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Metha-FM.qxd 10/31/03 1:47 PM Page i International Bank Management Metha-FM.qxd 10/31/03 1:47 PM Page iii International Bank Management Dileep Mehta and Hung-Gay Fung © 2004 by Dileep Mehta and Hung-Gay Fung 350 Main Street, Malden, MA 02148-5020, USA 108 Cowley Road, Oxford OX4OX4 1JF, UK 9600 Garsington Road, Oxford 2DQ, UK 550 Swanston Street, Carlton,Victoria 3053, Australia The right of Dileep Mehta and Hung-Gay Fung to be identified as the Authors of this Work has been asserted in accordance with the UK Copyright, Designs, and Patents Act 1988 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs, and Patents Act 1988, without the prior permission of the publisher First published 2004 by Blackwell Publishing Ltd 2007 Library of Congress Cataloging-in-Publication Data Mehta, Dileep R., 1939International bank management/Dileep Mehta and Hung-Gay Fung p cm Includes bibliographical references and index 978-1-4051-1128-7 (hardcover: alk paper) ISBN 1-4051-1128-3 (hardcover: alk paper) Banks and banking, International–Management Bank management I Fung, Hung-Gay II.Title HG3881.M422 2004 332.1’5’068–dc21 2003006953 A catalogue record for this title is available from the British Library Set in 10/121/2 Bembo by Newgen Imaging Systems (P) Ltd, Chennai, India Printed and bound in Singapore the United Kingdom by TJ International, Padstow, C.O.S Printers Pte Ltd Cornwall For further information on Blackwell Publishing, visit our website: http://www.blackwellpublishing.com Metha-FM.qxd 10/31/03 1:48 PM Page v Contents List of Figures List of Tables Preface Part I Overview Basic Premises 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Part II ix x xiii Introduction Risk-Return Tradeoffs Why Financial Institutions Are Necessary Competitive Markets and Impediments Market Hierarchies Uniqueness of a Bank Risk Dimensions of the Banking Business Conclusion 3 10 10 12 14 Foundation 17 Globalization of Commercial Banking 19 2.1 Historical Background 2.2 Structure of an International Banking Organization 2.3 International Banking Activities 2.4 Globalization of Financial Markets 2.5 Conclusion Appendix A: Foreign Exchange Rate Systems Appendix B: European Union Appendix C: Balance of Payment 19 23 28 29 33 34 37 40 Metha-FM.qxd 10/31/03 1:48 PM Page vi vi CONTENTS Appendix D: US Regulation for Foreign Banks Appendix E: Deregulation, Globalization and Japanese Banking 41 42 Foreign Exchange Market Participation 47 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 47 48 49 56 59 69 76 76 Eurocurrency Market 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Part III Introduction Institutional Background Mechanics of Currency Quotes and Trading Locational Arbitrage Theories of the Foreign Exchange Market Motivations of Participants in the Foreign Exchange Market Risk-Return Tradeoffs in Foreign Exchange Transactions Conclusion Introduction Development of the Eurocurrency Market Eurocurrency Centers Eurocurrency Interest Rates Activities in the Eurocurrency Market Eurocredits and Investments Conclusion 80 80 81 87 88 92 97 106 Futures and Options in Currency and Interest Rate Markets 110 5.1 Introduction 5.2 Forward and Futures Contracts 5.3 Functions of Futures Contracts 5.4 Option Markets 5.5 Option on Futures/Forward Contracts 5.6 Conclusion Appendix F: Derivation of the Futures Price Under Risk Neutrality Appendix G: Derivation of the Optimal Hedge Ratio Appendix H: Derivation of the Price Sensitivity Ratio 110 111 114 124 134 136 139 141 141 Applications 143 Swaps and Other Derivative Instruments 145 6.1 6.2 6.3 6.4 6.5 145 146 162 170 173 Introduction Swap Market Other Derivative Instruments Credit Derivatives Conclusion Metha-FM.qxd 10/31/03 1:48 PM Page vii CONTENTS International Credit Function for Private Business 176 7.1 Introduction 7.2 Cross-border Trade Transaction and its Financing 7.3 Trade-related Financing and Risk Insurance 7.4 Countertrade 7.5 Banking Services and Multinational Corporations 7.6 Special Financing Needs of Customers 7.7 Conclusion Appendix I: Private Credit (Loan) Analysis 176 177 182 187 191 192 199 201 Sovereign Risk Analysis 206 8.1 Introduction 8.2 Traditional Country Risk Analysis 8.3 Portfolio Approach 8.4 Debt Crisis Management in the 1980s 8.5 The Debt Crisis of the 1980s 8.6 Recent Financial Crises since 1990 8.7 Conclusion Appendix J: Chronology of the Asian Financial Crisis 206 207 212 214 221 224 244 246 Asset and Liability Management 249 9.1 Introduction 9.2 Interest Risk Measurement 9.3 Foreign Exchange and Gap Management 9.4 Convexity 9.5 Managing Interest Rate Risk 9.6 Conclusion Appendix K: Hedging Rule for a Bank Facing a Parallel Shift in Term Structure Appendix L: Derivation of the Duration Immunization Rule for a Bank Facing a Non-Parallel Shift in Term Structure 249 250 257 259 261 272 Part IV: Trends and Future Directions 10 vii 275 276 279 Capital Adequacy 281 10.1 10.2 10.3 10.4 10.5 10.6 281 283 284 285 297 301 Introduction The Key Role of Capital Development of Capital-based Regulation: Background Development of Capital Requirement in the USA Modifications in the Basel Standards Conclusion Metha-FM.qxd 10/31/03 1:48 PM Page viii viii CONTENTS 11 12 Toward Investment Banking Activities 305 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 305 306 310 316 322 328 329 330 Introduction Historical Background Major Investment Banking Activities Scope of Activities by Commercial and Investment Banks Mergers of Commercial and Investment Banks Capital Adequacy Regulations for Investment Banks Challenges and Opportunities Conclusion Bank Strategy 333 12.1 Introduction 12.2 Changes in External Environments:The International Dimension 12.3 Changes in External Environments:The Internet 12.4 Strategic Considerations: Activities and Resources 12.5 Conclusion Appendix M: Cost Analysis for Internet Transactions 333 334 340 343 346 347 Glossary References and Further Reading Index 350 367 373 Metha-FM.qxd 10/31/03 1:49 PM Page ix List of Figures 4.1 4.2 4.3 5.1 5.2 6.1 Rising term structure of spot and forward rates Declining term structure of spot and forward rates Computing the discount margin Call option Put option Plain-vanilla interest rate swap 90 90 100 125 125 148 Metha-FM.qxd 10/31/03 1:50 PM Page x List of Tables 1.1 2.1 C.1 E.1 E.2 E.3 4.1 4.2 5.1 6.1 6.2 6.3 6.4 6.5 7.1 7.2 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12 Market hierarchy and related impediments Foreign banks in the USA Illustration of a US balance of payment (in $ million) in 1994 Ratio of bank debt to assets for Japanese firms Ratio of deposit to GDP ROA and adjusted ROA for Japanese banks First round – IBM deposits $1 million from US Bank to Eurobank X Second round – Eurobank X loans $1 million to another Eurobank Y Results of the hedging activity Notional value of swap transactions (US$ billion) Indication pricing for interest rate swaps Interest rate scenarios before swap Interest rate scenario after swap Borrowing rates (%) for two firms in two currencies Payoff scenarios for project finance Typical risk of project finance The bank claims on Russia by different countries Currency value changes for different Asian countries External financing for the Asian region Regional annual growth rate of exports (%) Current account surplus (deficit) in terms of GDP (%) Real exchange rate (end of year data) Ratio of short-term foreign debt to reserves Size of banking sector Expansion of bank credit to private sector Non-performing loans (% of total loans) Incremental capital-output ratio (ICOR) Land values of Grade A office space for Thailand and Indonesia 11 25 42 43 44 44 85 86 129 147 149 150 150 151 196 196 227 228 229 230 231 231 232 232 233 234 234 235 Metha-Index.qxd 10/31/03 2:06 PM Page 381 INDEX Economic and Monetary Union (EMU), 37 equity markets, 39 European Monetary System (EMS), 63, 355 Exchange Rate Mechanism (ERM), 22, 33, 37 financial regulation, 38–9 insurance industry, 39 Maastricht Treaty, 27, 360 prospectus issues, 39 securities industry, 39 Euroyen, 83–4 evaluation of risks, 345 exchange controls, 88, 355 Exchange Rate Mechanism (ERM), 22, 33, 37 exchange rates see foreign exchange rates exchange risks, 13, 355 exchange-traded options see options exclusionary provisions, 215 exercise prices, 124, 355 Eximbank, 184–5, 186, 187, 356 export earnings decline South-East Asian currency crisis, 229–30 Export-Import Bank see Eximbank export trade notes (ETN), 183, 355 exporters, financing for, 183 external credit rating, 300–1 external environment changes international dimension, 334–5: arbitraging structural inefficiencies, 339; economic development, 335–6; phases of economy and relationship versus transaction orientation, 339–40; product life cycle, 336–8 Internet, 340: banking cost comparisons, 340–1; cost analysis for transactions, 347–9; cross-border payments, 342; strategic ramifications of banking activities, 341–3 factor income balance of payments, 40 factoring, 183, 356 FCIA (Foreign Credit Insurance Association), 186, 356 Federal Deposit Insurance Corporation (FDIC), 286 Federal Deposit Insurance Corporation Improvement Act (FDICIA), 286–7, 293 federal funds purchases, 266 Federal Reserve Bank of New York, 239–40 Federal Reserve System, 286 fees project finance, 344 381 syndicated loans, 102–3 financial innovations, 356 financial institutions financing for exporters, 183 financing for importers, 182–3, 184 leasing, 184 necessity for, 7–8 private credit analysis, 201–4 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), 286 financial intermediaries, 11–12, 356 financial leverage, project finance, 194 financial markets, 10, 11 competitive, 333–4 fixed exchange rate systems, 35 globalization of commercial banking see globalization of commercial banking meaning, 356 transaction costs, 337–8 well-developed, 336 financial regulation European Union, 38–9 financial resources, 343–4 Finland currency crisis, 22 FIRREA (Financial Institutions Reform, Recovery and Enforcement Act), 286 Fisher Effect, 66, 69, 356 Fisher Open, 65–7, 69, 258–9 fixed exchange rate systems, 35–6 meaning, 356 South-East Asian currency crisis, 236–7 floating currencies, 356 floating rate notes (FRN), 98, 99–100, 165, 356 floating rate system, 20 floors, 165, 358 flow-type projects, 193 foreign borrowers private credit analysis, 203 Foreign Credit Insurance Association (FCIA), 186, 356 foreign currency reserves decline, 35 foreign direct investment, 20, 47, 356 foreign exchange appreciation, 52 arbitrage, 56–9 ask prices, 49, 51–2 bid-ask spreads, 49, 51–2 Metha-Index.qxd 10/31/03 2:06 PM Page 382 382 INDEX foreign exchange (cont’d) bid prices, 49, 51–2 changes in currency value, 52 conversion, 29 cross rates, 56–9 denominating currencies, 50 depreciation, 52 devaluation, 52 direct quotes, 50–1, 354 equilibrium rates, 63 forward-forward swaps, 48 forward transactions, 48, 53–5, 61–3, 71, 73–6 gap management and, 257–9 indirect quotes, 50–1, 358 long positions, 48 nominal rates, 63 outright quotes, 53, 361 price-related risks, 48–9 provision, 29 real rates, 63 repurchase agreements, 48 settlement dates, 55–6 settlement risks, 49 short positions, 48 spot-forward swaps, 48 spot transactions, 48, 49–52, 71 spreads see bid-ask spreads above swap quotes, 54 swap (rate) quotes, 53 swaps, 48, 73 triangular arbitrage, 56–9 two-location arbitrage, 56 upvaluation, 52 value dates, 55–6 foreign exchange brokers foreign exchange market participants, 48 foreign exchange markets, 10, 11 Fisher Effect, 66, 69 Fisher Open parity, 65–7, 69 fixed exchange rate systems, 35 foreign exchange rate predictability, 68 forward, 53–5 hedging, 69: diversifiable risks, 69–70; hedge ratios, 70–2; systematic risks, 69–70 institutional background, 48–9 interest rate parity theory (IRPT), 59–62, 68 locational arbitrage, 56–9 market hierarchy and, 68–9 meaning, 356 mechanics of quotes and trading 49–56 participants, 48: motivations, 69–76 purchasing power parity (PPP) theory, 62–5, 68 retail, 47 risk-return tradeoffs, 76 speculation: pure, 72–3; spreading, 73–6; swap transactions, 73 spot, 49–52, 69 unbiased forward market hypothesis, 67–8 volume of trading, 47–8 wholesale, 47, 48 foreign exchange rates floating rate system, 20 IMF, 19–20 meaning, 355 pegged see pegged currencies predictability, 68 spot, 364 systems, 34: basket of currencies benchmark, 36; convertible, 35; crawling peg, 36, 353; currency board systems, 36, 241, 354; fixed rate systems, 35–6, 236–7, 356; free-float, 35; gold standard, 36, 357; managed float, 37, 360; par value, 35–6 volatility, 31–3 foreign exchange risks, 13, 355 foreign investments, 221–2 foreign portfolio investment, 47 foreign trading financing, 28–9 forfeiting, 183, 356 Forum of European Securities Commissions (FESCO), 39 forward contracts, 53 currency swaps as, 158–60 forward or future rate agreements compared, 93–7 futures compared, 111–14 meaning, 356 options on, 134–6 range, 165–6, 363 forward discounts, 55, 356 forward foreign exchange markets, 53–5 forward-forward swaps, 48 forward-forwards, 357 forward interest rates, 89–90 forward markets, 53–5, 356 forward rate agreements (FRA), 93–7, 154–6, 357 forward transactions, 48, 53–5, 61–3, 71, 73–6, 357 Metha-Index.qxd 10/31/03 2:06 PM Page 383 INDEX FRA see forward rate agreements; future rate agreements France civil law system, 26, 27 currency crisis, 22, 33, 225 free-float foreign exchange rate systems, 35 free rider problem, 215 FRN see floating rate notes front-end fees, 102 future rate agreements (FRA) 93–7, 269 future spot rates, 67 futures, 6, 110 clearing houses, 112 cornering, 115 correlation, 115 currency futures: arbitrage opportunities, 115–16; basis points, 116–17; hedge ratios, 117–18, 141; pricing, 115–16; risk management, 116–18 daily settlement, 113–14 forward contacts compared, 111–14 functions, 114–23 interest rate futures, 118: arbitrage, 121; Eurodollars, 119; hedging, 121; price discovery, 121;Treasury bills, 118–19;Treasury bonds, 119–21; use, 121–3 interest rate risks, 268–9 margin requirements, 112–14 marked-to-market, 113 meaning, 357 options and, relationship between, 128–30 options on, 134–6 organized exchanges, 111 price discovery function, 114 pricing under risk neutrality, 139–41 standardized contracts, 111–12 T-bonds see T-bonds G-5, 357 G-7, 357 G-10, 285, 357 gap analysis, 251–3, 261–2 gap management, 151, 257–9, 357 GARCH (generalized autoregressive conditional heteroscedasticity), 142, 357 GDP (gross domestic product), 38, 357 generalized autoregressive conditional heteroscedasticity (GARCH), 142, 357 Germany hidden reserves, 295 monetary policies, 32 383 transaction costs, 338 universal banking, 308, 338 Glass–Steagall Act, 29, 105, 306–8, 321, 324, 357 Gleacher & Co, 322 global environment, globalization of commercial banking financial markets, 29–30: communications technology innovations, 31; government, changing roles, 30–1; volatility of interest and foreign exchange rates, 31–3 historical background, 19–23 international banking activities, 28–9 meaning of globalization, 357 structure of international banking organizations, 23: agencies, 25; branches, 25–6; conventional form of international banking, 23–6; correspondent banks, 23–4; management typology for foreign presence, 26–8; representative offices, 24; subsidiaries, 26; US banks, 28 gold standard, 36, 357 goods markets, 10, 11 Fisher Effect, 69 fixed exchange rate systems, 36 purchasing power parity theory, 68 governments acquiescence, Eurocurrency markets, 82 agencies, cross-border trade transactions and financing by, 184–6 armed conflicts, 212 bank loans to, 20–1 changing roles, 30–1 impediments induced by, Internet banking and, 341 intervention, 32–3 political legitimacy, 212 regime shifts, 212 syndicate loans to, 214–16 Great Britain see United Kingdom Greenspan, Alan, 240 gross domestic product (GDP), 38, 357 Group-5, 357 Group-7, 357 Group of 10, 285, 357 guarantees, 28–9, 185 habitats, 101 Hang Seng Index Futures, 237 harmonization of barriers, 334 hedge funds, 357–8 Metha-Index.qxd 10/31/03 2:06 PM Page 384 384 INDEX hedge ratios, 70–2 currency futures, 117–18, 141 meaning, 358 hedges, short, 363 hedging, 20, 29 foreign exchange markets see foreign exchange markets forward contracts, 53 interest rate futures, 121 interest rate swaps, 267 meaning, 358 parallel shifts in term structure, rule, 275–6 heuristic approach country risk analysis, 207 HIBOR (Hong Kong Interbank Offered Rate), 82 hidden reserves, 295 holding companies, bank, 351 Hong Kong, 87 currency board system, 36 currency crisis, 228, 237–8 Hong Kong Interbank Offered Rate (HIBOR), 82 human resources, 344–5 see also employees; personnel IBF (international banking facilities), 23, 28, 88, 358 IBOR (Interbank Offer Rate), 82, 358 IBOS (Inter-Bank On-Line System), 342 ICON (indexed currency option notes), 166–8, 358 ICOR (incremental capital output ratio), 234 IET (Interest Equalization Tax), USA, 105, 358 illiquidity, investments, 312 IMF see International Monetary Fund IMM (International Money Market), 111 immunization, 358 duration, rule for non-parallel shifts in term structure, 276–7 in gap versus d-gap models, 261–2 impediments, 8–10, 11 market, 25, 360 nation-state boundaries, 31 quotas, 30 structural, 24, 364 imperfections, importers, financing for, 182–3, 184 in-house investment banking commercial banks, 322 in-the-money options, 125, 126, 359 incentive effect, 296 income-generating services, 344 Incoterms, 180, 358 incremental capital output ratio (ICOR), 234 indexed currency option notes (ICON), 166–8, 358 indication pricing schedules, 149, 358 indirect quotes foreign exchange, 50–1, 358 Indonesia currency crisis, 22, 228, 233 inefficiencies, markets, structural, 339 inflation, 20 information access, 31 analysis, 31 asymmetric, 26, 213 civil law systems, 27 overload, 31 processing, 11 informational efficiency, 4, ING, 342 initial margins, 112, 358 initial public offerings (IPO), 311 in project companies, 194 insurance certificates, 180 companies, 11–12 deposits see deposit insurance industry, European Union, 39 Inter-Bank On-Line System (IBOS), 342 inter-category asset switches, 294 interbank markets, 29, 47, 48 Eurocurrency markets, 82, 87 Interbank Offer Rate (IBOR), 82, 358 Interest Equalization Tax (IET), USA, 105, 358 interest on demand deposits, 29 interest rate parity theory (IRPT), 59–62, 68, 115 interest rate risks, 12, 250 balance sheet management strategies: borrowed funds, 266–7; brokered deposits, 265–6; investment portfolio mix alteration, 262–3; loan sales, 264–5; new products, pricing and developing, 263–4; securitization, 264–5 capital adequacy, 296 convexity, 259–61 duration gap model, 254–7, 262 foreign exchange and gap management, 257–9 gap analysis, 251–3, 261–2 Metha-Index.qxd 10/31/03 2:06 PM Page 385 INDEX immunization in gap versus d-gap models, 261–2 managing 261–72 measurement, 251–7 off-balance sheet activities: financial futures contracts, 268–9; forward or future rate agreements (FRA), 269; interest rate swaps, 267; option contracts, 270–2 interest rates caps, 162–5 collars, 165, 352–3 Eurocurrency markets see Eurocurrency markets floors, 165, 358 forward, 89–90 futures see futures parity, 61, 358 reference rates, 82, 93, 363 risks see interest rate risks spot, 89–90, 364 swaps see swaps volatility, 31–3, 253, 263 internal control, 297 international banking activities, 28–9 international banking facilities (IBF), 23, 28, 88, 358 international dimension external environment changes see external environment changes international Fisher Effect, 358 International Monetary Fund (IMF), 19, 359 debt crisis management in 1980s, 220 Special Drawing Rights (SDR), 41, 363 International Money Market (IMM), 111 international trade, 47 international trade certificates (ITC), 190 Internet, 340 banking cost comparisons, 340–1 cost analysis for transactions, 347–9 cross-border payments, 342 strategic ramifications of banking activities, 341–3 intervention governments, 32–3 intrinsic forward rates, 61 intrinsic value, options, 124 investment banks, 11–12, 29 acquisitions by commercial banks, 322–8 activities, 310: advisory services, 314–16; complementarities, 316; cross-subsidizing, 313; debt financing, 318; equity-enhanced securities, 318; equity funding, 321–2; mutual fund management, 313; new product development, 314; project financing, 385 318; risk arbitrage, 312–13; scope, 316–22; securitization of accounts receivable, 317; total return credit derivatives (TRCD), 317; trading securities, 312–13; underwriting new issues, 310–12 capital adequacy, 328: commercial banks compared, 329; derivative-related capital, 328–9; trade-related capital, 328 challenges, 329–30 commercial banks and, distinction between, 305–6 cross-border acquisitions by commercial banks, 322 deregulation, 308 foreign exchange market participants, 48 historical background: laws and regulations, 306–8; relationship versus transaction orientation, 308–10 mergers with commercial banks, 322–8 opportunities, 329–30 raiding star employees by commercial banks, 322 investment portfolio mix alteration balance sheet management strategies, 262–3 investments Eurocurrency markets see Eurocurrency markets: Eurocredits and investments invisible trade balances, payments, 40, 359 invoices commercial, 180 prices,T-bonds, 120 pro-forma, 178, 362 IPO see initial public offerings Iraq, 211 IRPT see interest rate parity theory irrevocable letters of credit, 178, 359 Italy civil law system, 26 ITC (international trade certificates), 190 J.P Morgan, 242 Credit Metrics, 199 J.P Morgan Chase, 319–21, 339 Japan bond markets, 105 commercial banks, 308 deregulation, 42–5 globalization, 42–5 hidden reserves, 295 investment banks, 308 Japan Offshore Market ( JOM), 87–8 Long-Term Credit Bank of Japan, 166 managed float, 37 Metha-Index.qxd 10/31/03 2:06 PM Page 386 386 INDEX jawboning South-East Asian currency crisis, 236, 237 joint ventures, 191 JOM ( Japan Offshore Market), 87–8 knockout options, 168–9, 359 Korea see South Korea Kuwait, 211 L/C see letters of credit Latin America currency crises, 225–6, 229, 241–4 South-East Asian currency crisis repercussions in, 241 laws and regulations investment banks, 306–8 LBO see leveraged buy-outs LDC see less developed countries lead banks meaning, 359 notes issuance facilities (NIF), 97 syndicated loans, 102 leadership attributes 27 leasing, 184 legal barriers, 338 legal enforcement, 203 lenders of last resort, 13 less developed countries (LDC), 23 debt crisis management in 1980s, 214–20 letters of credit (L/C), 178 advised, 179, 350 collateral, 180 confirmed, 179, 353 contingent liabilities for banks, 179 documents, 179 irrevocable, 178, 359 meaning, 359 revocable, 178 transferable, 179, 365 leverage ratios, 287, 359 leveraged buy-outs (LBO), 105, 199, 315, 359 leveraged loans, 103–4, 317–18 liability management, 249–78 LIBID (London Interbank Bid Offer Rate), 359 LIBOR see London Interbank Offer Rate life cycles economy, 359 products, 336–8, 359 lines of credit, 359 liquidation meaning, 359 risks, 13 liquidity country risk analysis, 210 investments, 312 risks, 12–13, 250: capital adequacy, 296; investment banks, 328; meaning, 359 Lithuania currency board system, 36 loans back-to-back, 146, 351 cross-border trade transactions and financing, 184, 185 default and negotiations: debt crisis management, 214–16 to governments, 20–1, 214–16 leveraged, 103–4, 317–18 long-term, 318–21 medium-term, 318–21 parallel, 146, 361 resale with recourse, 11 sales: balance sheet management strategies, 264–5; debt crisis management, 218–19 securitization, 11 short-term: to exporters, 185; seasonal, commercial bank activities, 316–17 syndicated: Eurocurrency markets, 102–4; project finance, 194 local borrowing, 29 locational arbitrage, 56–9 lockbox services, 192 London, 87 over-the-counter options, 127 London Interbank Bid Offer Rate (LIBID), 359 London Interbank Offer Rate (LIBOR), 82, 99, 359 long-lasting imperfections and inefficiencies, long positions, 48, 360 long-term bonds, 318–21 long-term borrowing, fixed rate, 267 Long Term Capital Management (LTCM), 31, 239–40 Long-Term Credit Bank of Japan, 166 long-term loans, 318–21 lowering barriers, 334 LTCM (Long Term Capital Management), 31, 239–40 Maastricht Treaty, 27, 360 maintenance margins, 112, 114, 360 Malaysia currency crisis, 22, 228 Metha-Index.qxd 10/31/03 2:06 PM Page 387 INDEX managed float foreign exchange rate systems, 37, 360 management fees syndicated loans, 102–3 management oversight, 297 management styles incompatible, 26 management typology for foreign presence, 26–8 managing interest rate risks, 261–72 mandates, syndicated loans, 102 margins contribution, 202 exchange-traded options, 127 futures, 112–14 initial, 112, 358 maintenance, 112, 114, 360 variation, 112, 114, 365 marked-to-market, futures, 113, 360 market-based economies, shift to, 221–2 market completeness, 360 market hierarchies, 10, 11 foreign exchange markets and, 68–9 market impediments, 25, 360 market imperfections swaps, 149–51 market makers commercial banks, 48 meaning, 360 price-related risks, 48–9 swaps, 152 market portfolio, 5–6, 360 market portfolio risks, market risks, 13 capital adequacy, 296 country risk analysis, 223–4 investment banks, 328 meaning, 362 swaps, 160 market structure, Marshall Plan, 20 material market distortions, mature products, 336 maturity days to (DTM), 118 yield to, 118, 366 measurement of interest rate risks, 251–7 medium-term loans and bonds commercial bank activities, 318–21 Memen, Carlos, 241 merchandise accounts, 40, 360 mergers commercial and investment banks, 322–8 financing, 199 Merrill Lynch, 314, 316 Mexico Brady plan, 220 currency crises, 21–2, 32, 225–6, 241 debt-equity swaps, 216–17 debt-for-debt swaps, 219 debt service suspension, 21 peso problem, 67–8 Middle East currency center, 87 minimum balance maintenance, 76 misery index, 229 mismanagement of economies, 212 MM theory of capital structure, 4–5, 249, 360 MNC see multinational corporations Modigliani–Miller (MM) theory of capital structure see MM theory of capital structure MOF (multi-option facilities), 98, 360 monetary policies changes, risk premiums, 67 currency board systems, 36 Eurocurrency markets and, 82 gold standard, 36 money creation, 12 money market alternative, 72 money market instruments, 13 money markets, 80 Fisher Effect, 69 Fisher Open, 69 interest rate parity theory, 68 meaning, 360 see also Eurocurrency market money supply growth Eurocurrency markets, 85–7 monitoring, 297 monopolies, breaking up, 334–5 Montgomery Securities, 325 moral hazard, 7, 218, 282, 283, 360 Morgan Grenfell, 327 Morgan Stanley, 323 mortgage-backed securities, 239, 360 mortgages, 263–4 multi-option facilities (MOF), 98, 360 multicurrency clauses, 360 387 Metha-Index.qxd 10/31/03 2:06 PM Page 388 388 INDEX multilateral agencies project finance, 194–5 roles, debt crisis management, 220 multinational corporations (MNC) banking services, 191–2 debt-equity swaps in LDCs, 217 foreign exchange market participants, 48 project finance see project finance mutual funds foreign exchange market participants, 48 management, investment bank activities, 313 national treatment, 30–1, 41, 361 Nations Bank, 325 NatWest, 322 NatWest Markets, 328 netting capital adequacy, 291–2 new products demand creation, 335 derivatives, 335 development: balance sheet management strategies, 263–4; investment bank activities, 314 life cycle phase, 336 pricing and developing: balance sheet management strategies, 263–4 repeal of laws standing in way of, 334 New York offshore market, 88 over-the-counter options, 127 NIF (note issuance facilities), 97–8, 361 Nigeria debt-equity swaps, 217 nominal rates foreign exchange, 63 non-parallel shifts in term structure, duration immunization rule, 276–7 note issuance facilities (NIF), 97–8, 361 OCC (Office of Comptroller of the Currency), 286 ocean bills of lading, 181, 361 off-balance sheet activities Basel Standards, 282, 286, 297 capital adequacy, 289–91 interest rate risks see interest rate risks netting derivatives, 288 Office of Comptroller of the Currency (OCC), 286 official reserves, 40–1, 361 offset clauses, 361 offsets, 188–9, 361 offshore activities underwriting new issues, 312 offshore banking centers, 361 offshore markets, 20, 29, 30 oil crises, 20 Oil Producing and Exporting Countries (OPEC), 20–1 on-balance sheet items capital adequacy, 288–9 OPEC (Oil Producing and Exporting Countries), 20–1 open account, 182 operating cash flow generation, 203 OPIC (Overseas Private Investment Corporation), 185–6, 361 opportunities, 9–10 banks’, cross-border trade transactions and financing, 186–7 commercial banks, 329–30 investment banks, 329–30 volatility of interests and foreign exchange rates, 33 option pricing theory (OPT), 6, 361 options, 110 American, 126, 350: exchange-traded, 127 at-the-money, 125, 126, 350 basket, 169–70 calls, 6: at-the-money, 126; down-and-out, 168; in-the-money, 126; knockouts, 168; meaning, 124, 352; out-of-the-money, 126; premiums, 124, 352 cylinder, 166, 354 delivery see delivery options down-and-in, 354 down-and-out, 168, 354 Eurodollars, 132 European, 126, 355: over-the-counter, 127 exchange-traded, 126: American options, 127; clearing houses, 128; margins, 127; premiums, 127 exercise prices, 124, 355 on forward contracts, 134–6 on futures, 134–6 futures and, relationship between, 128–30 in-the-money, 125, 126, 359 interest rate risks, 270–2 intrinsic value, 124 knockout, 168, 359 Metha-Index.qxd 10/31/03 2:06 PM Page 389 INDEX meaning, 361 out-of-the-money, 125, 126, 361 over-the-counter (OTC): European options, 127; premiums, 127; retail markets, 127; settlement risks, 128; wholesale markets, 127 premiums, 124: exchange-traded options, 127; over-the-counter options, 124 put-call parity, 128–30 puts, 6: at-the-money, 125; down-and-out, 168; in-the-money, 125; knockouts, 168; meaning, 124, 362; out-of-the-money, 125 quality see delivery options strike price, 124 swaptions, 161–2 T-bills, 132–4 T-bonds, 132 valuation, 130–1: currency options, 131–2; debt instruments, 132–4 wild-card, 121, 365 writers, 124 organizational cultures, 340 organizational integration commercial banks’ acquisitions and, 327–8 organized exchanges, futures, 111 origin, certificates of, 181, 352 OTC (over-the-counter) derivatives, 328–9 OTC (over-the-counter) options see options OTC derivatives dealers (OTCDD), 329 out-of-the-money options, 125, 126, 361 outright quotes, 53, 361 over-the-counter derivatives, 328–9 over-the counter markets, 361 over-the-counter options see options overall resources, 345–6 Overseas Private Investment Corporation (OPIC), 185–6, 361 overvalued currencies South-East Asian currency crisis, 230 overvalued forward rates, 61 P-type leadership, 27, 340 packing lists, 180 par value, 361 foreign exchange rate systems, 35–6 parallel barter, 188 parallel loans, 146, 361 parallel shifts in term structure, hedging rule, 275–6 partial ownership of subsidiaries, 26 participating banks syndicated loans, 102 payoff scenarios, project finance, 196 PEFCO (Private Export Funding Corporation), 186, 362 pegged currencies, 22, 230–1, 244 meaning, 362 South-East Asian currency crisis, 236–7 people-skills, 27, 340 perfect markets, 4, 31 performance bonds, 181, 362 performance evaluation, 345 personnel agencies, 25 monitoring effectiveness, 31 representative offices, 24 see also employees; human resources peso problem, 67–8, 362 phases of economy, 339–40 Philadelphia Stock Exchange (PHLX), 126 Philippines currency crisis, 22, 228 PHLX (Philadelphia Stock Exchange), 126 PIBB (purely Internet-based banks), 341 placement memoranda, 102 plain-vanilla, 362 currency swaps, 156–7 political legitimacy, 212 political risks, 211–12 portfolio approach country risk analysis, 207, 212–14 position risks, investment banks, 328 portfolio considerations on capital adequacy, 295–7 portfolio investments balance of payments, 40 portfolio risk, portfolio theory, 296 position risks, 297 investment banks, 328 meaning, 362 see also market risks potential exposure derivatives, 291 PPP see purchasing power parity theory pre-pay transactions, 319 predictability of foreign exchange rates, 68 preferred stock, 267, 294 389 Metha-Index.qxd 10/31/03 2:06 PM Page 390 390 INDEX premiums call, 352 exchange-traded options, 127 forward contracts, 54–5 interest rate caps, 162–3 options see options over-the-counter options, 127 risk see risk premiums preventive regulations, 13 price discovery, futures, 114, 121 price-related risks foreign exchange, 48–9 price sensitivity hedge ratios (PSHR), 121, 141–2, 362 pricing credit derivatives, 172–3 futures, 115–16, 139–41 new products, 263–4 policy modifications, 294 schedules, swaps, 149, 358 see also valuations private businesses credit functions for see credit functions for private businesses Private Export Funding Corporation (PEFCO), 186, 362 private institutions, financing by, 186–7 private placements, 311–12 privatization, 221 advisory services, 315 probability, cumulative, 298, 354 Proctor & Gamble, 327 products commodity phase, 336 differentiation phase, 336 life cycles, 33, 336–8, 359, 362 mature, 336 new see new products profitability, 263 country risk analysis, 210–11 profits underwriting new issues, 313 proforma invoices, 178, 362 project finance advisory services, 315 banks’ roles, 194, 198–9 bond issues, 195 bridge financing, 198 commercial bank activities, 318 fees, 344 financial leverage, 194 flow-type projects, 193 initial public offerings in project companies, 194 investment bank activities, 318 loan syndicates, 194 multilateral agencies, 194–5 payoff scenarios, 196 risks, 195–6: allocation, 196–8 special features, 193–5 stand-alone, illustration, 195 stock-type projects, 193 structuring, illustration, 196–8 unique features, 193–5 working capital maintenance, 194 promissary notes, unsecured, 98 property market bubbles South-East Asian currency crisis, 234–5 prospectus issues European Union, 39 prospectuses, 311, 362 PSHR see price sensitivity hedge ratios public enterprises, breaking up, 334–5 public ownership of banks, 30 purchasing power parity (PPP) theory, 62–5, 68, 362 pure speculation, 72–3 purely Internet-based banks (PIBB), 341 put-call parity, 128–30, 362 put-call-forward parity, 130, 362 puts options see options swaptions, 162 Q-type leadership, 27, 340 quality options see delivery options quantitative skills, 27, 340 Quattrone, Frank, 323 quotas, 30, 362 R2, 363 range forward contracts, 165–6, 363 RAROC (risk-adjusted return on capital), 204 rate-sensitive assets (RSA), 251–2 rate-sensitive liabilities (RSL), 251–2 RC (rejection costs), 201–2 real rates foreign exchange, 63 reciprocal equity ownership agreements, 26 reciprocity, 30, 363 Metha-Index.qxd 10/31/03 2:06 PM Page 391 INDEX Reed, John, 326 reference interest rates, 82, 93, 363 regime shifts, 212 risk premiums, 67 registration statements, 311 regulations capital adequacy, 282, 284–5 commercial banks, 306–8 regulatory arbitrage, 295, 297 regulatory barriers, 338 regulatory protection, 30 reinvestment risks, 12 rejection costs (RC), 201–2 relationship orientation, 339–40 commercial and investment banks, 308–10 countries, 26–7 relative version of PPP, 63–4 repos see repurchase agreements representative offices, 24, 363 repurchase agreements Enron, 339 foreign exchange, 48 meaning, 363 synthetic, 171–2 reverse, 266 resale of loans with recourse, 11 reserves, official, 40–1, 361 residual risks country risk analysis, 213 resources availability and augmentation, 343–6 financial, 343–4 human, 344–5 overall, 345–6 retail markets foreign exchange, 47 over-the-counter options, 127 reverse repurchase agreements, 266 revocable letters of credit, 178 risk-adjusted assets, 292 risk-adjusted capital, 292 risk-adjusted return on capital (RAROC), 204 risk arbitrage investment bank activities, 312–13 risk assessment, 297 risk-based capital adequacy requirements see capital adequacy risk-free security, 5–6 risk management currency futures, 116–18 services, 33 swaps, 151–2 risk neutrality, pricing futures under, 139–41 risk premiums future spot rates, 67 monetary policy changes, 67 regime shifts, 67 risk-return tradeoffs, 4–7 foreign exchange markets, 76 risk weighting capital adequacy, 287, 295–7, 298 derivatives, 290–1 risks actuarial, 7–8 asset–liability mismatches, 296 banking business dimensions, 12–14 basis see basis risks counterparty, 297 country see country risk credit see credit risks default see default risks delinquency, 13, 296 diversifiable, 69–70 evaluation, 345 foreign exchange, 13, 355 interest rate see interest rate risks joint consideration, 296 liquidation, 13 liquidity see liquidity: risks magnitude, 14 market see market risks market portfolio, political, 211–12 portfolio, position see position risks price-related see price-related risks project finance, 195–8 reinvestment, 12 residual see residual risks settlement see settlements: risks sharing, 11–12 swaps, 160–1 systematic see systematic risks systemic see systemic risks trading, 297 391 Metha-Index.qxd 10/31/03 2:06 PM Page 392 392 INDEX risks (cont’d) transaction-based, 49 unsystematic see unsystematic risks risky projects, excessive investment in South-East Asian currency crisis, 233–4 Robertson Stephens, 325 Royal Bank of Scotland, 342 RSA (rate-sensitive assets), 251–2 RSL (rate-sensitive liabilities), 251–2 Rule 144a, 105, 308, 322, 363 Russia crisis, 327 currency crisis, 22, 226–7, 228 debt service suspension, 22 sale and leasebacks, 294 Salomon Brothers, 165, 314 SDR (Special Drawing Rights), 41, 363 search costs, 11 secondary (Tier II) capital, 283, 287 secondary market approach debt crisis management, 218–19 securities industry European Union, 39 securities markets civil law systems, 27 common law systems, 27 Fisher Effect, 69 Fisher Open, 69 interest rate parity theory, 68 securitization, 11, 101, 295 accounts receivable, 317 balance sheet management strategies, 264–5 commercial banks, 308 debt crisis management, 216 legal structures, 335 meaning, 363 securitized assets, 363 SEH (speculative efficiency hypothesis), 114–15 SEM (speculative efficient market) hypothesis, 67–8, 364 settlements dates, foreign exchange, 55–6 meaning, 363 risks, 13: foreign exchange, 49; over-the-counter options, 128 share price volatility, 250–1 shelf registration, 105, 308, 324, 363 shipment-related documents, 180–1 short hedges, 363 short positions foreign exchange, 48 short-term capital balance of payments, 40 short-term foreign debt, excessive South-East Asian currency crisis, 231–2 short-term loans see loans SIBOR (Singapore Interbank Offered Rate), 82 Singapore, 87 Singapore Interbank Offered Rate (SIBOR), 82 smart cards, 340 Smithsonian agreement, 363 social hazard, 12 Society for Worldwide Interbank Financial Telecommunications see SWIFT South-East Asian currency crisis, 22, 228–9 analysis, 229–35 bank credit, excessive reliance on, 232–3 chronology, 246–7 current account deficits, 230 economic fundamentals, 235–9 export earnings decline, 229–30 fixed exchange rate systems, 236–7 jawboning, 236, 237 Latin America, repercussions in, 241 overvalued currencies, 230 pegged currencies, 236–7 property market bubbles, 234–5 risky projects, excessive investment in, 233–4 short-term foreign debt, excessive, 231–2 speculative capital flows, 236 vacancy rate, 234–5 South Korea currency crisis, 22, 228, 233 sovereign risk see country risk Soviet Union, 81 Spain civil law system, 26 Special Drawing Rights (SDR), 41, 363 special purpose vehicles (SPV), 101, 264, 318, 364 speculation foreign exchange markets see foreign exchange markets meaning, 364 speculative capital flows South-East Asian currency crisis, 236 speculative efficiency hypothesis (SEH), 114–15 speculative efficient market (SEM) hypothesis, 67–8, 364 Metha-Index.qxd 10/31/03 2:06 PM Page 393 INDEX speculative motives, 20, 364 spot alternative, 72 spot exchange rates, 364 spot foreign exchange markets, 49–52, 69 spot-forward swaps, 48 spot interest rates, 89–90, 364 spot transactions, 48, 49–52, 71, 364 spread, syndicated loans, 102–3 spreading, 73–6, 364 SPV see special purpose vehicles stand-alone project finance, illustration, 195 standard deviation, 5, 364 standardized contracts futures, 111–12 standardized normal distribution, 364 statistical discrepancies balance of payments, 41 stock-type projects, 193 stockholders’ equity, 282 strategic considerations activities, scope and scale, 343 resources, availability and augmentation, 343–6 strategic ramifications of Internet banking activities, 341–3 strike prices, options, 124 strips,T-bonds, 314 structural environment, 203 structural impediments, 24, 364 structural inefficiencies, 339 structure-based impediments, structure of international banking organizations see globalization of commercial banking structuring project finance, illustration, 196–8 subsidiaries, 26 meaning, 364 in tax havens, 267 supermajority rule, 215 supervision, 13 Basel Committee see Basel Committee of Banking Supervision European Union, 38–9 supervisory responsibilities, 297 suspension of deposit withdrawals, 13 swaps, 48, 73 background, 146–8 basis points, 149 brokers, 148 currency, 146: basic concept, 156–7; cross-currency interest rate swaps, 156, 353–4; as forward contracts, 158–60; 393 meaning, 354; plain-vanilla, 156–7; relationship to bond prices, 157–8; valuations, 157–60 dealers, 148 debt-equity, 216–17, 354 default risks, 148 end-users, 148 indication-pricing schedules, 149 interest, 146, 358 interest rates: bond valuation approach, 153–4; crosscurrency, 156, 353–4; forward rate arrangements (FRA), 154–6; meaning, 358; risks, 267; valuations, 152–6 meaning, 364 pricing schedules, 149 quotes, 54, 364 rates, 53, 364 rationale: market imperfections, comparative cost advantage, 149–51; risk management needs, 151–2 risks, 160–1 speculation, 73 valuations: currency swaps, 157–60; interest rate swaps, 152–6 swaptions, 161–2 Sweden banking crisis, 224 currency crisis, 22 SWIFT, 49, 178, 342, 363 switches, 188, 364 syndicated loans Eurocurrency markets, 102–4 to governments, 214–16 project finance, 194 syndicates banks, 227, 351 underwriting new issues, 311 synthetic forward hedges, 71 synthetic repurchase agreements credit derivatives and, 171–2 systematic risks country risk analysis, 213 foreign borrowers, 203 hedging, 69–70 meaning, 364 systemic risks, 13, 31, 240 bank runs, 283 T-bills interest rate futures, 118–19 options, 132–4 Metha-Index.qxd 10/31/03 2:06 PM Page 394 394 INDEX T-bonds futures, 115: delivery options, 119–21; invoice price, 120; wild-card options, 121 interest rate futures, 119–21 options, 132 strips and tranches, 314 tariffs, 365 tax arbitrage, 266–7 tax havens, 83, 266, 267 taxes, 71 technical skills, 27 technology, tender panels, 98 term structure duration rule for non-parallel shifts in, 276–7 Eurocurrency interest rates, 89–90 hedging rule for parallel shifts in, 275–6 meaning, 365 Thailand currency crisis, 22, 228 thefts, 12 thrift failures United States, 286 Tokyo, 87 total return credit derivatives (TRCD), 170–1, 317 tourism, 47 trade balances, 40, 365 trade in services, 40, 365 trade-related capital investment bank capital adequacy, 328 trade transactions and financing see cross-border trade transactions and financing trading risks, 297 trading securities investment bank activities, 312–13 tranches,T-bonds, 314 transaction-based risks, 49 transaction costs, 71, 101 financial markets, 337–8 transaction motives, 20, 365 transaction orientation, 339–40 commercial and investment banks, 308–10 countries, 26, 27 transferable letters of credit, 179, 365 transparency, 27, 345 Travelers Group, 325–6 TRCD (total return credit derivatives), 170–1, 317 Treasury bills see T-bills Treasury bonds see T-bonds triangular arbitrage, 56–9, 365 tripartite negotiations debt crisis management, 219–20 trust receipts, 182, 365 two-location arbitrage, 56 UBS, 322 UK see United Kingdom unambiguous market distortions, unbiased forward market hypothesis, 67–8 unbiased predictors, 67, 365 uncovered interest parity, 65 underpriced forward rates, 62 underwriting commitments, 97 underwriting new issues, 310 advising, 311 bonds, 313 documentation, 311 offshore activities, 312 private placements, 311–12 profits, 313 prospectuses, 311 registration statements, 311 syndicates, 311 Uniform Customs and Practice 500, 179 unilateral transfers, 40, 365 United Kingdom currency crisis, 22, 33, 225 gold standard, 36 United States balance of payments, 42 bank failures, 286 butter-and-guns policies, 82 capital adequacy see capital adequacy demand deposits, 29 deposit insurance, 285–6 dollar, 84, 92 domestic market dominance, 92 Edge Act corporations, 23, 28, 355 Eximbank see Eximbank foreign bank regulation, 41 foreign currency deposits, 29 Glass–Steagall Act see Glass–Steagall Act Interest Equalization Tax (IET), 105, 358 international banking activities, 20–1 international banking facilities (IBF), 23, 28, 88, 358 Metha-Index.qxd 10/31/03 2:06 PM Page 395 INDEX monetary policies, 32 prime rate, 82 T-bill rate, 82 thrift failures, 286 universal banking, 308, 338, 365 universally uniform impact of impediments, 9–10 unsecured commercial paper, 316–17 unsecured promissary notes, 98 unsystematic risks country risk analysis, 213 meaning, 365 upvaluation foreign exchange, 52 Uruguay currency crisis, 242–3 USA see United States vacancy rate South-East Asian currency crisis, 234–5 valuations currency swaps, 157–60 interest rate caps, 163–5 interest rate swaps, 152–6 options see options see also pricing value-at-risk (VAR) models, 298–300, 365 value dates foreign exchange, 55–6 meaning, 365 VAR see value-at-risk models variance, variation margins, futures, 112, 114, 365 Venezuela currency crisis, 226 debt service suspension, 21 Vietnam war, 20 warrants bonds with, 318 Weil, Sandy, 326 well-developed financial markets, 336 wholesale markets foreign exchange, 47, 48 over-the-counter options, 127 wild-card options,T-bonds, 121, 365 willingness to pay, 207, 211 Winterthur, 323 wire transfers, 365 Working Capital Guarantee Program, 185, 365 working capital maintenance, project finance, 194 World Bank, 20, 366 debt crisis management in 1980s, 220 WorldCom, 306, 318, 324 writers, options, 124 yield to maturity, 118, 366 Yosemite Trust, 319–21 zero coupon bonds, 366 zero coupon securities, 314 395 [...]... in conducting cross-border business; and unique features of banking business Based on the premises of this triad, our endeavor aims at providing “under one roof ” an up-to-date and integrated coverage of many important topics in international bank management ranging from foreign exchange markets, derivatives, country risk analysis, and asset-liability management to banking strategies Analytical frameworks... especially for regional banks However, a larger force at work is very likely the restructuring of priorities and strategies because of the perceived need for greater efficiency in the fiercely competitive global banking environment 2.2.1 Conventional form of international banking Correspondent banking A correspondent bank is a bank that provides services, typically as an agent, to anther bank located elsewhere.9... challenges facing the banking industry in the coming decade is made more difficult by the ever-increasing pace of change, making yesterday’s management practices obsolete today Existing textbooks in the market place have adopted a variety of approaches to discuss the international dimensions of banking: a focus on domestic bank management with ancillary material pertaining to international banking; an exclusive... undergraduate course in bank management when offering a stand-alone course is not feasible Finally, selected material can also be fruitfully assigned to students taking international business courses During the process of developing this text, we have benefited from helpful comments and insights of bankers as well as our colleagues and students at several institutions We would like to thank them, and especially... material pertaining to international banking; an exclusive focus on international banking through case method that highlights the complexity of international bank management with suitable abstraction of reality for expository convenience; and a macroeconomic perspective that focuses on issues related to international monetary economics and foreign exchange Our textbook rests on the foundation that integrates... analysis of the investment information, the investment bank can reduce risk and increase return The information gathering and processing skills of a bank far exceed those of most individual investors, especially those with limited investment funds By paying the bank commissions and transaction fees, individual investors can receive the benefits of compiling and analyzing the information at a fraction of the... a bank, and the bank determines that only $25 will be withdrawn from that account in the foreseeable future As a result, the bank loans out $75 To the extent that the borrower does not withdraw the loan in cash but instead writes checks on the bank, the bank has created $75 worth of an additional asset or money Sovereign governments have traditionally conferred this role exclusively on commercial banks... discusses the organizational structure of a bank pursuing international banking activities Section 2.3 briefly explains the scope of international banking activities Section 2.4 discusses various factors that have influenced the increasing globalization of financial markets.The final section provides the summary of the chapter 2.2 Structure of an International Banking Organization The appropriate organizational... the scope of international activities that a bank wants to pursue Further, a bank may adopt several forms in a country, since these forms are not necessarily mutually exclusive Typical forms provide a range: correspondent banking relationships, representative offices, agencies, foreign branches, foreign subsidiaries and affiliates In the USA, commercial banks can participate in the offshore banking activities... commercial banks can participate in the offshore banking activities through international banking facilities (IBFs) and Edge Act corporations The presence of foreign banks in the USA has been increasing, probably reflecting the potential size and profit opportunity of the US market.8 On the other hand, the shrinking physical presence of US banks overseas may partially reflect fading attractiveness of foreign
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