2. Overview
Although many FIs can diversify domestically, the benefits to global diversification are available only to large firms. This chapter explores the potential risk-return advantages and disadvantages of international expansion and the trends toward globalization of FI franchises. As countries such as the U.S. expand, some countries, Japan in particular, are contracting their overseas operations.

3. Global & International Expansions
Three ways to establish global presence
Sell financial services from domestic offices to foreign customers
Sell financial services through a branch, agency, or representative office in foreign customer’s country
Sell financial services through subsidiary company in foreign customer’s country.

4. Global Expansion of FIs
U.S. insurance companies and securities firms recent expansion
12 banks in the world with over 50 percent of assets in foreign countries
No single country dominates the top 30
Canada had 5 in the top 30, Ireland, Netherlands, U.S. all had 3.
Japanese banks absent in spite of their size

5. Top Global Banks (2003)

6. J.P. Morgan/Chase have had offices abroad since beginning of century.
U.S. Banks Abroad
J.P. Morgan/Chase have had offices abroad since beginning of century.
Major growth began in 1960s
Overseas Direct Investment Control Act, 1964.
Offshore funding and lending in dollars forged beginnings of the Eurodollar market.
Assets of U.S. bank activities abroad increased from $353.8 billion in 1980, to $854.4 billion in Declined in percentage terms.

7. Factors Encouraging U.S. Bank Expansions Abroad
Dollar as international medium of exchange
Effects of Euro
Political risk
Encouraged flows to U.S. branches and subsidiaries in Cayman Islands and Bahamas.
USA Patriot Act of 2001 prohibited services to shell banks and increased efforts to control money laundering
Know your customer rules

8. Factors Encouraging U.S. Bank Expansions Abroad
Domestic activity restrictions
Fed regulations permitting banks to engage in activities permitted by foreign host.
Diversification benefits.
Technology and communications improvements
CHIPS
Decreasing operating costs

9. Factors Deterring Expansion
Capital constraints
Proposed BIS 2006 reforms
raise capital requirements for loans to non-OECD sovereigns rated below B-
raise capital requirements for loans to OECD countries rated below AA-
zero risk weights for OECD countries rated above AA-

10. Factors Deterring Expansion
Emerging markets problems
Increased caution due to Korea, Thailand, Indonesia and Argentina
despite improved regulatory environment (NAFTA, for example allowing greater expansion into Mexico).
WTO reduction of barriers to global expansion
China as a recent noteworthy example

11. Factors Deterring Expansion
Competition
During 1990s, extensive competition from Japanese banks
Japan had 9 of the 10 largest banks
Effects of recession and bad debts
European Community Second Banking Directive resulted in significant consolidation of European banks.

12. Foreign Banks in the U.S.
Choice of organizational form affected by regulations in home country as well as risk management strategies
Subsidiary
Branch
Agency
Edge Act Corporation
Representative Office

13. Rapid expansion of foreign banks in U.S.
Trends and Growth
Rapid expansion of foreign banks in U.S.
In 1980, foreign banks had assets of $166.7 billion (10.8 percent of total U.S. bank assets)
1992, $514.3 billion (16.4 percent)
1994, $471.1 billion (13.8 percent)
Retrenchments due to several factors including competitive and regulatory effects.
16.1 percent, 2000
Global recession effects
14.5 percent in 2003

14. Regulation of Foreign Banks in U.S.
Prior to 1978, foreign branches and agencies were licensed mostly at state level.
No access to discount window
No direct access to Fedwire/fed funds markets
No FDIC coverage

15. Regulation of Foreign Banks in U.S. (post 1978)
Passage of International Banking Act, 1978
National treatment to level the playing field
Accelerated expansion of foreign banks in U.S.
Japanese bank entry into California, and subsequent sales notable

16. Regulation of Foreign Banks
Foreign Bank Supervision Enhancement Act 1991, increased federal control.
Triggered by three events:
collapse of BCCI
issuance of $1 billion in unauthorized letters of credit to Iraq by Atlanta agency of Banca Nazionale del Lavoro
unauthorized taking of deposit funds by U.S. representative of Greek National Mortgage Bank of New York.

17. Features of FBSEA Fed’s approval required for entry
Closure under control of Federal Reserve
Daiwa Bank ordered to cease operations.
Examination by Fed
Deposits: Only foreign subsidiaries with FDIC coverage can take deposits under $100,000.
Activity powers: restricted to activities permitted to federal branch.

18. Web Resources
Visit
Federal Reserve
FDIC

19. Advantages to International Expansion
Revenue and Risk diversification
Economies of scale
Innovations
generate extra returns from selling new products abroad.
Funds source
Customer relationships
Regulatory avoidance

20. Information/monitoring costs Nationalization/expropriation.
Disadvantages
Information/monitoring costs
Example: differences in accounting standards
Nationalization/expropriation.
Fixed costs may be high
Tokyo real estate prices for example.
Uncertainty about volume of business from foreign entry versus entry costs

21. Pertinent websites
Federal Reserve
The Banker
FDIC