Chapter Twenty

International Banking and the Future of

Banking and Financial Services
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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

20-2
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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

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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

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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

20-5
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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

20-6
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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

20-7
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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


20-8
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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

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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
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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
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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
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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
20-13
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TABLE 201 Key Customer Services Offered by International
Banks
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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-currencydenominated deposits from
businesses and individuals abroad who purchase
their products or securities
These foreign funds must be exchanged for
domestic currency and deposits
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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
20-16
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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
20-17
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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 currencydenominated loans to
customers
Issuing foreign-currencydenominated IOUs
(such as deposits) to raise new funds
Purchasing foreign-issued securities
Trading in foreign currencies for a banks own
currency position as well as for the needs of its
customers
20-18
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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.

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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)
20-20
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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
20-21
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EXHIBIT 203 A Straight Currency
20-22
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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)
20-23
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Services Supplied By Banks in International
Markets (continued)
Ways of Supplying Customers with Credit
Note Issuance Facilities (NIFs)
Eurocommercial Paper (ECP)
Depository Receipts (DRs)
20-24
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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
20-25
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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
20-26
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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
20-27
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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
20-28
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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
20-29
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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
20-30
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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?

20-31
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