraws their fee and forwards the money on to the supplier’s bank.
Interbank Market
 The interbank network consists of a global network of financial institutions that
trade currencies between each other to manage exchange rate and interest rate
risk. The largest participants in this network are private banks.
 Most transactions within the interbank network are for a short duration,
anywhere between overnight to six months.
 The interbank market is not regulated.
Interbank Deposits
 An interbank deposit is an arrangement between two banks in which one holds
funds in an account for another institution.
 The arrangement requires that the holding bank opens a due to account for the
other.
 Most interbank trading conducted on the market is proprietary—banks do so
between and for each other.