CHAPTER 2 IB (Types of international banking offices ( ( Representative…
CHAPTER 2 IB
Types of international banking offices
Considered as the lowest possible of banking exposure to the foreign market
Provide trade related and Forex services to its MNC cutomers
Establishes a physical presence in the foreign market
Has very limited functions
They help MNC clients with the information about business practices,
economic information and credit evaluation of customers and others
They operate like banks but legally part of the parent bank and not seperate entity
They acts functional arm of the head office
The rely on the banking regulations of home country and foreign country
1) To offer more extensive range of services
2) To take advantages on the situations not subject to local reserve requirement.
3) To compete with host country banks at the local level
4) To internationalizing bank operations .
A loacally incorporated bank that is either wholly owned or owned in major part of foreign parent.
They engages in fully banking activities as permitted by host country regulations
They also may established as a new entity of organizations through m&a activity.
The disadvantages is they must be separately
capitalized from its parent bank
is partially owned but not controlled by its foreign parent.
The similarities of both bank are
They are operate under the banking law of the country they are incorporated
They are allowed to underwrite securities
Offshore Banking Centres - Their primary activity is to seek deposits and grants loans in different currency from the host country or local government.
The bank functions
1) Low reserve requirement and no deposits insurance
2) No subject to interest rate ceiling
3) Take advantage of low tax location
4) Low margins , low overhead due to high degree of competitiveness
5) No pressure from domestic government
Reason offshore banks are
1) Low or no taxes
2) Services provided for non residents clients
3) No forex control
4) Legal regimes that uphold bank secrecy
Facilities offered by the
international commercial bank
This is done by issuing the LOC
Loc indicate the customer has deposited the full amount due on an order with a company that located in a different country.
The seller can feel assured of being paid if it ships good to its offshore customers.
Importer request letter of credit for the amount of sale bank issues letter of credit for a fee.
US bank sent letter of credit to exporter.
Exporter send goods to the importer.
Exporter present foreign bank with time draft on the US Bank.
US Bank send immediate payment of exporter.
Foreign Bank return draft bank to US Bank, which sent payment.
Issuing Bank accept the draft and decide whether to hold or sell it when the draft matures, the holder demand payment from the importer.
Is checking account in which the owner account is entitled to receive his or her funds on demand and to write check on the account which transfers legal ownership of fund to others.
The bank offer a number of transactions account and they are serve as the basic medium of exchange in the economy which amounting about half of the total money supply
the common type of banking facility
When fund are deposited or withdrawn from saving accounts, the customer must have the passbook and the transaction were recorded.
Unlike demand deposit because they have the maturity date and funds cannot transfer the ownership to another party by a written check.
Negotiable certificate of deposits
Commonly denominated a very large amount
Very unsecured liabilities of commercial bank
Have fixed maturity date
The exchange and trade foreign currencies
To facilitate the international trade and development
The largest market in the world due to high volume of trading
The main participants forex is the larger international banks
When company doing business in another country, they have to paid in the form of local currency of that country.
Companies need to borrow money to cover purchases of production raw material, machinery parts, inventory or payroll.
they also involve borrowing or lending ln the eurocurrency market
participating in the loan syndicate by lending to MNCs
Venture in project financing
participating in the underwriting of eurobonds and foreign bond issues
The effect of international
foreign commercial banks
Managerial and marketing knowledge
developed at home can be used abroad with low marginal cost
means that the foreign bank subsidiary can draw on the parents bank's knowledge of personal contacts and credit investigations for use in that foreign market.
Home nation information services
where local firm in a foreign market may be able to obtain more complete information on trade and financial market in the multinational bank's home nation than the foreign domestic bank
whereby the multinational banks are often not subject to the same regulations as local banks
may offer opportunities to growth that not found domestically
Negative effect of international transaction
The client know the actual information and have the tendency to fraud and susceptibility to penalties
Moral Hazard and rationing
can be happened when sovereign forces borrower to extend more credit than is optimal
Free rider problems in resolution of crises
It is never in the individual bank's interest to forgive debt
Some rely much more in equity than deposits
equity/ shares cannot be classified as cash equivalents if they raise too much equity that might have losing of control
Problem regarding international regulation for certain countries
Types of offshore banking distribution strategies
Used for delivery financial services without relying on bank
The example mediums of transaction are internet , ATM, POs devices, EFTPOS devices and mobile phone
The advantages of mobile phone branchless banking
1) Very mobile
2) open 24hrs a day
3) May withdrawn / deposits a small amount of money such as RM1
4) Almost no papereork
5) Suitable for people with low income
6) Reduce transportation cost & time
It included banking, investment , acquisition and other financial services provided by banks that for private individuals which they can enjoy high levels of income and invest huge amount of assets.
It rendered on more personal basis.
Traditionally private banks were linked to families for several generations
also as personal banking services
A bank performs transactions directly with end customers
Services offered are saving acc, mortgages, personal loans, debit&credit cards, current acc, ATM cards, traveller check and others