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CHAPTER 2 : INTERNATIONAL COMMERCIAL BANKING (SERVICES OFFERED (…
CHAPTER 2
:
INTERNATIONAL COMMERCIAL BANKING
TYPES OF INTERNATIONAL BANKING OFFICES
Correspondent Bank
Lowest possible of banking exposure to foreign market
Provide trade related and FOREX services without to establish its own physical presence
Subsidiary & Affiliate Bank
Subsidiary bank - A locally incorporated bank that is either wholly owned/ owned in major part by a foreign parent
Affiliate bank - partially owned but not controlled by its foreign parent
Engages in full banking activities as permitted by host country regulations
Both allowed to underwrite securities
Offshore Banking Centres
Primary activities - To seek deposits and grant loan in different currency from the host or local government
Types of offshore banking distributions strategist :
Branchless banking
Used for delivering financial services without relying on bank branches
Advantages : -very mobile
-open 24 hours
Private banking
Banking, investment, acquisition and other financial services provide by bank to private individuals
Retail banking
Also termed as personal banking services and a bank performs transaction directly with end customer
Representative Office
Establishes a physical presence in the foreign market but has very limited function
They assist MNC client with information about local business practice
Foreign Branches
Operate like a local bank but is legally part of the parent bank, not separate
Reason for foreign branchless
To offer more extensive range of services
To internationalizing bank operation
FUNCTIONS
Provide facilities for saving, current and fixed deposit account
Provide facilities to effects payments on behalf of its customer
Providing credit/loans/ advance facilities
Both to individual borrowers and corporate customer
Financing government through the purchase of government securities & treasury bills
Providing a wide range of other banking services
Such as remittance for exchange transactions and the financing both domestic and international trade
Facilities
:star:Trade Finance
• By issuing letter of credit (LOC)
• LOC’s indicate the customer has deposited the full amount due to an order with a company located in a different country
• The seller company can then feel assured of being paid if it ships goods to it offshore customer
:fire:Foreign Exchange
(FOREX/Currency Market)
• To facilitate international trade and development
• Main participants are the larger international banks
• FOREX arrangement would be in the form of cross-border transantions and foreign investment
• When a company is doing a business in another country, it may be paid in the form of local currency of that country
•Some of this income will be used to pay local worker and cor operational expense such as office rental, utilities and supplies
:tada:Corporate Finance :tada:
• Companies need to borrow money to purchase raw materials, machine parts, inventory and or payroll
• Involves borrowing in the Eurocurrency market
• Participating in the international loan syndicate by lending to MNC
Syndicate loan dealt with credit facility offered simultaneously by a number of banks from more than one country who sign the same load agreement and stand equally in right of repayment
:<3:Deposit Facilities
• Demand deposit
• Checking account
• Saving deposit
• Time deposit
• Negotiable certificate of deposit (NCD)
Demand Deposit
Owner account is entitle to received his/her funds on demand and to write cheque on the account which transfer legal ownership or fund to other.
Checking Account
Serve as the basic medium of exchange in the economy, amounting for about half of the total money supply.
Saving Deposit
When funds were deposited or withdrawn from saving account, most consumer did not receive passbook anymore instead they received quarterly statement from the bank.
Time Deposit
Unlike demand deposit in that are usually legally as a result of a maturity date and fund cannot be transfered to another party by a return cheque
NCD
Issued by larged, well known commercial bank of the highest credit standing and traded actively in the well organised secondary market
It can be redeemed at anytime in the secondary market without loss of deposit funds to the bank.
POSITIVE EFFECT
:smiley:Knowledge advantages
Very large multinational bank
:lock:Home nation information services
:black_flag:Foreign market may offer opportunities
:green_cross:Managerial & marketing advantages
It can be used abroad with low marginal cost. As there is knowledgeable workers and also international network to facilitate this facility, it will easy and able to cut expenses.
Risk risk reduction are gratest ability of earning due to diversifications. Diverse choice of consumer banking and financial products or service.
Local firms in the foreign market may be able to obtain more advance information on trade and financial market in the multi national bank’s home nation that is obtainable form foreign domestic bank
Have high perceived prestige or image or reputation, which can be attractive enough to potential clients. Transaction cost of multinational bank may be able to circumvent government currency controls
The foreign bank subsidiary can draw on the parent bank’s knowledge of personal context and credit worthiness for used in that foreign market
NEGATIVE EFFECTS
:!!:Moral hazard
:pen: Information asymmetry
:smiley:Free rider problems in resolution of crises
:green_cross:Some rely much more on equity than deposits
:star:Problems regarding international regulations in certain countries
Equity cannot be classified as cash equivalents . If they waste too much equity capital, it risk loosing control of the company
It is never in the individual bank’s interest to forgive debt
On overall indebtedness and as susceptibility to penalties enhance adverse selection
It can be happened when sovereign causes borrower to extend more credit than is optimal
SERVICES OFFERED
:lock: Trade Finance
:star: Project Finance
:pen: Payroll
:star: Foreign exchange transactions&trading
:check: Lock boxes for collecting payments
:lock: General corporate finance
INTRODUCTION
ICB is the interediaries that move money from the capital markets to business & institutions.