AJA4604.14 International Banking & International Debt Crisis

1. AJA4604.14International Banking & International Debt Crisis I. International Banking Several Organizational forms permit banks to deliver international banking services to their customers: (1) Representative Offices (2) Shell Branches (3) Correspondent Banks (4) Branch Banks (5) Edge Act Corporations Edges (6) Subsidiaries & Affiliates (7) Bank Consortia (8) International Banking Facilities (IBF)

2. (1)Representative Office Is a foreign office where one or more individuals represent the bank. Representative non-banking offices are established in a foreign country primarily to assist the parent bank's customers in that country. A representative office is the primary vehicle by which an initial presence is established by a bank in a foreign country.

3. (2) Shell Branch • One of the easiest and cheapest way to enter international banking. A shell branch is a "booking office" (agency) located abroad for a "domestic" bank's transactions. • The booking office has no contact with the public. Limited to interbank money market transactions, foreign currency transactions, and purchase of small shares of syndicated loans, …

4. (3)International Correspondent Banking Most major banks maintain correspondent banking relationships with local banks in market areas in which they wish to do business. e.g. "Michigan National" may have a correspondent relationship with a bank in Brasilia, Lagos, Cairo, London... Correspondent services include: accepting drafts, honoring letters of credit, furnishing credit info, collecting/ disbursing internal funds, investing funds in international money markets. In its basic form, Correspondent Banking describes an active clearing account relationship between two banks. Through correspondent banking, a domestic bank is able to meet the requirement of their domestic customers' foreign exchange and trade dealings.

5. (4)Foreign Branch A foreign branch bank is an integral part of a bank and acts as a legal and functional extension of the head office. It carries on complete domestic and international banking business in a host country, subject to the host country regulations. It accepts deposits, extends credits, participates in money market, and other transactions.

6. (5) Edge Act Corporation (Edges) • Are US bank subsidiaries that can carry on international banking and investment activities. • They are physically located in the US, usually in a state other than where the head office is located - to get around the prohibition on interstate branch banking. • Services include handling foreign customers and the international business of domestic residents, foreign exchange trading, export financing, international fund remittances.

7. (6)Foreign Subsidiaries and Affiliates A Subsidiary: is a separately incorporated bank owned entirely, or in part, by in part, by a US bank, a US bank holding company or an edge act corp. It provides local identity and the appearance of a local bank. An Affiliated Bank: Is a locally incorporated bank, owned in part, but not controlled by an outside parent. Usually a minority, non-controlling equity share is owned. Local majority share holders exist.

8. (7)Consortium Banking Banks started financing large international projects through formation of banking consortia from the mid 1960s. Is a joint venture, separately incorporated, owned by two or more banks, usually of different nationalities For example: a. Midland & International Banks made up of Midland Bank (UK), Toronto Dominium Bank, Standard & Chartered (UK), and Commercial Bank of Australia.

9. b.Orion Bank Ltd made up of Chase Manhattan Corp (US), National Westminster Bank (UK), Royal Bank of Canada, Westdeustsche Landers Bank Gitrozentrale (Germany), Credito Italiano & Mitsubishi Bank (Japan). • Such group of banks engage in medium, and long-term lending, intermediation of corporate mergers & acquisitions underwriting of public / private security issues, government economic development projects (syndicated loans).

10. 8) International Banking Facilities (IBF) In late 1981, the FED authorized US Financial institutions, including US branches and agencies of foreign banks to establish IBF. IBF permitted to conduct international banking business - largely exempt from domestic regulatory constraints. IBF represents attempt to attract Eurodollar business back into the US from London and offshore locations.

11. IBF permitted to accept deposits and make loans to non-residents. • Not subject to many of the regulations on domestic banks - reserve requirement & interest rate ceilings. • Attract funds largely from large corporations and foreign government agencies. • Located in major financial centers. • Transactions are large, usually $1m or more. No certificates of deposits.

12. International Banking Act (IBA) The IBA (1978) Restricts foreign-owned banks from accepting deposits across-state lines - except by establishing an Edge Act Corporation. Also requires deposit insurance. It effectively eliminates many of the comparative advantages of foreign banks operating in the US. The completion of market integration by the EU nations provides: Free capital flows throughout Europe Similar regulatory/competitive environment in Europe Enables banks to service EU with a single license. Recent Regulatory Developments

13. Global Uniform Capital Adequacy Guidelines • In July 1988, 12 major industrial countries agreed on standardized guidelines on capital adequacy for banks. • This provides a level global competitive field for banks.

14. II. International Debt Crisis 1. Definitions • Debt • External Debt 2. The Parties • Less Developed Countries (LDC) • Large Money Center Banks • The Bank for International Settlements (BIS) • The International Monetary Fund (IMF) • The World Bank (IBRD) • The Organization for Economic Cooperation and Development (OECD)

15. 3. Factors Leading to the Debt Crisis - The Oil Price Shocks - Interest Rate Developments - Aggressive Bank Lending - Global Economic Conditions - Capital Flights from the LDCs - Corruption in the LDCs

16. - Imprudent Loan Decisions - Mismanagement of Loans - Falling Commodity Prices - Deterioration of Term of Trade (Px / Pm <1) - Recession in Industrial Countries - resulting in export decreases for developing countries - Under-assessment of Risk on the Part of Lending Institutions or “disaster myopia”

17. Other Contributing Factors • Domestic policies involving overvalued currencies and inappropriate liberalization of trade or capital account. • Speculative capital flight from LDCs. • Deterioration of the world economy. • Fiscal deficits incurred by many countries, especially Latin American countries.

18. 4. External Debt Management Government-driven proposals Multilateral / international debt facility 5. Currency Crisis in Mexico 6. Currency Crisis in Brazil 7. The Asian Currency and Stock Market Crisis 8. Default and Currency Crisis in Argentina 9. Currency Crisis in Russia 10. Management of Global Interdependence.