International Banking and Money Market.ppt

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1、,7,International Banking and Money Market(Chapter 11),Essential Reading,The Whole Chapter,Main Contents,International BankingInternational Money MarketInternational Debt Crisis,The Worlds 10 Largest Banks,1.BNP Paribas France 2.Royal Bank of Scotland Group United Kingdom3.HSBC United Kingdom 4.Crdit

2、 Agricole France .Bank of America United States.BarclaysUnited Kingdom7.Deutsche Bank Germany.JP Morgan ChaseUnited States .Mitsubishi UFI Financial Group Japan.Citigroup United States,Low Marginal CostsManagerial and marketing knowledge developed at home can be used abroad with low marginal costs.,

3、Reasons for International Banking,Low Marginal CostsKnowledge AdvantageThe foreign bank subsidiary can draw on the parent banks knowledge of personal contacts and credit investigations for use in that foreign market.,Reasons for International Banking,Low Marginal CostsKnowledge AdvantageHome Nation

4、Information ServicesLocal firms in a foreign market may be able to obtain more complete information on trade and financial markets in the multinational banks home nation than is obtainable from foreign domestic banks.,Reasons for International Banking,Low Marginal CostsKnowledge AdvantageHome Nation

5、 Information ServicesPrestigeVery large multinational banks have high perceived prestige, which can be attractive to new clients.,Reasons for International Banking,Low Marginal CostsKnowledge AdvantageHome Nation Information ServicesPrestigeRegulatory AdvantageMultinational banks are often not subje

6、ct to the same regulations as domestic banks.,Reasons for International Banking,Low Marginal CostsKnowledge AdvantageHome Nation Information ServicesPrestigeRegulatory AdvantageWholesale Defensive StrategyBanks follow their multinational customers abroad to avoid losing their business at home and ab

7、road.,Reasons for International Banking,Reasons for International Banking,Low Marginal CostsKnowledge AdvantageHome Nation Information ServicesPrestigeRegulatory AdvantageWholesale Defensive StrategyRetail Defensive StrategyMultinational banks also compete for retail services such as travelers check

8、s, tourist and foreign business market.,Knowledge AdvantageHome Nation Information ServicesPrestigeRegulatory AdvantageWholesale Defensive StrategyRetail Defensive StrategyTransactions CostsMultinational banks may be able to circumvent government currency controls.,Reasons for International Banking,

9、Home Nation Information ServicesPrestigeRegulatory AdvantageWholesale Defensive StrategyRetail Defensive StrategyTransactions CostsGrowthForeign markets may offer opportunities to growth not found domestically,Reasons for International Banking,PrestigeRegulatory AdvantageWholesale Defensive Strategy

10、Retail Defensive StrategyTransactions CostsGrowthRisk ReductionGreater stability of earnings due to diversification.,Reasons for International Banking,Types of International Banking Offices,Correspondent BankRepresentative OfficesForeign BranchesSubsidiary and Affiliate BanksEdge Act BanksOffshore B

11、anking CentersInternational Banking Facilities,Correspondent Bank,A correspondent banking relationship exists when two banks maintain deposits with each other.Correspondent banking allows a banks MNC client to conduct business worldwide through his local bank or its correspondents.,Representative Of

12、fices,A 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.Representative offices also assist with information about local business customs, and credit evaluation of th

13、e MNCs local customers.,Foreign Branches,A foreign branch bank operates like a local bank, but is legally part of the the parent.Subject to both the banking regulations of home country and foreign country.Can provide a much fuller range of services than a representative office.Branch Banks are the m

14、ost popular way for U.S. banks to expand overseas.,Subsidiary and Affiliate Banks,A subsidiary bank is a locally incorporated bank wholly or partly owned by a foreign parent.An affiliate bank is one that is partly owned but not controlled by the parent.U.S. parent banks like foreign subsidiaries bec

15、ause they allow U.S. banks to underwrite securities.,Edge Act Banks,Edge Act banks are federally chartered subsidiaries of U.S. banks that are physically located in the U.S. that are allowed to engage in a full range of international banking activities.The Edge Act was a 1919 amendment to Section 25

16、 of the 1914 Federal Reserve Act.,Edge Act Banks,Federal Reserve Regulation K allows Edge Act banks to do the following:Accept foreign depositsExtend trade creditFinance foreign projects abroadTrade foreign currenciesEngage in investment banking activities with U.S citizens involving foreign currenc

17、iesIt is throughj the Edege Act that U.S parent banks own foreign banking subsidiaries and have ownership positions in foreign banking facilities.,Offshore Banking Centers,An offshore banking center is a country whose banking system is organized to permit external accounts beyond the normal scope of

18、 local economic activity.The host country usually grants complete freedom from host-country governmental banking regulations.,Offshore Banking Centers,The principal features that makes a country attractive for establishing an offshore banking operation are total freedom from host-country government

19、banking regulations-Low reserve requirements and no deposit insuranceLow taxesA favorable time zone for international banking transaction.Strict banking secrecy lawsAttractive Interest rate,Offshore Banking Centers,The IMF recognizesthe BahamasBahrainthe Cayman IslandsHong Kongthe Netherlands Antill

20、esPanamaSingaporeas major offshore banking centers,International Banking Facilities,An international banking facility is a separate set of accounts that are segregated on the parents books.An international banking facility is not a unique physical or legal identity.Any U.S. bank can have one.Interna

21、tional banking facilities have captured a lot of the Eurodollar business that was previously handled offshore.,Capital Adequacy Standards,Bank capital adequacy refers to the amount of equity capital and other securities a bank holds as reserves against risky assets to reduce the probability of a ban

22、k failure.In a 1988 agreement known as the Basle Accord, the Bank for International Settlement(BIS) established a framework for measuring bank capital adequacy. 8% is stipulated as the minimum rate.There are various standards and international agreements regarding how much bank capital is “enough” t

23、o ensure the safety and soundness of the banking system.,Capital Adequacy Standards,While traditional bank capital standards may be enough to protect depositors from traditional credit risk, they may not be sufficient protection from derivative risk.For example, Barings Bank, which collapsed in 1995

24、 from derivative losses, looked good on paper relative to capital adequacy standards.,Capital Adequacy Standards,Shareholder equity Tier 1: Core Capital 50% Retailed Earnings Preferred stocks Tier 2: Supplementary Capital : 50% Subordinated bonds government obligation 0% short-term interbank assests

25、 20%Assets residential mortage 50% other assets 100%,Capital Adequacy Standards,In June 2004, the new capital adequacy framework commonly referred to as Basel II was endorsed by central bank governors and bank supervisors in the G-10 countries.Its implemented in the end of 2006.,Capital Adequacy Sta

26、ndards,Basel II is based on three mutually reinforcing pillars: minimum capital requirements, a supervisory review process, and the effective use of market discipline.,Capital Adequacy Standards,With respect to the first pillar ( the minimum capital requirements), bank capital is defined as per 1988

27、 accord, but the minimum 8% ratio is calculated on the sum of the banks credit, market, and operational risk.,Capital Adequacy Standards,The second pillar is designed to ensure that each bank has a sound internal process in place to properly assess the adequacy of its capital based on a thorough eva

28、luation.,Capital Adequacy Standards,The third pillar is designed to complement the other two. It is believed that public disclosure of key information will bring market discipline to bear on banks and supervisors to better manage risk and improve bank stability.,International Money Market,The intern

29、ational money market: Where borrowing or lending have a year or less to maturity,The International Money Market,FunctionsBanks with a temporary shortage of money can borrow from those with a surplusCompanies, financial institutions and local governments with a temporary shortage of money can borrow

30、form those with a surplus,The International Money Market,CharacteristicsThere is no single marketplaceWebs of borrows and lenders-linked by telephones and computersA wholesale marketAll short term lending and borrowingNo mortgageNo single set of posted pricesMoney market instruments pay fixed intere

31、st-and most are sold at a discount to the face value,The International Money Market,Actually, the international money market mainly includes eurocurrency business.,International Money Market,Eurocurrency is a time deposit in an international bank located in a country different from the country that

32、issued the currency.For example, Eurodollars are U.S. dollar-denominated time deposits in banks located abroad.Euroyen are yen-denominated time deposits in banks located outside of Japan.The foreign bank doesnt have to be located in Europe.,Most Eurocurrency transactions are interbank transactions i

33、n the amount of $1,000,000 and up.Common reference rates includeLIBOR the London Interbank Offered RatePIBOR the Paris Interbank Offered RateSIBOR the Singapore Interbank Offered RateA new reference rate for the new euro currency,Eurocurrency Market,EURIBOR the rate at which interbank time deposits

34、of are offered by one prime bank to another.,Eurocredits,Eurocredits are short- to medium-term loans of Eurocurrency.The loans are denominated in currencies other than the home currency of the Eurobank.Eurocredits feature an adjustable rate. On Eurocredits originating in London the base rate is LIBO

35、R.,Eurocredits,Because eurocurrency loans are frequently too large for a single bank to handle, Eurobanks will band together to form a bank lending syndicate to share the risk.The lending rate on these credits is stated as LIBOR+X%Rollover pricing is created on Eurocredits so that eurobanks do not e

36、nd up paying more on time deposits than they earn from the loans.,Eurocredits Example,Teltrex international can borrow $3,000,000 at LIBOR plus a lending margin of 0.75 percent per annum on a three-month rollover basis from Barclays in London. Suppose that three-month LIBOR is currently 5 17/32 perc

37、ent. Further suppose that over the second three-month interval LIBOR falls to 5 1/8 percent. How much will Teltrex pay in interest to Barclays over the six-month period for the Eurodollar loan?,Exercises,Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending margin

38、 of 1.25 percent per annum on a six-month rollover basis from a London bank. If six-month LIBOR is 4 percent over the first six-month interval and 5 3/8 percent over the second six-month interval, how much will Grecian Tile pay interest over the first year of its Eurodollar loan?,Forward Rate Agreem

39、ents(FRAs),FRAs are useful devices for hedging future interest rate risks.They are agreements about the future level of interests.The rate of interest at some point in the future is compared with the level agreed when the FRA was established.The compensation is paid by one party to the other based o

40、n the difference.,Forward Rate Agreements,An interbank contract that involves two parties, a buyer and a seller.The buyer agrees to pay the seller the increased interest cost on a notational amount if interest rates fall below an agreed rate.The seller agrees to pay the buyer the increased interest

41、cost if interest rates increase above the agreed rate.,Forward Rate Agreements: Uses,Forward Rate Agreements can be used to: Hedge assets that a bank currently owns against interest rate risk.Speculate on the future course of interest rates.,Forward Rate Agreement,A company needs to borrow $6million

42、 in 3 month for a period of one year. Current interest rate is 7%. How will the company use the FRA?The company is concerned that the interest rate will rise in 3 month.So it will buy the FRA.,Forward Rate Agreement,A $10million is expected to be available for putting into a one-year bank deposit in

43、 three month. How will the company use the FRA?The company could lock into a rate now by selling an FRA to a bank.,Financial Instruments,Treasury Bill (T-Bills)EuronotesEuro-commercial paper,Treasury Bill,What is a Treasury bill?Treasury bill are securities with a maturity of one year or less, issue

44、d by national governmentsIf issued by reputable government they are the safest investments.US: 3 or 6 months, 1 year maturityUK: 3 or 6 months maturity,Treasury Bill,CharacteristicsSecurityHigh liquidity-holders can convert to cash easilyTax waived,Treasury Bill,If a 3 month T-bill is issued on 15th

45、, January, it will mature on 15th, April.UK money markets assume a 365-day year.US & Euro market assume a 360-day year.,Treasury Bill,How to calculate the interest rates?T-bill are often sold at a discount,e.g. 1 year US T-bill,Face (par) value=$100Dealer bids and pays for $95Discounted by 5%Interes

46、t rate earned, 5/95=5.26%,Treasury Bill,A UK 91 day 100 Treasury bill issued with a quoted annual interest rate of 10.256%. How much would the issuing price be?P = 100 = 97.5068 1+0.10256(91/365)Or, more generally,P = F 1+r (N/365) Where: F=face value P=issue price or market price r=interest rate (annual rate) N=number of days to maturity,Treasury Bill,Alternatively, we may know the price and have to solve for the yield: 97.5068 = 100 1+r (91/365) r= 10.256%This is the same as an annual discount rate of 10%: 2.4932 (365/91) =10% 100,