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:INTERNATIONAL BANKING (CHAPTER 2 : INTERNATIONAL COMMERCIAL BANKING…
:INTERNATIONAL BANKING
CHAPTER 2 : INTERNATIONAL COMMERCIAL BANKING
Introduction
Intermediaries that move money from capital markets to businesses and institutions
offer services
payroll
foreign exchange transaction and trading
lock boxes for collecting payment
project finance
general corporate finance
trade finance
functions
:<3:provide facilities for saving
:<3:provide facilities to effect payment
:<3:provide credit / loan / advance facilities
:<3:financing government
:<3:other banking facilities
Facilities
trade finance
issuing LOC
deposit facilities
:check:demand deposit
:check:checking account
:check:saving deposit
:check:time deposit
:check:negotiable certificate of deposit (NCD)
FOREX / currency market
:checkered_flag:to facilitate international trade and development
:checkered_flag:larges market in the world
:checkered_flag:FOREX arrangement would be in the forms of cross border transactions and foreign investment
Corporate finance
:pen:also involves borrowing/ lending in the Eurocurrency market
:pen:participating in the international loan syndicate by lending to MNCs
:pen:companies need to borrow money to purchase raw materials, machine parts, inventory and payroll
:pen:venture in project financing & to sovereign government for the sake of economic development
:pen:participating in the underwriting of Eurobonds & foreign bond issues
The Effects
Positive
:smiley:managerial and marketing advantage
:smiley:regulation advantage
:smiley:home nation information services
:smiley:risk reduction and greater stability
:smiley:knowledge and advantage
Negative
:tada:moral hazard
:tada:free rider problems in resolution of crises
:tada:information asymmetry
:tada:some rely much more on equity than deposits
:tada:problems regarding international regulations in certain countries
CHAPTER 3 : INTERNATIONAL INVESTMENT BANKING
:unlock: INTRODUCTION
Investment Banking : banking activities whose functions involved provision of long-term equity and loan finance for industrial and other corporations, particularly new securities.
Investment Banks : financial institutions that specialize in helping businesses & governments sell their new security issues (debt/equity) in primary market to finance capital expenditures.
after sold : they make secondary markets for the securities as brokers and dealers.
provide advisory service, deal with larger companies,
do not take deposits
e.g: Citigroup, J.P Morgan, Labuan Branch, Kenanga Investment Bank
:unlock: FEATURES
:fire:manage buying and selling stocks, bonds, other financial instruments for their own portfolio and on behalf of clients
:fire:securitization / bundling of assets: to sell in secondary market
:fire:bringing Initial Public Offering (IPO) to the market
:tada:enables company to raise fund or to cash in private stock for public stock
:tada:consist of common stock and preferred stock
:black_flag:Top 10 International Investment Banks (based on advisory fees)
J.P. Morgan & Co.
Bank of America Merrill Lynch
Goldman Sachs
Morgan Stanley
Citigroup
Deutsche Bank
Credit Suisse
Barclays
Wells Fargo
UBS
:unlock: FUNCTIONS
Revenue Generating Activities
:smiley:involve in primary market making, secondary market making, trading, corporate restructuring, financial engineering, advisory services, investment mgt, venture capital, consulting
:smiley:assist with corporate reorganizations and advising on strategic matters such as M&A, divestitures, joint ventures.
:smiley:assist public and private corporations in raise fund in primary capital markets
Support Activities
:<3:involve clearing, internal finance, information services
as intermediaries:
between corporations/gov that want to attract investment capital and investors wanting to invest capital
in trading for clients
Operational System
:<3:
FRONT OFFICE
:<3:
2 main areas: investment banks and markets
on average: the most prestigious & highest paid department in that particular bank
in the market: they helps customers to raise partner for JV, do sales & trading, conduct research
:<3:
MIDDLE OFFICE
:<3:
relates to risk mgt issues
focuses on identifying & managing the level of rick that the company assumes in order to do business
-they relies heavily on data collected by the back office in terms of risks, profits & losses and underlying reasons for those activities
-functions:
a) Risk Management
b) Corporate Strategy
c) Compliance
d) Financial Control
:<3:
BACK OFFICE
:<3:
facilities offered
:fountain_pen:
e) Others
Financial Research
Bridge Financing
Currency Exchange
:fountain_pen:
d) Providing Advice
offered: corporate restructuring exercises, rearrange a company's gearing/operations
offers independent evaluation on corporation transactions: valuing of companies/securities
:fountain_pen:
c) New Product Development
trend: more on creativity & innovation / creation of new products (hybrids) that can generate profitable opportunities
Islamic banking: many hybrid products have been introduced in order to meet the needs & wants of the Muslim & non-Muslim.
creativity & innovation activities created: to stabilize the financial market imperfections
:fountain_pen:
b) Trading Securities and Risk Arbitrage
serves as securities broker & dealer in secondary market
as a broker: make arrangements
services include: recommendation of security & helping the client obtain margin credit on collateral of securities
also manages mutual funds
:fountain_pen:a)
Underwriting New Issues
-the activity of providing long term equity & debt finance for corporations & gov (issuance of new securities)
-company raise fund by selling common stock to public for the first time (IPO)
-includes both basic securities like equity & bond issues & hybrids
-other services bank: advising, documentation
-the issuers: industrial firms, public utilities & high-tech companies
eg: Merrill Lynch, Salomon Smith Barney
:unlock: DIFFERENCES BETWEEN COMMERCIAL BANKING AND INVESTMENT BANKING
..,,
.
Attraction Of Investing With OFC's Investment services
:check: No capital tax
:check: No corporation tax
:check: No capital gains tax
:check:No tax on transfers
:check:No exchange controls
:check:No withholding tax on dividends or onterest
:check: Light regulation and supervision
:check: Less stringent reporting requirements
:check: Less stringent trading restrictions
*CHAPTER 5 : INTERNATIONAL BANKING RISKS
✨ INTRODUCTION TO INTERNATIONAL
RISKS
👉 may be defined as the possibility of loss caused by some unfavorable or undesirable event in international business (i.e. banking and financial institutions) operations.
✨ TYPES OF INTERNATIONAL RISKS
Credit Risk
it is the probability that a loan will not be repaid or there will be a default in payment
the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms
it associated with the traditional lending activity of banks as it is simply described as the risk of loan not being repaid in part or full
Due the fact that this phenomenon was in a rising mode
BASEL I
- primarily focused on credit risk where banking and
financial institutions were required to maintain their
capital levels equal to 8% of risk-adjusted assets
BASEL II
- revealed numerous weaknesses in accurately managing risks during financial crisis
BASEL III
- had to prove more effective regulations about addressing credit risk. it determined several shortcomings and ambiguities present in
BASEL II
such as capital for counterparty default risks inherent in structured financial transaction and over the counter (OTC) or securitization transaction
Market Risk
it is the risk of losses in on- and off-balance sheet positions arising from movements in market prices or rates, including interest rates, exchange rates, securities prices, & commodity prices
2 types of market risks
systematic risk
caused by the prices of all market instruments due to macro factors such as a change in economic policy
also known as uncontrollable
occurs when the financial systems suffers from a failure that is caused by other forms of risks
unsystematic risk
caused where the price of one instrument moves out in lines with other similar instruments because of events related to the issuer of instruments
e.g : law suit against the issuer misconduct / financial adviser improperly in managing customer account
Operational Risk
the oldest risk that banks have ever faced
it is a risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events
consists of 2 key elements
internal aspects
bank can and should shape, control & influence
e.g losses or breakdown caused by insufficient management
by physical causes
by personnel failure
misleading
from liability for accidents
due to mismanagement of business ventures
external aspects
e.g market environment
credit situation
other risk condition
Interest Rate Risk
can be defined as the exposure of a banking and financial condition to adverse movements in interest rates.
bank's main source of return or profit is converting bank's liabilities i.e. depositors and borrowings and turns them into assets i.e. loans & securities.
bank makes profit by paying a lower interest rate on its liabilities than it earns in it assets, the difference is called as net interest margin
in terms of period of time, its liabilities are usually shorter than its assets
the interest rate paid on deposit and short-term borrowings is sensitive to short-term rates, while interest rate earned on long-term liabilities is fixed.
this creates interest rate risk- in case of banks is the risk that interest rates will rise, causing the bank to pay more liabilities & thus reducing its profits
interest rate risk arises in banking system when financial institution act as asset transformers i.e. they lend out long-term and refinance short-term
Foreign Exchange (FOREX) Risk
known as currency risk or exchange rate risk
FOREX risk is a financial risk that exists when a financial transaction is denominated in a currency other than the currency of the origin country
the risk of investment value changing due to changes in currency exchange rates
The risk that an investor will have to avoid loss in a foreign currency due to an adverse movement in exchange rates either in a short or long position
this risk usually effects international businesses i.e. export & import, but it can also effect investors making international investments
e.g : foreign direct investment ( FDI) & real estate
Sovereign Risk
it refers to political risk
many foreign loans are paid in US dollars and repaid with dollars
some of these foreign loans are given to countries with unstable political environment
Normally, if political environment is unstable it may threaten foreign investments, including FDIs, investors will pull their investment out to prevent losses arising form sovereign risk
Political risk has an adverse effect on any economy,mostly because it affects international banking & financial institutions' behaviour
political risk constitutes the major constraint on foreign investment in merging markets
Transport Risks
due to long distance between countries, gods are despatched by shipping or airways
sea and transport are exposed to many types of additional risks
Cultural Risks
culture differs from 1 country to another. the language, the value of time, customs & lifestyles differ from country to country
as a result a business firm faces additional risks
✨INTERNAL RISK ASSESSMENT OF
INTERNATIONAL BANKING :
💕 credit scoring system - traditional approach
can be found in virtually all types of credit analysis, from consumer credit to commercial loans
essentially to pre-identify certain key factors that determine & probability of default & combine or weigh them into a quantitative score
can be literally interpreted as a probability of default
💕 value at risk (VaR) - the modern approach
to measure the minimum loss ( of value) on a given asset or portfolio over a given time period at a given confidence level 95%, 97.5% or 99%
💕 credit derivatives
-
to transfer credit risk on portfolios of bank loan & debts securities from banks to non-banks, particularly insurance companies
✨SUPERVISION AND REGULATION ON INTERNATIONAL BANKING
:check:
Single Bank Supervisor or Multiple Bank Supervisors
:check:
Bank Supervisory Role OF The Central Bank
:check:
Scope Of Supervisory Authority
:check:
Supervisory Approach Of Countries
:check:
The Basel Committee On Banking Supervision (BCBS)
:check:
Offshore Financial Cetres (OFCs)
:check:
Banking And The World Trade Organization (WTO)
:check:
Islamic Banking Supervision And Regulation
:check:
Anti-Money Laundering (AMLA) Regulations
Individual Instruments
Credit Default Option (CDO)
involves a purchase of one option & sale of another option in the same class & expiration but different strike prices
an option to buy protection (payer option) or sell protection (receiver option) as a credit default swap on a specific reference credit with a specific maturity
option is usually European, exercisable only at one date in the future at a specific strike price defined as a coupon on the credit default swap
Credit Default Swap (CDS)
financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event
this is say that the seller of CDS insures the buyer against some references loan defaulting
the buyer of CDS makes a series of payments i.e. CDS fee or CDS spread to the seller & in exchange, receives a payoff if the loan defaults
in the event of default the buyer of the CDS receives compensation usually at the face value of the loan & the seller of the CDS takes possession of the defaulted loan
credit Forward Agreement (CFA)
Hedges against an increase in default risk on a loan or decline in credit quality of a borrower after the loan rate is determined & the loan has been issued
CFS specifies a credit spread i.e. a risk premium above the risk-free rate to compensate for default risk in a benchmark bond issued by the borrower
Credit Securitizations
Refers to the complex process of transforming individual loans into assets that may be purchased by investors
Banks coordinate these transactions to reduce their exposure to individual financial risks
investors prefer securitized products as means to diversify their respective portfolios & gain entry into multiple financial markets
despite these inherent benefits, abuse of the securitization model may create asset bubbles that inevitably collapse
AMLA
1
*PLACEMENT
placement of currency into a banking & financial institutions e.g commercial bank, brokerage, investment bank. etc
2
*LAYERING
second stage is movement of funds from one institution to another in order to disguise the original source and ownership of the funds
3
*INTEGRATION
Third stage is the time when the funds, having been laundered are reinvested into a legitimate business
Two-Tier Mudarabah
the assets & liabilities sides of a bank's balance sheet are fully integrated
liabilities side - depositors enter into a Mudarabah, a profit-sharing contract with the bank to share the overall profits accruing to the banks business
deposits act as capital providers or financiers by providing funds, and the bank acts as an entrepreneur by accepting them-
assets side - the bank enters into Mudarabah contracts with agent-entrepreneurs who search for investable funds and agree to share profits with the bank according to a certain % stipulated in the contract
TWO WINDOWS
Demand Deposits
assumed to be placed as Amanat (safekeeping), they are considered to belong to depositors at all the times
cannot be used by the bank as the basis to create money through fractional reserves
bank operating according to this arrangement must apply a 100% reserve requirement ration on demand depositors
Investment Deposits
used to finance risk-bearing investment projects with depositors's full awareness
not guaranteed by the bank and reserve requirement are not applied to the
bank may charge a service fee for safekeeping services
interest-free loans may only be granted from funds specifically deposited for the purpose
Types of international banking offices
foreign branches
operate like local bank but is legally part of the parent bank, not separate identity
acts as a functional arm of the head office
more independent than rep office
reasons
to offer more extensive range of services
to take advantage on the situations not subject to local reserve requirement/ deposit insurance
to compete with host country banks at local level
to internationalizing bank operations
subsidiary & affiliate bank
affiliate bank
partially owned but not controlled by its foreign parent
both operated under banking laws of the country in which they are incorporated
both allowed to underwrite securities
subsidiary bank
a locally incorporated bank that is either wholly owned / owned in major part by a foreign parent
engages in full banking activities as permitted by host country regulations
may established as a new entity of organization / through the M&A activity of an existing bank
representative office
establishes a physical presence in the foreign market but has very limited function
they assist MNC clients with the information about local business practices, economic information, credit evaluation of customer etc.
offshore banking centres
a country whose banking system is organized to permit external accounts beyond the normal scope of local economic activity
host country grants complete freedom from its governmental banking regulation
primary credit services - in foreign currency
primary activities - to seek deposits & grant loans in diff currency from the host / local government
functions
low reserve requirements & no deposit insurance
not subject to interest rate ceiling
take advantage of low tax location
low margins, low overhead etc due to high degree of competitiveness
no pressure from domestic government
reasons
low / no taxes
services provided for non-resident clients
few / no forex controls
legal regime that upholds bank secrecy
correspondent bank
considered as lowest possible of banking exposure to the foreign market
provide trade-related & forex services w/out to establish its own physical presence
BM 199 4D
FATIHAH BT MOHAMAD
SITI NUR AISYAH BT RAMLAN
NUR HANA AZIERA BT ZAINAL
NUR A'IN BT ROSLI
NUR AISHAH BT MASOR
CHAPTER 4
OFFSHORE FINANCIAL CENTRES
COMMON REASON COUNTRIES SEEK TO DEVELOP THEMSELVES OF OFCs :black_flag:
May have little land base and few opportunities to develop other
types of economic activities
:<3: Limited energy supplies
:<3: Limited raw material & other natural resources
:<3: far from resource including raw material & energy
Possess natural features that makes it an
ideal OFC
:<3:political stabiliy
:<3:close geographically proximity to wealth coutries
:<3:well educated manpower & some natural amenities that could attract tourist
:<3:a political willingness o pass bank secrecy law & prepare to invest in policing & security infrastructure
TYPES OF INSTITUTIONS UNDER OFFSHORE FINANCIAL CENTRES
International Investment Bank
:explode: no minimum amount of deposits to be investment
:explode:Bank transaction may be tax-exempt (no taxt) under a favourable fiscal regime
:explode: may be free of interest and exchange controls
Offshore Bank
:check: subject to lesser form of regulatory scrutiny
:check:information disclosure requirements may not be rigorously applied
Offshore Corporations / International Business CorporatIon (IBCs)
:recycle: use to own and operate businesses
:recycle:maybe set up with one director only
:recycle: in some cases- residents of OFC host country may act as nominee directors to conceal the identity of the true company directors
:recycle:in many OFCs, the costs of setting up IBCs are minimal & generally exempt from all taxes
:recycle:used to create complex financial structures
:recycle: IBCs are limited liability vehicles registered in an OFC
Insurance Companies
:warning:commercial corporation establishes a captive insurance company in an OFC to manage risk and minimize taxes
:warning: onshore insurance company establishes a subsidiary in an OFC to reinsure certain risks
:warning: onshore insurance company incorparates a subsidiary in an OFC to reinsure catastrophic
:warning:Attractions of OFC in these circumstances include :
:red_flag: favourable income
:red_flag:capital tax regime
:red_flag:low / weakly enforced actuarial reserve requirements
:red_flag:capital standards
FUNCTION OF OFFSHORE FINANCIAL CENTRES
:star: Jurisdictions provider
:star: Entities to manage financial systems
with external assets and liabilities
:star: International Centres which provide low /
zero tax, moderate financial regulation, bank secrecy & anonymity
:star:Maintain extensive legislation & to take measure to reduce criminally related activities
:star: Must have / maintain necessary structure for providing the varied services required by global clientele
Facilities Offered By Offshore Financial Centres
Offshore Savings Account
:silhouette:Most people thought that, it requires millions to open a savings account at offshore banking
:silhouette: However, based on the OFCs around the world, it is a common misconception
:silhouette: Some offshore savings accounts accept opening deposits of as little as USD1 & should denominated in foreign curency
:silhouette: someone may have to invest a minimum of USD 5,000 OR USD 10.000 to open an offshore savings acount
:silhouette:Charges for operating an offshore savings accounts may be high
:silhouette: e.g. making a withdrawal, fee can be as high as USD25 a time, so depositing a small balance in an offshore savings account may not make financial sense
Offshore Current Account
:pencil2:This account is varied with the one offshore under the onshore current account, therefore the current offered are normally in foreign or major currencies
:pencil2:depositor can use a debit card to withdraw money in either Dollar, Euro and Sterling currencies for free, again helping to save on charges.
:pencil2:the ease of movement between accounts also means whoever can protect their money against currency fluctuations
:pencil2: E.g those who are traveling to UK can open their current account in Sterling before arrival, can get their salary pain in, pay UK bills, set up standing orders and make payments
: :pencil2:If in the process of buying or investing in property abroad, a depositor can open accounts in Euro, US dollar or Sterling to pay his/her mortgage or local bills and talk to English speaking advisers
Forex Services
Services available for Forex transaction are :
:<3:converting money for a property i.e. house purchase in a foreign currency
:<3:making regular payments in a foreign currency i.e. paying monthly school fees in a different currency to which a person receives his/her income
:<3: Moving to a foreign country with the need to exchange money
:<3:making a foreign currency payment at a specific time in the future
:<3: Managing the client's overall foreign currency exposure
:<3:frowards contracts and spot transaction,
:<3: Managing currency risk, i.e. liquidity, fluctuation.etc
Offshore Investments
types of services offered including the following instruments :
:star: structured notes
:star: structured deposits
.
INTRODUCTION OF INTERNATIONAL BANKING
EVALUATION OF INTERNATIONAL BANKING
COLONIAL BANKING
*Good reasons to promote and develop this system
:star:They believe that profits could be made in two conditions : force trade and natural resource exploitation
:star:The ruling nation was assumed to be intrinsically superior .
:star:The conventional tenet of white colonizers held that there was an obligation to "rule subordinate, inferior, and less advanced peoples
:star:The Europeans viewed whatever their belongings i.e cultures,government, administrative and educational policies as superior
Modern International Banking
:green_cross: Three form of waves
:red_flag:First wave
:red_flag:Second wave
:red_flag:Third wave.
COMPONENT OF INTERNATIONAL BANKING
GLOBALIZATION
LIBERALIZATION
INTEGRATION
FACTORS OF INTERNATIONAL BANKING GROWTH
:pencil2: Trade block/ Agreement
:pencil2: Low marginal cost
:pencil2: Knowledge Advantage
:pencil2: Information Services
:pencil2: Prestige / Reputation
:pencil2: Banking Regulation
:pencil2: Multinational Advantage
:pencil2: Transaction Costs
:pencil2: Market Needs
:pencil2: Risk Reduction
:pencil2: Economic Development
:pencil2: Competitive market
:pencil2: Government Policies
:pencil2: Techological Changes / Advances
:pencil2: Growing Diversity
:pencil2: Economies of Scale
:pencil2: ondition in Host countries :pencil2: Comparative Advantege
: :pencil2: Efficiency Considerations
GLOBAL AND EMERGING MARKET BANKING SYSTEMS
:<3: Tradisional and modern foreign banking
:<3: Post-Crisis of the international banking
:<3: Multinational banking
:star: Correspondent Banking
:star: Resident Representatives
:star: Bank Agencies
:star: Foreign Branches
:star: Foreign Subsidiaries and Affiliates
:star: Consortium Banks
Types of offshore banking distribution strategies
private banking
rendered on more personal basis
traditionally - private bank were linked to families for several generations
banking, investment, acquisition & other financial services provided by banks to private individuals ( those enjoy high levels of income / invest a huge amount of assets )
retail banking
a banks performs transactions directly with end customers
services offered
savings account
mortgages
personal loans
debit cards & credit cards
personal banking services
branchless banking
complement an existing bank branch network
advantages of mobile phone branchless banking
no need account - only mobile phone number
suitable for people with low income
small fees for the agents
reduced transportation cost and time
open 24 hours a day
used for delivering financial services w/out relying on bank branches
