INTERNATIONAL BANKING - INTRODUCTION

1. INTERNATIONAL BANKING - INTRODUCTION • Bank and International Banking • Theory and Evolution • Brief History of International Banking • International Banking Activities in M’sia * Please read Chapter 1 & 2 in your textbook.

2. The Eurocurrency & Eurobond Markets • One of the most significant development - postwar period. • Eurocurrencies are currencies held outside their home country i.e eurodollars are dollars on deposit outside the US. • Eurodollar market = international money market. • Emerged in late 1940s and 1950s when large amounts of US dollars ended up outside US (bank branches & US business exploded around the planet) • Eurobond market = international capital market. • Developed in the early 1960s when in 1963, Autostrade issued first eurobond worth $15 million. • Also in 1963, US government imposed an interest equalization tax in effort to reduce the dollar outflow which in turn caused US corporations turned to the eurobond market to raise capital.

3. Development of Eurodollar Market • Significant for the following reasons: • The market served as a source of short-term funds for the trade financing activities of IBs • The eurocurrency market facilitated foreign exchange transactions by banks & provided short-term money market trading opportunities. • IBS used the market as an outlet for placing surplus funds temporarily at attractive yields. • Eurocurrency interbank market became central mechanism to channel flows of international funds among banks which gave birth to London Interbank Offered Rate (LIBOR) • Also provides an outlet for the recycled petrodollars in early 1970s.

4. Development of Eurobond Market • From 1963 – 1983, bonds issued worth $266 million • An important element in remaining competitive for any major IB compared to US commercial banks which prohibited by legislation from involvement in securities. • Stimulated the development of Euroclear (1968) & CEDEL (1970) – clearing houses for eurobonds. • Subject to self-imposed standards of practice and usually listed on the Luxembourg or London stock exchange. • Early 1990s, developed into a more mature market where the confidence on the market underpinned by these factors; • Both London & Luxembourg stock exchange have their own specific disclosure requirements • Minimum standard are set by the Association of International Bond Dealers (AIBD)

5. The Expansion of International Banking • Grew in 1960s and 1970s with US institutions dominating – expanding into foreign market. • Early 1970s saw the hike in oil prices – required recycling - US & European banks became active agents. • Competition among IBs to lead large syndications – too much credit funneled into the developing worlds. • Developing world’s debt crisis. August 1982 – Mexican government unable to meet its debt repayment which bring profound problems to IBs – debt rescheduling, forced new lendings & debt write-offs.

6. Cont’d…. • Mid 1980s – declining of US dominance as European & Japanese institutions grew & become more competitive. • The development of eurocurrency market – recast European banks as tough global competitor • Middle & late 1980s – depreciation in the USD aided the international expansion of Japanese banks which led them as major international players. • 1980s deregulation of the US banking system led to domestic problems e.g savings & loans banking crisis. • By 1990s – US banks has restructured and reemerged as more competitive institutions.

7. Banking in 1990s • End 1990s – IB was dominated by large institutions (in the most developed countries) • Major trends – consolidation within national frontiers, cross-border mergers & shift to universal banking. • IBs have to invest, develop & implement new technologies to remain competitive. • Rise of nonbank financial institutions i.e insurance companies, pensions funds & assets management firm – led to proposed bank regulation changes. • Globalization of the market for financial services. • By the beginning of 2000s, IB in the process of reinventing itself.

8. International Banking Activities in Malaysia

9. Why Go International?? • Domestic activity restrictions • Technology and communications improvements • Relationship with customers • Expansions • Ready access to interbank market • Risk diversification • Differences in banking regulation

10. Ways For International Presence • Selling financial services from domestic offices to foreign customers • Selling financial services through a branch, agency or representative office • Selling financial services to a foreign customers through subsidiary companies in the foreign customer’s country

11. Example of Banking Services; • Transactions with foreigners and domestic residents. • Participate in international loan syndication • Facilitate foreign exchange transactions • Facilitate international trade finance • Advising clients on foreign exchange risk hedging

12. Advantages Risk diversification Economic of scale Innovations Funds source Customer relationship Regulatory avoidance Disadvantages: Information/monitoring costs Nationalization/expropriation Fixed costs International Expansion:

13. Factors Deterring Expansions • Capital constraint • Emerging market problems • Competition • Political and country risks • Exchange rate risks

14. Future Problems for IB • Growing customer use of securities markets to raise funds • Developing better methods for assessing risk in international lending • Adjusting to new market opportunities:deregulating and new international agreements