INTERNATIONAL BANKING ASSIGNMENT

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International Banking
International bank
Definition An international bank is a financial entity that offers international companies and individual clients financial services, such as payment accounts and lending opportunities. Although the term foreign clients encompasses both international businesses and individuals, every international bank will operate under its own policies that outline how they conduct their particular business. According to OCRA Worldwidean international organization that connects individual customers and companies to various international banking systemsan international bank will tend to offer their varied services to companies wealthy individuals typically individual clients with $100,000 or above accounts. That being said, some international banks, specifically banks in Switzerland, will offer their services to customers of any income bracket.

Introduction to International Banking

Banks are the key players in the financial system of a country. They perform the function of financial intermediation in an effective manner. Banks in many nations have internationalized their operations since1970. The quantum of operations has increased in such a manner that the concept evolved into a subject in itself. International banking and multinational banking can be used interchangeably. Multinational banking signifies the presence of banking facilities in more than one country. According to Aiber,International banking" is defined as a sub-set of commercial banking transactions and activity having across-border and/or cross- currency element. International banking comprises a range of transactions that can be distinguished from purely domestic operations by: I. The currency of denomination of the transaction, II. The residence of the bank customer, and III. The location of the banking office. A deposit or a loan transacted in local currency between a bank in its home country and a resident of that same country is termed as pure domestic banking. Thus, the term international banking is used to refer to the crosscurrency facets of banking business. Euro-currency market is an example of a typical international banking community. The euro-currency market conventionally encompasses all deposit and loan operations of a bank transacted in a currency other than that of the nation where the office is located. Euro-currency banking involves intermediation in foreign currencies and the relative freedom from local reserve requirements and monetary regulation.

History
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The origin of international banking dates back to the 2nd century BC when Babylonian temples safeguarded the idle funds and extended loans to merchants to finance the movements of goods. The loans extended by the Florentine banking houses were the first instance of international lending. During the nineteenth century many innovations were witnessed in the international lending, leading to trade financing and investment banking. Trade financing started as short term lending. Of the two investments banking accounted further great bulk of the international lending and financial companies acted as agents or underwriters for the placement of funds. By 1920, American banking institutions dominated international lending, and the European nations were the major borrowers. There was perfect international banking system existing till the time of First World War. The Bretton system had installed a secured financial framework and revolutionized the economic life by creating a global shopping center. International banking speeded up after the first oil crisis in 1973. Progress in the telecommunications sector across the world supplemented the growth of international banking.

Reasons for the Growth of International Banking

There are number of explanations or theories provided to support the growth in international banking operations. International banking theories explain the reasons behind the banks choice of a particular location for their banking facilities, maintaining a particular organizational structure, and the underlying causes of international banking. Certain theories are as such:

Follow the leader, explanations suggests that banks expand across national borders to continue to serve customers by establishing branches or subsidiaries abroad. Expansion abroad has a pervasive effect on competition. Banks use management technology and marketing knowhow developed countries for domestic uses at very marginal cost abroad. Banks can take ownership-specific and location-specific advantages while operating abroad. Market imperfections due to domestic rules, regulations and taxations along with the drastic reduction in the cost of communications prompt the banks to set up operations abroad. Inter-country differences in the cost of capital attract banks to set up their operations in different countries. The multi-lateral system of payments came into existence after the creation of the IMF and the World Bank. Resources were new raised through financial markets for financing the development projects in member countries. Effectively it was the commercial banks which mobilized savings and channelized them to these institutions for development use.
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With the introduction of the flexible exchange rate system, exchange rates were determined by market demand- supply forces. Since all transactions went through the banking system involved with International Banking were ideally placed to establish the demand supply equilibrium. The role of establishing exchange rate was therefore transferred from central banks to commercial banks.

Characteristics and Dimensions

Though international banking concept is quite old, it has acquired certain new characteristics and dimensions. The maturities have risen considerably and now the average maturities are about ten years. Banks have started diversifying their sources of funds along with the assets. Apart from the above, two kinds of overseas bank operations characterized international bank expansion in the late 1960s and 1970s.

A multinational consortium bank, was created by several established by parent banks, and; The shell branch, which is not really a bank but a device to get around the domestic government regulation, was created.

Features of International Banking International banks are organized in various formal and informal ways from simply holding account with each other to holding common ownership.

CORRESPONDENT BANKING This represents an informal linkage between banks and its customers in different countries. The linkage is setup when banks maintain correspondent accounts with each other and facilitates international payments and collections for customers. BANK AGENCIES The agencies mostly deal in the local currency markets and in the foreign exchange markets, arranges loans and clears cheques. FOREIGN BRANCHES These are operating banks and are subject to local banking rules and the rules at home. These branches most of the time offer quality services and safety that are provided by a large bank to the customers in small countries.

Recent Trends

In the past two decades, people around the world have come across complex developments in the financial sector which have evolved gradually.

The increasing domination of securities of markets by financial institutions managed by professional bankers has led to the institutionalization of markets. Globalization has affected the financial markets in the world almost entirely. Foremost among the global trends in the worlds financial industry are consolidation and convergence. These two encompass financially driven mergers within domestic market.

Services offered by international bank

1. EXIM Financing In order to be a success in your export activities, you need to know how to finance your import or export and how to get paid, especially when dealing in foreign currencies. Your banker can and should be a key member of your advisory team. Finding a bank that is comfortable and proficient in providing the various products and services required by exporting and importing firms is becoming easier as international sales become more and more common. The expansion of the internet and the advent of e-banking are also helping to increase the number of banks that companies can work with for their international banking requirements. Services offered under EXIM financingDepending upon the industry in which your company operates, there are several products and services available from major international banks that can help you to get ahead of the competition. Financing and speed are integral to any sale and now is the time to look for banks on the leading edge. Multinational companies, commodity companies, capital equipment and consumer product producers are the primary users of trade financing products, which include import letter of credit, export letter of credit, stand-by letters of credit, collections, trade-related loans, structured and barter trade. The most common of these is the letter of credit. Simply put a letter of credit is a banking mechanism that permits importers to offer secure terms of sale to exporters. In the past, most companies didn't need to know about letters of credit. With the expansion of international trade, this has changed and even small companies increasingly are coming to utilize letters of credit and other even more advanced international financing services. Knowledge is power and you should learn about each of these instruments and evaluate if they are applicable to your particular transaction. In addition to providing the services above, companies should also expect the financial institution to be able to provide products through a web-enabled delivery portal. Many of the best trade banks are already doing this. Additionally, your international bank should also be able to offer information on the following value-added trade products and services such as: Prepayment and structured pre-export facilities: these services finance pre-export fabrication and provide export financing for a countrys key exports. Export receivables financing. Government-backed insurance and guarantee programs: These are available from government bodies such as Exim bank or private insurers and can help your company
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spread the risk. Programs offered by regional development banks and institutions: the IFC, ADB, World Bank, and other institutions support international sales by providing guarantees as credit support or enhancement Linked exports and import financing: In some countries the export contract can act as security for essential imports. For example, in some countries that export value-added products (Asia has many), if imports (generally but not always raw materials) do not flow into the country then value-added exports stop. An international bank can credit-enhance the deal by using the export contract as security thus allowing country imports to continue. Global trade management: This allows you to out-source the trade documentation preparation to others who are more familiar with it and who work with these forms daily. Option-linked financings for commodities: Again, these are risk spreading options. Examples are trade finance solutions that have interest rate, foreign exchange, and commodity-hedging options. These can be made part of the transaction if desired. Counter-trade transactions: commodities, durable and other goods are essentially bartered. Forfeiting: This is a provision of medium-term trade finance where trade contracts are sold into the secondary market.

2 Online Letters of Credit For a company dealing globally, the internet is a critical tool for speed and efficiency of communications. One area where it is still in its infancy, however, has been in financing international deals. This is changing. Recently Imperial Bank launched its online SWIFT trade service at www.imperialbank.com/home.asp the site was in beta testing for two years prior to this so this is a very mature service at this point. With this service, Imperial Banks customers can obtain a letter of credit immediately and have it seen immediately by those who need to know about it. Safety of informationThe information in the system is not public and if fact most people wouldn't have access to it. For example, the system can be kept secure by a series of passwords. In the case of imports, the importer can let the person selling to him see the letter of credit online by supplying a password; the exporter then doesnt have to wait to be advised by his bank in his home city and can begin production immediately. In the case of fast changing market requirements such as fashion or toys, this speed can be critical. The company receiving the letter of credit can also allow others to view the document such as freight forwarders, customs brokers or other specialists, so preparation and paperwork can begin in those areas, as well. SWIFT trade is still being enhanced but can already provide the following online services: Letter of credit issuance; Sending electronic copies of letters of credit to the beneficiaries via e-mail; Allowing shippers and other partners of the company acquiring the letter of credit to have access to specific portions of the information to speed their work; Tracking the status of letters of credit; Monitor account activity, even for accounts held with foreign banks.
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International Trade Banks

International Banking Operations

International banking operations are essentially to facilitate the movement of goods across the political boundary of countries. Banking system came along with the development of money as an institution. As civilization narrowed down the social distances and mankind learned about the benefits of exchanging commodities across political boundaries, the present-day international trade developed. The transaction of commodities across countries required financial intermediation in the international level and thus international banking business was born. What started with movement of gold and silver across country-borders became ultimately an efficient institution of international transfer of not only yellow metal but the currencies of sovereign countries. In this way the emergence and growth of
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international banking is closely interwoven with the development of international trade and international capital movement. The above gives the general perspective of the growth of international banking. But there are many aspects of this development. From a historical standpoint, the recent growth of international banking can be regarded as a reversion to the situation before World War I when European banks dominated the world capital market. During the period 1940-1960 regulatory control on capital flow and convertibility of the currencies reduced the importance of international banking. From 1960 onwards globalization of capital market started and the emergence of surplus in petro-dollars in the seventies gave the much needed liquidity to the international banking business. The latter has been characterized by an increasing turnover in international trade, a phenomenal increase in the international flow of capital and also an increasing flow of funds from the banks to non-bank sectors. To understand the causative factors properly the literature has attempted to identify the factors supporting the internationalization of banking business. Thus factors like non-financial multinational corporations, the proximity to customers abroad, the competitive advantage with better information technology and the benefits due to international diversification have been mentioned in the literature in the contexts when these become relevant. These factors along with other forces of globalization have established the huge international financial architecture which rule the international financial market today. The theoretical studies mentioning the factors helping the expansion of international banking are important, but in today's scenario the major business of international banks is based on international trade , international transfer of capital and money and derivatives. The literature abounds in the exploration of the causative link in the development of international banking, but not many studies are found testing the theory empirically. There have been several studies which attempt to measure empirically the role of the different factors behind the growth of the US banks in the international fields (Nandi, 1996).

Determinants of growth in International Banking Activity

In today's world no country can afford to be autocratic either in the field of international trade or in international banking. But the latter is subject to much more restrictions in almost all the countries compared to the former. What determines the growth of international banks in the domestic banking sector of a particular country? Analytically we can proceed as follows:

International Trade Since international trade is closely related to international banking, volume of international trade (imports and exports together) is a determinant of the growth of international banking and the relationship is direct. Assuming that no specific restrictions are imposed on the
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operation of foreign banks so far as their operations are concerned in international banking vis--vis the practice of international banking done by home country's banks, it can be said that an increase in the turnover of international trade should have positive impact on the growth of international banking. Alternatively, the ratio of export to gross domestic product can be taken as the explanatory variable. This alternative formulation can be tested.

Foreign Direct Investment Foreign direct investment has been cited as an important determinant for the expansion of international banking. In fact, the presence of international banks facilitates the inflow of foreign capital and it is expected that the increase in foreign direct investment should have a positive impact on the growth of international banking.

Growth in Banking SectorBanking service as a commodity is supposed to have positive income elasticity. As national income is growing, demand for banking service should increase. To what extent the increase in income will help the growth of foreign banking activity in domestic soil depends on the preference of the consumers and also the participation of the foreign banks in the trade, both domestic and international, of the host country. If we take per capita income as the explanatory variable for the growth of international banking activity, then the growth of per capita income may facilitate the growth of international banking in the host country on the assumption that foreign banks have complementary role in the domestic banking structure.

Growth of Banking DepositThe growth of domestic deposit should have influence on the activity of foreign banks. But in many countries the foreign banks are not allowed to create a domestic deposit base, though this facility is crucial for the increase in business. Foreign banks often face difficulties in the creation of domestic deposit base even when it is allowed, as the cost of the maintenance of deposits may be too high compared to business. Many foreign branches of Indian banks operating abroad have not created the domestic deposit base for this reason.

Deposit MobilizationAn increase in domestic deposit is supposed to have positive influence on the deposit mobilization of all banks including the foreign banks. That helps the building up of the asset
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portfolio. To what extent deposit mobilization will affect the activities of foreign banks depends on the competition between domestic banks and the foreign banks in the host country. Foreign banks prefer the creation of a domestic deposit base in the domestic currency as this helps in the expansion of business. Many countries do not allow the foreign banks to create a domestic base, as the latter is perceived to help the foreign bank to mount an attack on the domestic currency.

Exchange rateThe exchange rate changes affect the activities of the foreign banks. An increased volatility of the exchange rate increases the risk factor in international banking, and unless this aspect is properly taken care of, this acts negatively so far as the growth of international banking is concerned. We are to understand that the balance- sheet of the foreign banks in the head office is in their mother currency. If Indian rupee appreciates vis--vis their mother currency that would show a good results in their foreign operations.

Dollarization
Dollarization of a country currently means replacement of its currency completely by US dollar so that the latter becomes the legal tender. In a softer sense, it also means allowing US dollar to be used as a medium of exchange side by side the domestic currency. The first, i.e., full dollarization ensures a way of avoiding a currency and balance of payments crisis as there is no domestic currency and so no fear of sudden depreciation and capital flight from the country. Full dollarization has some sacrifices. Currency is a sovereign symbol of the country. As the issuer of the national currency, which are mostly fiduciary issues now-a-days (which means less than 100 per cent backing by gold and foreign exchange reserve), the central bank earns the seignior age revenue and this is passed on to the government as profit. This is lost to the government.
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Further, a country adopting dollar as the currency is to relinquish any possibility of having an autonomous policy regarding monetary and foreign exchange issues, and also refrain from the use of central bank credit to provide liquidity support to the banking system.

The Eurodollar System

The Eurodollar system evolved through a complex process of history. Some countries in east Europe preferred to deposit dollars in non-American banks in Europe. Also some American banks were eager to do banking outside the legal arms of the Federal Reserve of the USA. Again, there is a surplus of dollar depositors relative to dollar borrowers in USA, and the opposite has been the case in Europe with a surplus of dollar borrowers, relative to dollar depositors. Eurodollar system developed as an inter-bank market. Given the assumptions of regional imbalances in dollar deposits, differences in legislative requirements, differences in transactions costs, it made sense for US banks to shuffle funds from surplus US banks to London branch banks, for later distribution to European banks. In the process the Eurodollar system grew, in its early development, from the mid- 60's up through the early 1970's, as an inter-bank market for dollars.
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The interest rate in the Eurodollar markets is known as the LIBOR rate or London Inter-bank Offered Rate. Since ruble was not fully convertible, The Russians wanted to store the proceeds of this gold sale in a hard currency. However, Russia could hardly deposit the money in Chase Manhattan for fear of siege. The London banks accommodated the Russians, and started taking deposits, and making loans in dollars. It is important to see the Eurodollar bank facilitating the development of the dollar as the vehicle currency or key currency, in world business. Bilateral payments imbalances were settled in dollars, or in gold, under the Bretton Woods fixed exchange-rate system. Again, multinational firms kept their consolidated accounts, across several countries, in dollars. There were obvious savings, in terms of information and accounting costs, in doing business in dollars. The American banks doing the Euro-dollar business outside of the jurisdiction of the Federal Reserve System, could offer deposit rates that were not regulated at zero (the famous Regulation Q), and could charge borrowers rates without ceilings set by state usury laws in the United States. The result was that borrowing and lending in dollars in the Eurodollar markets was much more a "market oriented phenomena", or a much less distorted market, compared to the internal U.S. market. The market grew and stabilized through the mid-70. Many thought that the Euro dollar market had peaked. Then came the OPEC crisis and that paved the way for rapid expansion of the Eurodollar markets.

The Basel Committee recommendations 1. Bank regulators and representatives from 27 leading rich and developing nations have reached an agreement on reforms to the international banking system aimed at reducing the risk of future financial crises. 2. The Basel Committee on Banking Supervision has agreed to substantially strengthen the existing capital requirements of banks, almost doubling capital requirements. 3. The committee announced that the total capital banks need to hold will remain at around 8 per cent of their risk-weighted assets but it will be strengthened by an additional capital buffer of 2.5 per cent of risk-weighted assets, bringing it to 10.5 percent.

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4. The reforms also include increasing common equity, the highest form of loss-absorbing capital, requirements from 2 per cent to 4.5 per cent, which will be phased in over the next few years. 5. In addition to increasing minimum common equity, banks will also be required to hold a capital conservation buffer of 2.5 per cent, taking the total common equity requirements to 7 per cent. 6. Banks that fail to meet the second 2.5 per cent buffer will be stopped from paying dividends; however they will not be forced to raise cash. 7. These capital reforms coupled with the introduction of global liquidity standards have been delivered to enable banks to withstand future periods of stress. 8. The announcements are also in line with the committee's efforts to deliver global financial reforms in order to prevent future financial crises. 9. The Basel Committee has also increased tier one capital from 4 per cent to 6 per cent. 10. Currently, lenders are required to set aside capital valued at 8 per cent of their risk-weight assets, out of which 4 per cent must be tier one capital with a minimum of half being core tier one. 11. Tier two assets make up the remainder. 12. Tier one, a measure of financial strength includes common equity and other equity-like debt instruments based on stricter criteria. 13. The new adjustments made to tier one capital are set to be phased in by January 1, 2015. 14. President of the European Central Bank and chairman of the Basel Committee's governing council, Jean-Claude Trichet, says that the new rules will make a paramount contribution to long-term financial stability and growth. 15. "The agreements reached today are a fundamental strengthening of global capital standards. Their contribution to long-term financial stability and growth will be substantial," Mr. Trichet said. 16. "The transition agreements will enable banks to meet the new standards while supporting economic recovery." 17. Globally, there has been significant political pressure to tighten the reins on banks' risktaking behavior by implementing stricter capital rules and creating new financial reform measures. 18. The new rules will force lenders to sell new shares and restrict the money they return to their shareholders over the coming years. 19. President of the Netherlands and chairman of the Basel Committee on Banking Supervision, Nout Wellink says that the new design also means that banks are better
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protected during periods of losses, enabling them to be less reliant on tax payers money to be bailed out. 20. "The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth," Mr. Nout said in a statement. 21. Another buffer, which will be implemented according to national circumstances and during times of excess credit growth, is the counter-cyclical buffer. 22. The counter-cyclical buffer will be set within a range of 0 per cent to 2.5 per cent of common equity or other loss-absorbing capital. 23. The committee issued a statement saying the purpose of this buffer is to achieve the broader macro prudential goal of protecting the banking sector from periods of excess aggregate credit growth. 24. For any country, this buffer will only take effect when there is an overflow of credit growth that might result in build up and exposure to risk. 25. The stringent new rules are set to be gradually phased in and banks will be allowed a 10year period, commencing 2013, to substitute capital instruments that no longer qualify. 26. Today's decisions by the so-called Basel III will be submitted for approval at the G-20 summit of advanced and emerging economies in Seoul in November. 27. A number of US federal banking agencies have voiced support for an international agreement. 28. The Basel committee has another meeting scheduled for September 21 where it will further complete its work on a package of financial reforms, with a tentative finish date of October.

The Importance of Banking Instruments in International Trade Transactions

Internationalization of banksBanking has become internationalized and globalized in the wake of the liberalization of the financial markets; changes have taken place in customer structure and behavior. These factors have resulted in a pressing need for banks to adapt its organizational structures in its domestic and international fields of operations and make them future oriented. New offices and branches abroad increased banks presence.

GlobalizationGlobalization has touched banking mainly in terms of:

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1) the growth of transborder deposits; 2) the advent of transborder bank lending; 3) the expansion of transborder branch networks; 4) the emergence of instantaneous transworld interbank fund transfers. and 5) the emergence of new credit instruments such as savings accounts for children and savings account calculator. Overcoming and prevention of the system banking crises can be achieved only through the complex solution of the global instability problem. Nevertheless, often politicians and economists see different solution of this problem, some times even diametrically opposite. There are many Development I. Attach offered to modified IMF into International gendarmes, authorized with resources and real authorities supporters of the further Globalization for the purpose of increase in the role of International Institutions. This way, the ex-president of the European Bank of Reconstruction and on the long term supervision over economic in different countries, imposing certain sanctions on them for not fulfilling the agreements setting Trusteeship over economies of troublesome countries. Quiet appropriate program for getting out of the formed situation was proposed by the professor of economics of Columbian University, Nobel Prize winner G.Stiglitz. Having analyzed the reasons and development of the crises in a number of countries, he has suggested the following steps on the level of separated country: 1. The linking of national currency rate to any other including reserve one is inadmissible. 2. While realizing the reforms it is important to take into account historico-national peculiarities if this are that country. 3. Economic policy must rely on social stability. 4. It is not permitted to focus only on one angle of the Magic triangle inflation. It is also important to achieve the decrease in unemployment level and economic increases. 5. The economic increase requires the presence of financial institutions that provide credit for undertakings of the national economy. That is why it is significant to provide a relevant development of the financial infrastructure. The admittance of foreign capital into the banking sector must be careful and should be followed by the adequate facilitation of the National Banking System. 6. During the period of recession, the cutting down of the budget expenses is forbidden. In professor, G. Stiglitzs opinion, besides actions on international level, fundamental reformation of International Financial Institutions, the search for new forms of cooperation with sides that carry out reforms is necessary. Facts explain why government financial system and why banking is the heavily regulated sector in the economy. One of the regulations lies in establishment of government safety nets that are created to prevent bank runs by maintaining depositors confidence and protecting their savings. Among other forms of safety nets, deposit insurance is probably the most sophisticated. After a number of years of trials and faults in supporting financial stability, a system of deposit insurance came into life.
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Worldwide expansionSuch a worldwide expansion allows economists to investigate different aspects of deposit insurance and make recommendations concerning its parameters. Through there are contrary opinions on desirability of deposit guarantees, most economists agree that a well organized deposit insurance system effectively prevents bank runs keeping a banking system sound (Santomero, 1997, Garcia, 1999, 2000, Working group on deposit insurance, 2000). On the contrary, a badly organized system may negatively affect economic stability due to pitfalls such as moral hazard and adverse selection arising under these guarantees.

Banking business a risky ventureAt the same time, banking business is a risky venture. Configurations of credit portfolios of commercial banks make them sensitive to liquidity and insolvency, market situation fluctuation both across economy and within various economic sectors. Moreover, a banking system is often exposed to triggering effect when the bankruptcy of one bank may trigger bankruptcy of several banks which are closely interconnected with one that went bankrupt first. This factor, in its turn, could lead to panic and wide scale financial crisis.

Risky cross country transportSending goods from one country to another, as a part of a commercial transaction, can be a risky business. If they are lost or damaged, or if delivery does not take place for some other reason, the climate of confidence between parties may degenerate to the point where a lawsuit is brought. However, above all, sellers and buyers in international contracts want their deals to be successfully completed. Because of this, buyer and seller specifically refer to one of the ICC Incoterms, they can be sure of defining their respective responsibilities, simply and safely. In so doing they eliminate any possibility of misunderstanding and subsequent dispute.

Offshore bank
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

While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra.
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Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accountswhich may or may not be numbered bank accountsthey may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clear stream, based in Luxembourg, being possible crossroads for major illegal money flows. Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted not by security and financial concerns but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.

Advantages of offshore banking

Stable Jurisdiction- Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear example, during the. However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability.

Lower Cost and Higher Interest- 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. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.

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Source of Investment- Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world.

Tax free Interest- 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.

Additional Services- 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.

Linked to Other Financial Institutions- Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals.

Disadvantages of offshore banking

Less Financial Security- Offshore bank accounts are less financially secure. In banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009. Both offshore and onshore banking centres often have depositor compensation schemes. For example The Isle of Man compensation scheme guarantees 50,000 of net deposits per individual depositor or 20,000 for most other categories of depositor and point out that

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potential depositors should be aware that any deposits over that amount are at risk. However only offshore centres such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapse. Onshore depositors have been refunded in full regardless of what the compensation limit of that country has stated thus banking offshore is historically riskier than banking onshore. Money Laundering- 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.

Costly Jurisdiction- Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail.

Accessible to High Incomes- Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.

International Monetary System

The Gold and Gold Bullion Standards The gold standard was the first modern international monetary system. The gold standard facilitated the free circulation between nations of gold coins of standard specification. Under this system, gold was the only standard of value. One of the major advantages of the system was in its stabilizing influence. Gold was received in payment in balance by those countries that exported more than it imported. As a result of such an injection of gold raised prices, and thus lowered the value of the domestic currency. Further, higher prices resulted in decreasing the demand for exports, a depletion of gold to pay for the relatively cheap imports, and eventually return to the original price level.
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This system was not free from defects. It lacked liquidity since the world's supply of money would be limited by the world's supply of gold. Moreover, any unusual increase in the supply of gold, like the discovery of a rich deposit of gold, would cause prices to rise suddenly. Then eventually, in 1914, the international gold standard broke down. Later during the 1920s the gold bullion standard took the place of gold standard. Under the gold bullion nations no longer issued gold coins but backed their currencies with gold bullion and agreed to buy and sell the bullion at a fixed price. But this system too couldnt see the day-light and was abandoned in the 1930s. The Gold-Exchange System This system came into existence after World War II. Under such a system, nations peg the value of their currencies some foreign currency instead of gold, which is in turn fixed to and redeemable in gold. Many nations fixed their currencies against U.S. dollar and preserved dollar reserves in the United States, which was known as the key currency country. At the Bretton Woods international conference in 1944, a system of fixed exchange rates was adopted, and the International Monetary Fund (IMF) was created for the task of maintaining stable exchange rates on a global level. The Two-Tier System The 1960s saw the fall of the gold-exchange system because the U.S. commitments abroad drew gold reserves from the nation, confidence in the dollar diluted, causing some dollar-holding countries and speculators to exchange their dollars for gold. As a result gold reserves in U.S. started depleting and in order to correct the situation, the two-tier system was created in 1968. In this system there were two tiers:

The official tier, consisting of central bank gold traders, the value of gold was set at $35 an ounce, and gold payments to non-central bankers were prohibited. In the free-market tier, gold was completely demonetized, with its price set by supply and demand.

Gold and the U.S. dollar remained the major reserve assets for the world's central banks, although Special Drawing Rights were created as a new reserve currency. In spite of such measures, the drain on U.S. gold reserves continued and eventually in 1971 the United States was forced to abandon gold convertibility. Floating Exchange Rates and Recent Developments After the fall of the gold convertibility the IMF was compelled to agree on a system of floating exchange rates. By this method the gold standard became obsolete and the values of various
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currencies were to be determined by the market forces. In the late 20th century, the Japanese Yen and the German Deutschmark strengthened and became increasingly important in international financial markets, whereas the U.S. dollar weakened with respect to them and diminished in importance. Moreover, the Euro was introduced in financial markets in 1999 as replacement for the currencies of 11 countries belonging to the European Union (EU). The euro replaced the European Currency Unit, which had become the second most commonly used currency after the dollar in the primary international bond market. European Monetary System It is an arrangement by which most nations of the European Union (EU) associated their currencies in order to prevent fluctuations relative to one another. It came into existence in 1979 to stabilize foreign exchange and counter inflation among members. In the early 1990s this system was stressed due to the differing economic policies and conditions of its members. In 1994 the European Monetary Institute was formed as intermediary in establishing the European Central Bank (ECB) and a common currency. The ECB is responsible for setting a single monetary policy and interest rate for the adopting nations, in line with their national central banks. At the beginning of 1999, the same EU members adopted a single currency called the Euro. It was regarded as a major step toward European political unity. A common economic policy helped the nations to put a constraint on excessive public spending, reduce debt, and make a strong attempt at soaring inflation. However, many members of the Union violated the ceilings established on the budget and deficit ceilings in part because of national government measures to stimulate economic growth. In 2003, EU finance ministers, faced with the fact that economic downturns had put France and Germany in violation of the ceilings, temporarily suspended the pact. The European Commission challenged that move, however, and the EU high court annulled the finance ministers' decision in 2004. Euro coins and notes began circulating in Jan., 2002, and local currencies were no longer accepted as legal tender two months later. The European Currency Unit (ECU), which was established in 1979, was the forerunner of the euro. Derived from a basket of varying amounts of the currencies of the EU nations, the ECU was a unit of accounting used to determine exchange rates among the national currencies. Of the European Union members, Denmark, Great Britain, and Sweden did not adopt the euro when it was introduced. Britain is the most notable, which continues to regard itself as separate from Europe. In all three nations there has been strong public anxiety that dropping their respective national currencies would give up too much independence.

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