Topic 9 - International Banking Flashcards
(28 cards)
What are the major drivers of international banking activities? (In recent years)
- Deregulation (opening up markets)
- Rapid innovation of technology (making it easier)
- Increasing globalisation
- Large scale cross-border transactions creating large MNCs
What impacts did the GFC have on international banking?
- Large international banks found themselves in liquidity crises (did not want to engage with other banks)
- Many global banks withdrew from foreign operations or sold them
- Created tigher regulation on transactions
- Risk appetite significantly declined
Overall: Demand for international finance declined
Why do governments allow foreign banks into their countries?
Governments wanting to develop strong, competitive and efficient financial system + strong economy
What are shell branches? What are the advantages to using them?
Booking offices for bank transactions located abroad;
- No contact with public
- Low operational costs
- Mostly in Caribbean Islands (due to lack of regulation)
- Can perform international transactions with little interference
How are the activities of foreign banks regulated in Australia?
Foreign banks wanting to create operations in Aus must show APRA that their regulatory body provides sufficient prudential supervision
Foreign operations of AU banks are regulated by APRA + any regulation imposed by the foreign nation
(FI must weigh up cost v benefit of establishing a foreign operation)
What is money laundering?
Processing financial proceeds from criminal activities to disguise the origin of funds
Why does money laundering represent a threat to the international fin system?
Since the financial system is the mechanism by which the money gets laundered;
- Reputational risk (social/political costs)
- Macroeconomic risk (changes money demand)
- Large costs spent on combatting laundering (anti-money laundering software etc.)
What risks do banks with international activities face?
- Country risk
- Transfer risk
- Currency risk
- Political risk
- Sovereign risk
+ risks that domestic banks face
What risks do domestic banks face?
- Credit risk
- Market risk
- Liquidity risk
- Interest rate risk
- Operational risk
What forces are likely to change international banking in the future?
- EU consolidation
- Capital needs to developing nations
- Increased awareness of operational risks
- Trend towards securitisation
- Increased competition
- Growing interdependence among international economies
LIBOR
London Interbank Office Rate - commonly used as the benchmark short term interest rate, set by 16 member banks
List all 6 overseas banking structures
- Representative offices
- Offshore banking units
- Shell branches
- Foreign subsidiary affiliates
- Foreign branches
- Correspondent banks
Representative Offices
Assist parent bank’s customers in a foreign country
e.g. Helping Bank of China customers in Australia
Offshore Banking Units
Foreign branch that has limited access to domestic market
A branch that does not deal with domestic deposits, makes eurocurrency loans
Shell Branches
Booking office located abroad, no contact with public
Think Caribbean Islands - Panama Papers
Foreign Branches
(Requires ADI status) Legal & operational part of parent bank, costly to establish and regulated by home & host countries
e.g. ANZ Branches in Asia
Correspondent Banks
Business arrangement between two banks, one provides the other with special services (e.g. cheque clearing)
Foreign Subsidiaries Affiliates
(Requires ADI status) Separately incorporated domestic bank, owned by foreign bank
e.g. ING Direct Australia owned by ING in Netherlands
Project Finance
Funding of large scale projects, e.g. property development
Trade Finance
Short term funding for imports and exports
International Lease Finance
Funding of mobile capital goods: planes, computers, medical equipment
Commodity Financing
Funding for commodity traders (grains, oil, wood)
Risky for banks as success depends on commodity price movements
Transfer Risk
Not being able to convert currency, may be due to gov controls, affects ability to meet payment obligations
Currency Risk
Currency loses value, loan repayments become lower
