A BRIEF HISTORY OF INTERNATIONAL BANKING

Business 4039

International Banking

International Banking
Linked to the development of world trade, the

process of urbanization, and the rise of the nation-state. Essential prerequisites for international banking is

The rule of law Political stability Large-scale economies with depth and scope to support major international banking hubs

Early Banking first references

Babylonian Empire (1728 1686 B.C.)

Code of Hammurabi contains 150 paragraphs pertaining to loans, interest, pledges and guarantees, standardizing procedures.

Creation of Money
Chinese probably invented money.

Lydians in Anatolia (modern day Turkey) who

invented money in the west. A standardized unit of currency would simplify transactions. (640 to 630 B.C.) they minted coins. Money and sea travel throughout the Mediterranean, Indian Ocean and the Far East supported the growth of trade.

Roman Empire (1st Century AD)

The power and breadth of the Roman Empire

controlled piracy and provided uniform, formalized and predictable legal environment. Construction of sea ports and shipping infrastructure underwrote the development of trade further.

Importance of History
Much of what we see today is the product of history You should see in this chapter how the evolution of

banks, trade, economic, political and social development are all intertwined. The evolution of banking is inextricably linked to the development of the global economy especially in trade, industrial development and infrastructure. Reflect on the importance of confidence (a concept introduced in chapter 1) and rule of law to the extension of credit, the creation and trade of financial instruments.

The History of Banking

Early Banking - Principles of lending (1728 1686 B.C.) the Code of Hannurabi a code containing 150 paragraphs that pertain to loans, interest, pledges and guarantees. - Creation of money (640 630 B.C.) Lydians in ancient Anatolia (Turkey) a standardized coin made from electrum (unit of commerce) to simplify transactions. - Greco-Roman banking in support of trade involved smiths and collectors, money changers and inspectors of currency. - Roman Empire (1st Century AD) again trade in a stable, far-flung empire - Italy (middle ages) because of its central location, Italian city-states emerged as the first international banking centers using coins (florin in Forence 1252 and ducat in Venice)

Importance of Trade Fairs

Trade fairs were safe, convenient meeting places

between northern and southern Europebetween Italian and Flemish cities. A system of credit made the trade fairs work. Credit was used to settle large cross-border transactions without the physical expense and risk of transporting coined or uncoined bullion. Credit worked in the trade fair system because of the rule of law that supported it as well as a healthy dose of self-regulation.

JP Morgan
What trend did J.P. Morgan discern early in the 1980s yetnot manage to take advantage of?
The eventual repeal of the Glass Steagall Act and the trend

toward disintermediation (ie. the move to universal banking) Lew Preston observed that their traditional clients were abandoning wholesale lending and defecting to the capital markets. Sothey decided to recreate the commercial bank as an investment bank.

Rothschilds
Who were the Rothschilds and what innovations did they initiate to support their banking activities?
One of the most prominent German banking families in the mid-

1700s. The five sons of Mayer allowed the growth of their business to Paris, Vienna, Naples, London and Frankfurt. They found that superior information could make the difference between massive profits and losses. They constructed their own international intelligence network:

Fast packets Agents Carrier pigeons Couriers

Bretton Woods Conference

Conference held in 1944 in Bretton Woods, New Hampshire near the conclusion of WWII New International monetary order designed to avoid falling into the same mess that occurred following WWI

Weaknesses in international monetary organizations allowed the great depression and contributed to the emergence of the Nazi Regime

Bretton Woods Agreement

Established:

International Monetary Fund (IMF) World Bank General Agreement on Tariffs and Trade (GATT) - now the World Trade Organization

Bretton Woods.
Promote international monetary cooperation by establishing and

maintaining exchange rate stability The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments. On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. As a result, "[t]he Bretton Woods system officially ended and the dollar became fully 'fiat currency,' backed by nothing but the promise of the federal government.

International Monetary Fund

Primary Mission
Promote international monetary cooperation by establishing and

maintaining exchange rate stability Also to facilitate the expansion and balanced growth of international trade and provide confidence to members to correct maladjustments in their balance of payments without resorting to measures detrimental to national or international economic order. (ie. devalue currency) The combined effect of the IMF was to help shorten the duration of and lessen the degree of disequilibrium in the international balance of payments.

World Bank
Initially to provide long-term loans for

reconstruction following the end of WW II. Also provide loans for economic development of the newly independent nations in Africa, Asia and Carribean. Over time World Bank extended technical expertise to developing economies.

World Bank Mission Today

The World Bank is a vital source of financial and technical

assistance to developing countries around the world. Our mission is to fight poverty with passion and professionalism for lasting results and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity and forging partnerships in the public and private sectors. We are not a bank in the common sense; we are made up of two unique development institutions owned by 187 member countries: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

Key Concepts
Bretton Woods Agreement

International Monetary Fund (IMF)

World Bank General Agreement on Tariffs and

Trade(GATT)[and now its successor the World Trade Organization(WTO)] Eurocurrency and Eurobond Markets London Interbank Offered Rate (LIBOR) Universal banking

Question 1
Who were the first people to develop modern banking techniques? Italian city-states

Question 2
What was the contribution of the Fuggers to international banking?

Question 2 - answer
Who were the Fuggers and what important lesson in diversification was learned from their experience?
One of the most prominent German banking families in the late Middle

Ages (1487 1577) Gained control of the countrys silver production as collateral for loans. Developed letters of credit to provide liquidity to clients who faced multiple currencies and inefficient markets for currency exchange. The Fuggers became too closely aligned with Charles V who decided to borrow money to wage a series of wars against the Ottomans, French and German Protestants and they later found that even sovereign leaders are only as solvent as the underlying health of their economies. They learned an important lessondiversify both sides of the balance sheet. In their case, they developed too much exposure to one political figure.

Question 3
What are the eurobond and eurodollar markets and how did they develop?

Question 3 - answer
What are the eurobond and eurodollar markets and how did they develop?
Eurodollar market is an international money market focused on

short-term credit flows Eurobond market is an international capital market dealing with long-term bonds (developed in the early 1960s) Significance of the eurodollar (eurocurrency) market:

Serves as a source of short-term funds for the trade financing activities of international banks Facilitates foreign exchange transactions by banks An outlet for placing surplus funds Gave birth to LIBOR London Interbank Offered Rate Outlet for recycled petrodollars in the early 1970s

Question 4
What is Bretton Woods and what is its importance to international banking?

Question 4 - answer
What is Bretton Woods and what is its importance to international banking?
Created in 1944 (after math of WW II) At this conference the allied nations created organizations that were

designed to provide coordination of monetary policy among the major world economies Created were:

IMF promote international monetary cooperation by establishing and maintaining exchange rate stability World Bank long-term loans for reconstruction technical expertise to developing economies GATT promote free international trade through tariff reduction and nondiscrimination

The Bretton Woods system came to an end when Nixon took the

US dollar off the gold standard in 1971. Surviving institutions: [IMF (G7) and World Bank, and GATT is now WTO]

Question 5
How did the system of international banking evolve, starting with the Italians and eventually ending up with the Americans as the dominant force?

Question 6
International banking has been through through several crisis. What has been the cause of these crises, such as the cases of Latin America in the 1980s or of Asia in the late 1990s?

Question 6
International banking has through through several crisis. What has been the cause of these crises, such as the cases of Latin America in the 1980s or of Asia in the late 1990s?

Too much debtand rapid decline in a countrys ability to service that debt are perhaps the too most common causes. (see table 2.2, page 21)