1. International Banking and the Future of Banking and Financial Services
Chapter Twenty
International Banking and the Future of Banking and Financial Services

2. Key Topics Types of International Banking Organizations
Regulation of International Banking
Foreign Banking Activity in the United States
U.S. Banks Operating Abroad
Services Provided by International Banks
Managing Currency Risk Exposure
Challenges for International Banks in Foreign Markets
The Future of Banking and Financial Services

3. Types of International Banking Organizations
Representative Offices
Limited-service facility: markets home-office services; does not take deposits or book loans
Agency Offices
Does not take deposits from the public but extends commitments to make or purchase loans
Branch Offices
The most common organizational form for most international banks: a local office that represents a single large financial-service corporation

4. Types of International Banking Organizations (continued)
Subsidiaries
Foreign subsidiary possesses its own charter and capital stock; may not necessarily close down if its principal owner fails
Joint Ventures
Bank concerned about risk exposure in entering a foreign market alone may choose to enter into a joint venture with a foreign financial firm, sharing both profits and expenses

5. Types of International Banking Organizations (continued)
Edge Act Corporations
Domestic US companies owned by the US or foreign bank but located outside of he home state of the bank that owns them; limited to international transactions
Agreement Corporations
Subsidiaries of a bank organized under Section 25 of the Federal Reserve Act; devote the bulk of their activities to serving international customers

6. Types of International Banking Organizations (continued)
International Banking Facilities (IBF)
Computerized account records that are not part of the domestic US accounts of the bank that operates them
Shell Branches
Offshore locations established in order to escape the burden of regulation

7. Types of International Banking Organizations (continued)
Export Trading Companies (ETCs)
The Export Trading Company Act (ETCA) allowed U.S. banking firms and Edge Act corporations to create ETCs; these specialized firms must receive over half their income from activities associated with exporting goods and services from the United States

8. Regulation of International Banking
International banking activities are closely regulated by both home and host countries
A strong trend toward deregulation of banking and the related fields of securities brokerage and underwriting took place from the 1960s to the 1990s
Changing regulatory rules have contributed to a more volatile international economy

9. Regulation of International Banking (continued)
Harmonization
The coordination of various nations in their regulatory activities so that all financial firms serving international markets will operate under similar rules

10. Goals of International Banking Regulation
Protecting the Safety of Depositor Funds
Promote Stable Growth in Money and Credit
Foreign Exchange Controls
Restrict the Outflow of Scarce Capital
Protect Domestic Financial Institutions and Markets from Foreign Competition

11. Regulation of Foreign Bank Activity in the U.S.
International Banking Act of 1978
Branches and agency offices of foreign banks must secure federal licenses for the US operations
Foreign branching in the US is regulated, with a designated home state
Larger foreign branches and agencies (>$1 billion) are subject to legal reserve requirements

12. Regulation of Foreign Bank Activity in the U.S. (continued)
Foreign Bank Supervision Act of 1991
Tighter control of foreign bank operations in the US. Empowered the Fed to examine the US offices and affiliates
International Lending and Supervision Act of 1983
Federal regulatory agencies should prepare capital and lending rules for US-supervised banks
Basel Agreement
Calls for all banks to achieve a minimum total- capital-to-total risk-adjusted assets ratio

13. Services Supplied By Banks in International Markets
The variety of services international banks and their strongest competitors offer has expanded in response to evolving customer needs and intense international competition

14. TABLE 20–1 Key Customer Services Offered by International Banks

15. Services Supplied By Banks in International Markets (continued)
Making Foreign Currency (FOREX) Available to Customers
Customers require sizable quantities of currencies to pay for imported goods and raw materials, to purchase foreign securities, and to complete mergers and acquisitions
Other customers may receive foreign-currency or foreign-currency–denominated deposits from businesses and individuals abroad who purchase their products or securities
These foreign funds must be exchanged for domestic currency and deposits

16. Services Supplied By Banks in International Markets (continued)
Making Foreign Currency (FOREX) Available to Customers
FOREX trading activity among commercial and investment bank dealers has sharply increased due to volatility among leading currencies
Trading volume often exceeds a trillion dollars a day and is climbing
Proprietary Trading
When dealers speculate on the prices of selected currencies

17. Services Supplied By Banks in International Markets (continued)
Hedging Against Foreign Currency Risk Exposure
Currency risk is the potential for loss due to fluctuations in currency exchange rates
Customers are not the only ones who face currency risk; international banks themselves must deal with exchange rate risk exposure

18. Services Supplied By Banks in International Markets (continued)
Hedging Against Foreign Currency Risk Exposure
Currency risks arise most often in international banking when
Making foreign currency–denominated loans to customers
Issuing foreign-currency–denominated IOUs (such as deposits) to raise new funds
Purchasing foreign-issued securities
Trading in foreign currencies for a bank’s own currency position as well as for the needs of its customers

19. Services Supplied By Banks in International Markets (continued)
Hedging Against Foreign Currency Risk Exposure
The net exposure of a bank or its customers to fluctuations in currency values can be determined from the following equation
If Net Exposure > 0, the bank is long on currency i and if Net Exposure < 0, the bank is short currency i.

20. Services Supplied By Banks in International Markets (continued)
Hedging Against Foreign Currency Risk Exposure
International banks typically employ a wide variety of currency-hedging techniques to help shelter their own and their customers’ risk exposure
The most widely used of these currency-risk management techniques include
Forward Contracts
A customer works through a bank to negotiate a contract calling for the delivery of a particular currency at a stipulated price on a specific future date
Currency Futures Contracts
Contracts promise delivery of stipulated currencies at a specified price on or before a terminal date (long hedges and short hedges)

21. Services Supplied By Banks in International Markets (continued)
Hedging Against Foreign Currency Risk Exposure
Currency Options
Right but not an obligation to deliver of take delivery of a designated FOREX futures contracts at a set price any time before the option expires
Currency Swaps
Contract between two parties to exchange one currency for another and help reduce the risk of loss as currency prices change

22. EXHIBIT 20–3 A Straight Currency

23. Services Supplied By Banks in International Markets (continued)
Additional Services Provided to Customers
Supplying Customers with Short and Long Term Credit or Credit Guarantees
Supplying Payment and Thrift Instruments
Underwriting Customer Note and Bond Issues in the Eurobond Market
Protecting Customers Against Interest Rate Risk
Helping Customers Market Their Products Through Export Trading Companies (ETCs)

24. Services Supplied By Banks in International Markets (continued)
Ways of Supplying Customers with Credit
Note Issuance Facilities (NIFs)
Eurocommercial Paper (ECP)
Depository Receipts (DRs)

25. Services Supplied By Banks in International Markets (continued)
Payment Instruments
Payment Services
Sight Drafts
Time Drafts
Thrift Instruments
Thrift services
Tap CDs
Tranche CDs
Floating Rate CDs
Floating Rate Notes

26. Challenges for International Banks in Foreign Market
Growing customer use of securities markets to raise funds in a more volatile and risky world
Developing better methods for assessing risk in international lending
Adjusting to new market opportunities created by deregulation and new international agreements

27. Challenges for International Banks in Foreign Market
Solutions to Troubled International Loans
They may be restructured
They can be sold in the secondary market
They can be written off
Either a portion or in its entirety

28. Challenges for International Banks in Foreign Market
International Loan Risk Evaluation Systems
The Checklist Approach
The Delphi Method
Advanced Statistical Methods
Published Country-Risk Indicators
Euromoney Magazine
Institutional Investor Index
International Country Risk Guide

29. Challenges for International Banks in Foreign Market
New Opportunities
Opportunities created by the North American Free Trade Agreement (NAFTA) and the Central American Free Trade Agreement (CAFTA)
Opportunities in the expanding European community
Opportunities in Asia as barriers erode

30. The Future of Banking and Financial Services
Convergence
Consolidation
Survival of Community Financial-Service Institutions
Reaching the Mass Media
Invasion by Industrial and Retailing Companies
The Wal-Mart Challenge
Fighting for Ultimate Survival in a Global Financial System

31. Quick Quiz
What organizational forms do international banks use to reach their customers?
What are the principal goals of international banking regulation?
Describe the principal customer services supplied by international banks serving foreign markets.
What types of risk exposure do international banks strive to control?
What types of tools have these banks developed to help protect themselves and their customers against various risks?