chapter 11 Flashcards
international banks
facilitate the imports and exports of their clients by arranging trade financing. Additionally, they serve their clients by arranging for foreign exchange necessary to conduct cross-border transactions and make foreign investments. In conducting foreign exchange transactions, banks often assist their clients in hedging exchange rate risk in foregin currency receivables and payables through forward and options contracts. Since international banks have the facilities to trade foreign exchange, they generally also trade foregin exchange products for their own account
universal banks or full service banks
provide all services including foreign exchange hedging strategies, interest rate and currency swap financing, and international cash management services
Rugman and Kamath formal list of reasons for why a bank may establish multinational operations
low marginal cost (managerial and marketing knowledge developed at home can be used abroad with low marginal costs)
Knowledge advantage
Home country information services
Prestige
Regulation advantage
Wholesale defensive strategy
Retail defensive strategy
Transaction costs
Growth
Risk reduction
correspondent bank relationship
a correspondent bank is established when two banks maintain a correspondent bank account with one another
For example, a large new york bank will have a correspondent bank account in a london bank and the london bank will maintain one with the new york bank
Benefits and disadvantages of correspondent banks
The correspondent bank relationship is beneficial because a bank can service its MNC clients at a vary low cost and without the need of having bank personnel physically located in many countries
A disadvantage is that the banks clients may not receive the level of service through the correspondent bank that they would if the bank had its own foreign facilities to service its clients
Representative office
is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the banks correspondents. It is a way for the parent bank to provide its MNC clients with a level of service greater than provided through merely a correspondent relationship.
The bank may open a representative office in a country in which it has many MNC clients or at least an important client. Representative offices also assist MNC clients with information about local business practices, economic information and credit evaluation of the MNC s foreign customers
Foreign branch
operates like a local bank, but legally it is part of the parent bank. As such, a branch bank is subject to botht he banking regulations of its home country and the country in which it operates.
Reasons why a parent bank might establish a branch bank
the primary one is that the bank organization can provide a much fuller range of services for its MNC customers through a branch office than it can through a representative office.
For example, branch bank loan limits are based on the capital of the parent bank, not the branch bank. Consequently, a branch bank will likely be able to extend a larger loan to a customer than a locally chartered subsidiary bank of the parent.
Additionally, the books of a foreign branch are part of the parent banks books. Thus a branch bank system allows customers much faster check clearing than does a correspondent bank network because the debit and credit procedure is handled internally within one organization
2 reason:
To compete on a local level with the banks of the host country. Branches of us banks are not subject to us reserve requirements on deposits and are not required to have federal doposit insurance corporation insurance on deposits. Consequently, branch banks are on the same competitive level as local banks in terms of their cost structure in making loans.
Affiliate bank
one that is only partially owned but not controlled by its foreign parent. Both subsidiary and affiliate banks operate under the banking laws of the country in which they are incorporated
Edge act banks
are federally chartered subsidiaries of US banks that are physically located in the United states and are allowed to engage in a full range of international banking activities.
offshore banking center
a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country.
Offshore banks operate as branches or subsidiaries of the parent bank. The principal features that make a country attractive for establishing an offshore banking operation are virtually total freedom from host-country governmental banking regulation - for example, low reserve requirements and no deposit insurance, low taxes, a favorable time zone that facilitates international banking transactions, and, to a minor extent, strict banking secrecy laws. It should not be inferred that offshore host governments tolerate or encourage poor banking practices, as entry is usually confined to the largest and most reputable international banks
International banking facilities (IBF)
An IBF is a separate set of asset and liability accounts that are segregated on the parent banks books
It is not a unique physical or legal entity. Any us chartered depository institution, a US branch or subsidiary of a foreign bank, or US offices of an edge act may operate an IBF
IBFs are not subject to domestic reserve requirements on deposits
Bank capital adequcy
refers to the amount of equity capital and other securities a bank holds as reserve against risky assets to reduce the probability of a bank failure
operational risk
includes such matters as computer failure, poor documentation and fraud, was becoming evident as a significant risk. This expanded view of risk reflects the type of business in which banks now engage and the business environment in which banks operate
