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Chapter 2: International Commercial Banking (EFFECTS (🍭Managerials &…
Chapter 2: International Commercial Banking
EFFECTS
🍭Managerials & marketing advantage
🍭Knowledge advantage
🍭Home nation information services
🍭Large multinational banks - reputation can attract potential client
🍭Regulatory advantage
🍭Risk reduction & greater stability
🍭Diverse choices
INTRODUCTION
🍦The intermediaries that move money from the capital markets to businesses and institution
🍦Commercial banking play important role in supporting international finance/trade
🍦Commercial bank specialize in transferring fund/debt and translation of business practices between different countries and different customs
🍦Serves as a worldwide benchmark
🍦Commercial bank offer services
Trade finance
Project finance/joint venture
General corporate finance
Payroll
Foreign exchange transaction and trading
Lock boxer for collecting payments
FUNCTIONS
🍦Provide credit/ loan/advance facilities
🍦Financing government (purchasing government securities)
🍦Provide facilities to effect payment
🍦Also arrange deals between their customers globally including strategic partnerships & project fulfilment agreements
🍦Provide facilities for saving (saving, current and fixed deposit account and other financial instrument)
🍦Other banking services (remittances, FOREX, financing both domestic & international trade)
FACILITIES
🍦Deposit Facilities
-Demand deposit
-Checking account
-Savings deposits
-Time deposits
-Negotiable certificate of deposit (NCD)
🍦FOREX/Currency Market
-To facilitate international trade and development
-The largest market in the world
-Main participants are larger international banks
-FOREX arrangement would be in the forms of cross border transactions & foreign investment
-It assists in the implementation of risk management under hedging exchange rate risk
🍦Trade Finance
-By issuing Letter of Credit (LOC)
-The seller company can feel assured of being paid if it ships goods to its offshore customers
🍦Corporate Finance
-Companies need to borrow money to purchase raw materials, machine parts, inventory or payroll
-Involve borrowing and lending in the Eurocurrency market
-Participating in the international loan syndicate by lending to MNCs
-Participating in the underwriting of Eurobonds & foreign bond issues
-Other banking services
NEGATIVE EFFECTS
🍭Information asymmetry
🍭Moral hazard
🍭Free rider problems in resolution of crises
🍭Some rely much more on equity than deposits
🍭Problems regarding international regulations in certain countries
TYPES OF OFFSHORE BANKING DISTRIBUTION STRATEGIES
🧀Retail Banking
-Termed as personal banking services
-A bank performs transactions directly with end customers
-Services offered:
•Saving account
•Mortgage
•Credit cards
•Personal loans
•Debit cards
•Current account
🧀Private Banking
-Banking, investment & other financial services provided by banks to private individuals
-Rendered on more personal basis
-Consists of banking services, brokerage, limited tax advisory services, offered by a single
-Private banks were linked to families for several generations
Examples: First banks in Venice focused on managing personal finance for wealthy families for a specific period of time
🧀Branchless Banking
-Used for delivering financial services without relying on bank branches
-Complement an existing bank branch network
-Example mediums of transactions:
~Internet
~ATM
~POS devices
~EFTPOS devices
~Mobile phones
Advantages
•Very mobile
•May deposit/withdraw a small amount of money such RM 1
•Only need a mobile phone
•Small fees for the agents
•Almost no paperwork
•Open 24 hours a day
•Reduced transportation cost & time
TYPES OF INTERNATIONAL
BANKING OFFICES
🌰Offshore Banking Centres
-Primary activities is to seek deposits & grant loans in different currency from the host/local government
-Primary credit services in foreign currency
🌰Subsidiary and Affiliate Bank
-Subsidiary and Affiliate allowed to underwrite securities
-Subsidiary and Affiliate operate under the banking laws of the country in which they are incorporated
-Affiliate bank is partially owned but not controlled by its foreign parent
-May established as a new entity of organization/ through the M&A activity of an existing bank
-Engages in full banking activities as permitted by host country regulations
-Subsidiary bank is a locally incorporated bank that is either wholly owned/owned in major part by a foreign parent
🌰Foreign Branches
Reasons for foreign branches:
Internationalizing bank operations
3.Compete with host country banks at the local level
Take advantage on the situations not subject to local reserve requirement/deposit insurance
1.Offer more extensive range of services
-More independent than representative office
-Subject to both the banking regulations of Home Country & Foreign Country
-Acts as a functional arm of the head office
-Operate like a local bank but is legally part of the parent bank, not a separate entity
🌰Correspondent Bank
-Provide trade-related & FOREX service for its MNC customers in the foreign market without to establish its own physical presence
-Considered as the lowest possible of banking exposure to the foreign market
🌰Representative Office
-They assist MNC clients with information about local business practices, economic information, credit evaluation of customer
-Establishes a physical presence in the foreign market but has very limited function