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International Banking

Globalization
Since

1970, there has


been tremendous
growth in international
trade

Globalization
Even

more
impressive is the
growth in foreign
exchange

International Banking
Citigroup

has over 50% of its assets ($600B)


located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!

International Banking
Citigroup

has over 50% of its assets ($600B)


located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!
General

Motors has an established relationship to buy


auto parts from a Mexican supplier. GM may find it
convenient to have an account with Citibank in
Mexico (Banamex)

International Banking
Citigroup

has over 50% of its assets ($600B)


located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!
Honda

has a manufacturing plant outside of


Columbus, Ohio. It might be convenient for Honda to
open an account with Deutschebank in the US to
finance its US operations.

International Banking
Citigroup

has over 50% of its assets ($600B)


located outside the US. Citigroup provides
banking and investment services in over 100
countries around the world!
Fidelity

operates a global bond fund. It may be


convenient for the to have several accounts around
the world to manage the flow of interest payments.

International Banking
Facilitation

of international transactions
Managing exchange risk
Avoiding Regulation (Eurodollars)
Avoiding Taxes (Offshore Banking)

Types of Banks
US Banks Abroad
Branches
Edge Act
Corporations
Foreign Subsidiary
International Banking
Facility

Foreign Banks in the US


Branches
Agency Offices
US Subsidiary

Eurodollars

Since WWII, the dollar has become the premier


international currency. Therefore, many foreign
companies and governments hold dollars rather than
their own currency.
Further, to avoid interest rate restrictions, US banks
began offering dollar denominated accounts at their
foreign branches. These accounts became known as
Eurodollar accounts.
Euromarkets have expanded into Eurobonds, Euroloans,
Euro Commercial paper. There is currently over $30
Trillion in Eurodeposits around the world.

Exchange Rate Risk


In

addition to information, liquidity, and


interest rate risk, international banks must
also deal with exchange rate risk.

An Example
Assets
Cash Reserves: $2M
E2M
Securities (3%): $15M
Loans
Consumer:
Commercial (7%): $5M
E20
Real Estate (8%): E3M
Other:

Liabilities
Transaction Deposits
Checking (0%): E10M
Savings (2%): E10M
Eurodollar Accounts: $10M
Loans:
Equity: $8.25M

An Example
Dollar Assets: $22M
Euro Assets: E25M * $1.25/E = $31.25M
Total: $53.25M
Dollar Liabilities: $20M
Euro Liabilities: E20M * $1.25/E = $25M
Total: $45M
Equity = $53.25M - $45M = $8.25M

Exchange Rate Risk


In

addition to information, liquidity, and


interest rate risk, international banks must
also deal with exchange rate risk.
Suppose that the dollar depreciates to
$1.30

An Example
Dollar Assets: $22M
Euro Assets: E25M * $1.30/E = $32.5M
Total: $54.5M
Dollar Liabilities: $20M
Euro Liabilities: E20M * $1.30/E = $26M
Total: $46M
Equity = $54.5M - $46M = $8.5M

In

Regulating International
Banking

the US, monitoring/regulating of US


banks is done by either the Fed, OCC or
FDIC.
British Banks in England are regulated by
the Bank of England.
Who regulates British banks in the US or
US Banks in Britain?

Regulating International
Banking

After

1978 (International Banking Act),


foreign banks were subject to basically the
same laws as US Banks, but were not
subject to as much oversight.
Prompted by the BCCI scandal in 1991,
the US passed the Foreign Bank
Supervision Act giving the Fed and OCC
greater control over foreign banks.

Bank For International


Settlements

Established

in 1930 to handle German


WWI reparations, the BIS has become a
center for international cooperation.
Played

a central role in the Bretton Woods


Exchange Rate System
Integral in the Establishment of the Euro
The

BIS is like a central bank for central


banks.

Basle Accords
In

1988, the G-10 countries established


uniform worldwide standards for:
Capital

Requirements
Off Balance Sheet Assessments
Risk Weighting
Interest rate sensitivity

Problems with International


Regulation

The

key issue is that the banking industry


in Japan and Europe is Fundamentally
different.

Top Ten World Banks


Bank

Assets
(Billions)

Citigroup (US)

1,497

JP Morgan + Bank One (US)

1,097

Mizuho Financial Group (Japan)

1,080

Bank of America + First Union (US)

851

UBS (Switzerland)

851

Sumitomo Mitsui (Japan)

844

DeutscheBank (Germany)

795

Mitsubishi Tokyo (Japan)

781

HSBC (UK)

759

BNP Paribas (France)

744

European Banking
Unlike

the US, European Banks are


allowed to engage in securities markets
(universal banking)
In fact, in Europe, banks are generally
significant shareholders in European
companies.
Banks rely much more on equity than
deposits.

Japanese Banking
Japanese

industry is organized into industrial


groups (keiretsu)
Mitsubishi
Mitsui
Sumitomo
Fuyo
Daiichii
Kangyo
Sanwa

Japanese Banking
These

groups are both vertically and


horizontally integrated and are comprised
of a very large number of companies:
Sumitomo

has 15 divisions ranging from


electronics to mining to consumer goods.
Sumitomo controls assets equal to $50T.

Japanese Banking
Each

group has its own bank which


handles its finances. This main bank
Owns

equity in member firms


Monitors member firms
Provides credit for member firms.