INTERNATIONAL BANKING MANAGEMENT

International markets, offer opportunities to the traders and corporate and multinational
companies, to expand their business, across different parts of the globe. International
investors explore more investment avenues for their investments. The international markets in
the financial sector offers a wide range of opportunities for expansion of trade and financial
activities across the borders of nations.
We can define International Banking as sub-set of commercial banking transactions and
activity having a cross-border and/or cross currency element.
International Banking comprises of range of transactions that differ from domestic operations
in the following manner
1. Currency of denomination of the transaction
2. Residence of the bank customer
3. Location of booking office

Some of the important features of International Banking Management are as follows:

1. Expansion
International Banking helps the businesses and trade to expand beyond the domestic
boundaries. The business expand internationally to gain competitive advantage in pricing,
demand and supply factors, future growth opportunities, cost of production and operating
costs, etc. So to facilitate this, banks have expanded to meet their requirements, which has led
to growth of international banking.
2. Legal and Regulatory Framework
If a country has flexible legal and regulatory framework, it encourages traders and investors
to enter the international markets. Also, due to lesser tax rates or no taxes to be payable,
certain tax havens play important roles as off shore banking centres which encourages many
international banking units to open their branches in such off shore centres.
3. Cost of Capital
The average cost of capital defines the operating efficiency of an enterprise. Almost all the
companies entering this market take advantage of the lower cost of capital. Here the banks
acts as a financial intermediary, have a huge role to play as they are the source of funds.
Banks take the advantage of the arbitrage opportunity in different international markets and
this helps in increasing their profits.
4. Current account and Capital account transactions
In this banks play an important role in import and export trade. This is done by extending
trade finance and investment opportunities. The banks facilitate the movement of funds
through their networks and banking arrangements.

Legal and Regulatory Framework

The legal and regulatory framework in India is the FEMA Act, 1999 which replace the FERA
Act, 1973
In the FEMA Act, 1999 there were certain changes to rules mentioned in FERA, 1973
1. To facilitate the external trade and payments and also to develop foreign exchange
markets in India.
2. Any violation of FEMA is a civil offence.
3. The offences under the FEMA Act, 1999 are compoundable.
4. Also FEMA is a civil law.
5. In FEMA almost all the current account transactions are free except a few.
Some of the important aspects of FEMA are
 1. FEMA allows free flow of transactions on current account subject to certain
reasonable restrictions
2. FEMA has control over realization of export proceeds
3. FEMA allows RBI to have control over capital account transactions
4. FEMA provides for dealing in foreign exchange through ‘Authorised Persons’ like
authorized dealer/money changer/ off-shore banking unit
Now coming on to the next topic
International Banking Operations Management
As we have seen the scope of international banking, also we have seen the large scale
expansion of international banking, this has led to increase in cross border transactions.
Because of this International Banking face many issues like
 Cross Border Risks
 International legal and regulatory framework
 Money Laundering activities
 Volatile international markets due to various factors including PESTEL factors.
Now coming on to some important features of operations management are
Expansion of Business.
As we know banks have agreements between themselves. Some of the inter bank relations are
as follows:
 Foreign Branches
In this when the banks open their branches outside home countries, they are designated as
Foreign Branches. The foreign branches are subject to rules of both the host country and
home country. The foreign branches are generally equipped with latest technology, this helps
them to gain competitive advantages and also offer innovative products to their customers.
 Offshore Banking Units (OBU’s)
Offshore Banking units are the banks that are located outside the country of residence of the
depositor. These units are strategically located in areas having low taxes. These places are
also known as tax havens. These tax havens provide tax and legal advantages. Some of the
features are
1. Access to politically and economically stable jurisdictions.
2. Have higher interest rate for deposits.
3. Situated in tax havens
4. Exempted on reserve requirements, this leads to lower costs
The Article 10 of FEMA, 1999 allows the RBI to delegate powers to OBU’s to deal in
foreign exchange. The OBU’s are exempted from reserve requirements and provide access to
SEZ Units to International Trader at international rates.
 Foreign Subsidiaries and affiliates
These are the types of banks that is locally incorporated bank that is owned either completely
or partially by a foreign parent. A Foreign subsidiary is difficult to distinguish from locally
operated bank as they provide all the services.
 Correspondent Banks
A correspondent bank is a bank that provides services on behalf of another, equal or unequal,
financial institution. It can facilitate wire transfers, conduct business transactions, accept
deposits, and gather documents on behalf of another financial institution. Correspondent
banking allows banks to help their clients in their business abroad. Correspondent banking
relationship is useful in issuing and confirming of LC’s, Guarantees and Bid Bonds etc.

Risk Management in International Banking

There are many risks involved in international banking. The important factors that exposes
the international banking to additional risks are
 1. Cross Border Risk
This risk arises on account of trade and investment activities between two or more countries.
This is also known as country Risk
2. Currency Risk
This risk arises due to the market fluctuations, the currency exchange rate of the currencies
results as risk and is also known as foreign exchange rate risk.

In addition to these risks there are some other risks that are involved, they are
1. Credit Risk
2. Liquidity Risk
3. Market Risk- This consists of Foreign Risk, Interest Risk, Price Risk
4. Operational Risk

Technology and International Banking

First we will look on how some of the improvements in technology has helped international
banking. Some of them are
1. Clearing House Interbank Payment System (CHIPS)- This advancement offers same
day settlement of transactions. This led to introduction of similar technologies such as
NEFT, RTGS, CHATS, CHAPS.
2. These Tech innovations have helped the banks to setup effective CHIPS wherein the
Central Bank could play the role of an exchange to absorb the credit risk.
3. SWIFT- The Society of Worldwide Inter-Bank Financial Telecommunications
provide the international line used for interbank advice and other services.
Globalization and International Banking: Important Aspects
Some of the important aspects are
1. Integration of economies led to creation of more opportunities for expansion of trade
and financial investments.
2. International Banking operates 24X7. This has created many opportunities but also
led to creation of cross border risks. This risk is a unique feature of international
banking operations in a globalized environment.
3. International legal framework and regulatory compliance is another important aspect
which makes the operations of the international banks highly complicated.
4. If a bank is operating internationally then the banks have to follow the International
accounting Standards.
5. Bank for International Settlement acts as the world’s central bank for central banks
has been playing a very active role in guiding and regulating the international banking
system in the globalized environment.
Coming on to the final topic
Financial Innovations in International Banking

Some of the important innovations that has been seen in the International Banking are
 Financial Derivatives -> This consists of Forward Exchange Contract, Futures,
Swaps, Options, Forward Rate Agreements.
Some of the swaps are as follows
1. Interest rate swaps- This is used to mitigate Interest rate risks. In this the parties agree
to exchange streams of cash flows during the contract period.
2. Currency Swaps- In these parties agree to exchange obligations in different countries
at various stages of the contract period.
Some of the Credit Derivatives are Collateralized Debt Obligations, Credit Linked Notes,
Single Tranche CDO’s.

Submitted By
Vedantam Gupta
20152095
IBM 2015