CHAPTER 2 INTERNATIONAL COMMERCIAL BANKING (INTRODUCTION :bird: (:!:…
CHAPTER 2 INTERNATIONAL COMMERCIAL BANKING
BANKING DISTRIBUTION STRATEGIES
forms an important, high-level and more exclusive subset of wealth management
consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by single designated relationship manager
it is banking, investment, acquisition and other financial services provided by banks to private individuals who enjoy high levels of income or invest in a sizable amount of assets
a bank performs transactions directly with end-customers, rather than large corporations/business entities or other banks
services offered include savings accounts, mortgages, personal loans, debit cards and credit cards
also termed as personal banking services
Eg: Internet, Automated Teller Machine (ATM), POS devices, EFTPOS devices and mobile phone
advantages of mobile phone branchless banking;
very mobile (users and agents)
open up to 24hours/day
may withdraw or deposit a small amount
almost no paperwork (administration)
suitable for many people with low income
a distribution channel strategy used for delivering financial services without relying on bank branches.
TYPES OF INTERNATIONAL BANKING OFFICES
CORRESPONDENT BANK :checkered_flag:
:<3: Considered as the lowest possible of banking exposure to the foreign market.
:<3: To provide trade-related and FOREX services for its MNC customers in the foreign market without to establish it own physical presence in the foreign market.
:<3: Smaller foreign banks that want to do business say in the US, will enter into a correspondent relationship with large US bank for a fee.
:<3: Large banks provide international trade facilities (import & export) and FOREX services for the smaller banks so these banks do not have to incur the expense.
REPRESENTATIVE OFFICE :checkered_flag:
:fire: Establishes a physical presence in the foreign market that has very limited functions.
:fire: This not allow to offer traditional banking services
:fire: There is no traditional credit services provided by rep office
:fire: The office looks for foreign market opportunities and serves as liaison between parent and clients.
Foreign Branches :checkered_flag:
:<3: Operates like a local bank but is legally part of parent bank not a separate entity.
:<3: Subject to both the banking regulations of home country and foreign country.
REASONS FOR ESTABLISHING A FOREIGN BRANCH
:fire: To offer more extensive range of services.
:fire: To take advantage on the situations not subject to local reserve requirements or deposit insurance.
:fire: To compete with host country banks at the local level
:fire: To internationalizing bank operations
SUBSIDIARY BANK :checkered_flag:
:<3: Is a locally incorporated bank that is either wholly owned in a major part by a foreign parent.
:<3: Engages in full banking activities as permitted by host country regulations.
:<3: Established as a new entity of organization or through the M&A activity of an existing bank.
:fire: Is one that is only partially owned but not controlled by its foreign parent.
:fire: Both subsidiary & affiliate bank operate under the banking laws of the country in which they are incorporated.
:fire: Allowed to underwrite securities
OFFSHORE BANKING CENTRES :checkered_flag:
:<3: Is organized to permit external accounts beyond the normal scope of local economic activity
:<3: Host country usually grants complete freedom from its governmental banking regulations.
:<3: Operate as branches/subsidiaries of the parent bank
OFFSHORE BANKING CENTRES FUNCTION WITH LOWER SPREAD
:fire: Low reserve requirement & no deposit insurance
:fire: Not subject to interest rate ceilings
:fire: Take advantages of low tax location
🎞 EFFECT OF INTERNATIONAL COMMERCIAL BANKING
:tada: The resulting increased competition has forced banks to become even more competitive and effecient.
:tada: Transactions costs of multinational banks may be able to cicumvent goverment currency controls.
:tada: Foreign markets may offer opportunities to growth not found domestically.
:tada: Risk reduction and greater stability of earnings due to diversification.
:tada: Diverse choices of consumer banking and financial products/ services.
🎞 EXAMPLES OF ADVANTAGE MADE THROUGH TRANSACTION.
:warning: Risk sharing, currency and interest rate swaps reduce customers' exposure to exchange rate risk.
:warning: Liquidity, bank participation in FOREX markets provides liquidity and reduces transaction costs.
Functions of international Commercial Banks
:explode:The function include:-
1) Providing facilities for saving through saving through savings, current and fixed/time deposit account and other financial instruments.
2) Providing facilities to effect payments on behalf of its customers.
3) Providing credit/loan/advance facilities involve both to individual borrowers and corporate customers.
4) Financing government through the purchase of government securities and treasury bills (TBs).
5) Providing a wide range of other banking services such as remittances, FOREX transactions and the financing both domestic and international trade.
:!: Commercial banks do not create money.
:!: Move money from the capital markets to businesses and institutions.
:!: Banks get their money through business checking or deposit accounts, services fees and by issuing certificates of deposit (CD) and banker's acceptances(BAs).
:!: Money market instruments that are collateralized by letters of credit (LOC) used in trade finance and commercial paper (CP)
:!: Offers services such as trade finance, project finance or joint venture, payroll, foreign exchange transactions and trading, lock boxes for collecting payments and general corporate finance.
:!: Without the establishment of commercial banking system or sector, the international finance or trade would not exist.
:!: Commercial bank specialize in transferring funds or debts and translation of business practices between different countries and different customs all over the world.
:!: The global nature of commercial banking also makes possible the distribution of valuable economic and business information among customers and the capital markets of all countries
:!: Commercial banking also serves as a worldwide benchmark or indicator of economic health and business trends.
FACILITIES INTERNATIONAL COMMERCIAL BANK
A. TRADE FINANCE
:<3:Customer deposited full amount in different country
:<3:Seller fell assured being paid if ships to customer.
:<3: lssue Letter of Credit (LOC)
:<3:Used by company to guarantee manufacturer's loan
B. DEPOSIT FACILITIES
:<3:Checking account in the owner account to receive her @ his fund
:<3:Individual, government and corporation can own deposit demand
:<3:Primarily for transaction purposes
:<3:Customer receive quarterly statement from bank & saving transaction electronically
:<3: Support green banking campaign with paperless approach
:<3:Passbook had to be presented & transaction recorded
C. FOREIGN EXCHANGE
:<3:Main participant i larger international banks
:<3:Trades between exchange foreign dealer
:<3:Company do business in other currency, paid in local currency
:<3:Income used to pay local worker & operational expense such as office rental, utilities and supplies.
:<3:Example, central bank control aspects of money flow such as inflation, money demand and supply, interest rate.
D. CORPORATE FINANCE
:<3:Companies always need to borrow money to cover purchases production inputs.
:<3: Banks with oversea branches can simplify process of corporate finance
:<3:Involve borrowing/lending in the Eurocurrency market, , participating in the international loan syndicate by lending to MNCs