UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 ASSIGNMENT COVER SHEET UNIVERSITY OF SUNDERLAND BA (HONS) BANKING AND FINANCE Student ID: 149078874/1 Student Name: Nguyen Thi Kieu Anh Module Code: UGB 322 Module Name / Title: International Banking Centre / College: Banking Academy of Viet Nam Due Date: 15th May 2015 Hand in Date: 15th May 2015 Assignment Title: Individual assignment Students Signature: (you must sign this declaring that it is all your own work and all sources of information have been referenced) Nguyen Thi Kieu Anh UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 International Banking UGB 322 Nguyen Thi Kieu Anh - ID:149078874/1 Submission date: 15th May 2015 Number of words: 3,300 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 TABLE OF CONTENTS Part A I Introduction II Main Body Income opportunities available to international banks International banks operations in foreign markets to maximize shareholder value 2.1 The reasons that banks move to abroad 2.2 Organizational mechanisms for carrying on international banking 2.3 Shareholder value maximization 2.4 Determinants of bank operations in international market III Conclusion IV References 10 V Appendices 11 Part B 13 I Introduction 13 II Main body 13 The need for regulating international banks 13 Regulations applied to international banks 14 Difficulties in regulating international banks 14 International banking regulation reform 15 III Conclusion 17 IV References 17 V Appendices 19 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 Part A: Discuss the income opportunities available to international banks and critically evaluate international banks operations in foreign markets to maximize shareholder value I Introduction International banking refers to banking services undertaken across borders (Hagendorff, 2010, p.16) By approaching various markets and offering wider range of financial services, international banks have more chances to generate profit as well as maximise shareholder value In order to understand deeply about this, this study aims to discuss the income opportunities available to international banks and evaluate international banks operations in foreign markets to maximize shareholder value II Main Body Income opportunities available to international banks In international environment, banks have four principal sources of revenues, namely net interest income (from loans), net fees and commission income (income from setting up deals, providing advice and services), net trading income (from currency and financial instruments), and investment income (from associates or subsidiaries) (Fight, 2004, p.7) An example is given from income statement of Barclays bank as follows: Figure 1: Consolidated income statement of Barclays PLC (Barclays, 2010, p.187)  Net interest income (NII): NII is the difference between interest income and interest expense: a primary indicator of a bank’s ability to generate profit on its primary business (Fight, 2004, p.118) Net interest income (NII) = Interest income - Interest expense Interest income arises from the loans and represents the largest source of revenue International banks offer the loans to both domestic and international clients in a UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 range of currencies and maturities One of the special services of international banking is syndicated lending In a syndicated loan, two or more banks jointly lend to a business with big amount of money, typically exceed £50 million, which would be too risky to underwrite by a single lender (Hagendorff, 2010, p.29) Interest expense usually involves the amount of money (interest) that banks paid to depositors for the use of their money  Net fees and commission income: Fees and commissions are an increasing important source of income International banks get the front-end fees for the arrangement of syndicated loans and the fees on issuing letters of credit (L/C)1, documentary collections (D/C)2 to avoid risk of non-payment between trading partners (importers and exporters who engaging in international trade) They get the commission on factoring that allows exporters sell their receivable to the bank (forfaiter) at a discount to meet its present and immediate cash needs Besides, there are many others fees and commissions such as underwriting commissions, commissions on selling securities to investors, mergers and acquisitions advice and so on (Fight, 2004, p.120)  Net trading income: It includes trading profits from the bank’s operations in securities, investments, and sometimes treasury operations The major part of trading income is foreign exchange or FX trading (Derivatives for hedging, namely forwards, futures, options, swaps), but can also include income from trading in bonds, certificates of deposit, treasury bills, and other marketable securities (Fight, 2004, pp.119-120)  Investment income: Interest and dividends earned on securities held as investments Income from associates is fairly common among European and Asian banks but less so with US banks due to historical US banking restrictions on crossing state boundaries and on investing in non-banking subsidiaries (Fight, 2004, p.120) International banks operations in foreign markets to maximize shareholder value 2.1 The reasons that banks move to abroad Banks move to abroad for a variety of reasons but the biggest motive is to seek growth or A commitment by a bank on behalf of the buyer that payment will be made to the beneficiary (exporter) provided that the terms and conditions have been met, as verified through the presentation of all required documents (Mizan, 2011, p.247) International bank acts as intermediaries between importer and exporter by stipulating the term and conditions under which the importer gains title to the goods purchases (Hagendorff, 2010, p.46) UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 profit In fact, when domestic banking system is mature, competitive and overly regulated, approaching new potential market can offer better opportunities for growth than domestic market Indeed, there are some evidence shows that it is very difficult for domestic banks as well as foreign banks can earn profit in such a market For example, Stijin Claessens, Asli Demirgiic-Kunt, and Harry Huizinga examined the behavior of banks in eighty mature and emerging markets in the period of 1988 to 1995 to investigate how profitability differed between foreign and domestic banks The results showed that foreign banks were found to have higher profitability than domestic banks in emerging markets, while the opposite was true in mature markets (Litan et al., 2001, p.34) That is also the reasons why banks have a tendency to move to developing countries more than developed countries By going international, banks can offer wider range of products and services, access new customer base and benefit from their brand awareness, economies of scale, and lower their risk through increased opportunities for diversification (G20, 2008, p.262) Specifically, providing products and services in multiple countries reduce the bank’s exposure to possible economic and political instability in a single country (Acevedo, 2015) Financial liberalization and the globalization of finance are the second motive for banks to move abroad Before the 1990s, the liberalization and adoption of the market economy that have occurred worldwide together with the globalization tendencies have led to deregulations in the financial markets One specific outcome is abolishing the restrictions on the entrance of foreign banks into the local banking system Thus in 1990s, foreign banks have started to display their presence in the national economies (KÖSE, 2009) Competitive advantage is also an important factor in driving the decision of banks from specific countries to enter specific countries Competitive advantages mentioned are managerial expertise, technological know-how, sizeable capital and superior products and services, marketing techniques which will outweigh the costs associated with foreign market entry (costs of adapting to new regulatory environment and different customer demand) (Hagendorff, 2010, p.26) Last important motivation mentioned is ‘follow the customer’ In order to prevent multinational corporations from soliciting these local or other foreign competitors, banks are impelled to follow the client by moving abroad themselves in order to defend their unique bank-client relationship (Wezel, 2004, p.7) Further, multinational firms may face additional incentives to continue banking with their home market institution in case they find it harder to borrow funds from local banks in their host market (Hagendorff, 2010, p.28) UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 2.2 Organizational mechanisms for carrying on international banking When a bank decides to enter a foreign location, it needs to determine the form of representation Representative office, agency, brand and subsidiary are generally available organizational forms for the bank Each of them involves different level of investment, as well as allows offering a different range of banking services The representative office is the most economical of overseas banking organizational forms It is relatively inexpensive to establish but these offices are not allowed to participate in the typical banking activities (Blandón, 1998, p.2) Agency requires a higher investment and provides advantages over representative offices in that they can conduct transactions but a certain limit A foreign branch overcome the demerits of the above two modes They can offer a full range of banking services, with restrictions on regards access to liquidity provision in the event of distress However, the branches are not separate entities from their parent unit The parent unit has a full control over the functioning of the branches so the branches have access to the full support, credit rating and capital base of the parent (Sharan, 2012, p.351) Bank subsidiary can engage in a full range of banking activities but the main difference makes it relatively costly compared to branch is that it needs to be capitalized separately from the parent bank (Hagendorff, 2010, p.24) Establishing representation offices can protect shareholder wealth as it is more risk averse, involves less sunk costs However, in fact banks tend to establish branches and subsidiaries abroad in expectation of increasing shareholder wealth For instance, U.S banking organizations conduct most of their international activities through foreign branches and subsidiaries, in which they conduct an estimated 60 percent of their international business through foreign branches (Houpt, 1999, p.601) 2.3 Shareholder value maximization Shareholder value maximization implies that the ultimate goal of business is to enrich shareholders by increasing returns in the form of dividends and/or capital appreciation and banking industry is no exception (Hall, 2015) Going abroad is one of the strategic plans helps banks increase shareholders wealth However, in order to achieve such thing, banks need to make wise investment Each market, each country may have different economic environment, different level of financial system structure and different social characteristic, therefore, foreign banks seem to thoroughly consider and evaluate cost and benefit of each market to find the market where the underlying conditions are favorable For example, although China’s CPI is really high and the inflation rate is higher than the UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 actual saving interest as a result of the non-maturity economy Foreign banks still choose China because Chinese economic began to take off since China’s reform and opening-up Especially after 2001, China have join into WTO, Chinese economic construction is further developed and the cooperation with foreign partners was getting closer and closer through the keeping opening up on different industries The foreign banks come to China in order to retain the customer resources that are searching for overseas investment opportunities Another reason for foreign banks access is to strive for the enormous market opportunities in China There are a large number of wealthy residents accompanies by Chinese economic development (refer to appendix 1) (Zhao, 2009, p.24) Foreign banks also recognize the challenges they face in these markets, therefore, they make more efforts to enable success by investing in technological innovation and in people (EY, 2014, p.28) Citibank was the first foreign bank in China to launch the smart banking model Citi Smart Banking branch comes equipped with media walls, interactive kiosks and work benches to enable customers to surf through information, learn about products and services and conduct transactions within a few minutes (Citi, 2015) HSBC focuses on training local talent into experts with both banking and international experience which will become key human resources for HSBC in the future Currently they employ about 5,500 staff, around 98% of whom were recruited locally (HSBC, 2009) Besides, banks utilizes Eurocurrency market3 to reduce the cost of capital and minimize the risk as this market can avoid strict regulations imposed on the banking system such as interest rate ceilings and strict reserve requirements and most of the lending in the Eurocurrency market takes the form of syndicated lending (Hagendorff, 2010, p.32) 2.4 Determinants of bank operations in international market International bank operation is also affected by many risks Due to the limitation of the study purposes, this study only mentions about country risk, operational risk and market risk  Country risk is the probability that political, social and economic conditions in the foreign country which will affect the commercial operations of the foreign bank Country risk events could include political unrest, increases in corruption (Hagendorff, 2010, p.68) In order to mitigate country risk, banks need to capture The Eurocurrency markets offer wholesale foreign exchange transactions (loans, deposits) involving residents and non-resident UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 changes of the market in each period to give appropriate strategy at the right time For example, Standard Bank Group employed internal rating models to assess and manage its country risk exposures (refer to appendix 2) (Standard Bank, 2013, p.56) Besides, banks should start operation with low risk products and services first until they operate stably in host countries Especially they can purchase political and commercial risk insurance to be more safety  Operational risk is defined at the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events (Hagendorff, 2010, p.67) To anticipate, mitigate and control operational risk, bank should have a system of policies and establish a consistent framework for monitoring, assessing and communicating risks Citi bank has established a “Manager’s Control Assessment” program to help managers self-assess key operational risks and controls and identify and address weaknesses in the design or effectiveness of internal controls (Citigroup, 2013, p.119)  Market risk is the risk of losses overtime due to a number of risk factors such as changes in interest rates, currencies, and equities It can be understood as a form of trading risk Even banks which are completely focused on lending activities may be exposed to market risk If a particular bank has lent heavily to hedge funds (its business engage in investing a wide range of market instruments such as stocks or derivative securities), the bank becomes indirectly exposed to market risk because those loans may not be repaid if the prices of the stocks or derivative securities held by hedge funds decline substantially (Hagendorff, 2010, p.66) Commonly, banks measure their exposure to market risk by applying the value-at risk (VaR) method If a bank determines that its exposure to market risk is excessive, it can reduce its involvement in the activities that cause the high exposure For example, it could reduce the amount of transactions in which it serves as guarantor for its clients or reduce its investment in foreign debt securities that are subject to adverse events in a specific region Alternatively, it could attempt to take some trading positions to offset some of its exposure to market risk by selling some of its securities that are heavily exposed to market risk (Madura, 2008, pp.537-538) III Conclusion Through the analysis above, it is obvious that international bank can generate a lot of profit and each bank has its own way to penetrate and maximize shareholder value in UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 international environment However, all banks face many risks that require bank give out methods and solutions to manage the business operations for the purposes of existing in fierce competitive market IV References Acevedo, L (2015) Why Do Companies Go International? Available at: http://www.ehow.com/facts_5256365_do-companies-go-international.html (Accessed: 26 April 2015) Barclays (2010) Financial Statements Available at: http://reports.barclays.com/ar10/files/pdfs/barcar10_financialstatements.pdf (Accessed: 25 April 2015) Blandón, J.G (1998) 'The Choice of the Form of Representation in Multinational Banking: Evidence from Spain', Economics Working Paper 271 , pp.1-17 Citigroup (2015) Citi’s Smart Banking named Service Channel Innovation by IDC Financial Insights Available at: http://www.citi.com.cn/html/en/news/11/2011031401.html (Accessed: 27 April 2015) Citigroup (2013) Annual Report 2013 Available at: http://www.citigroup.com/citi/investor/quarterly/2014/ar13c_en.pdf (Accessed: 29 April 2015) Claessens, S and Horen, N V (2008) 'Location Decisions of foreign banks and institutional competitive advantage', DNB Working Paper No.172, pp.1-32 EY (2014) Banking in emerging markets: Investing for success Available at: http://www.ey.com/Publication/vwLUAssets/EY Banking_in_emerging_markets:_Investing_for_success/$FILE/EY-Banking-inemerging-markets-Investing-for-success.pdf (Accessed: 27 April 2015) Fight, A (2004) Understanding International Bank Risk England: John Wiley & Sons Ltd G20 (2008) Competition in the Financial Sector Available at: http://g20russia.ru/load/780983084 (Accessed: 26 April 2015) Hagendorff, J (2010) International Banking UGB 322 United Kingdom: University of Sunderland Hall, R (2015) Assignment Revision, [Lecture to International Banking UGB322] University of Sunderland Houpt, J.V (1999) International Activities of U.S Banks and in U.S Banking Markets Federal Reserve Bulletin, pp.599-614 HSBC (2009) HSBC Bank (China) Company Limited Available at: https://www.hsbc.com.cn/1/PA_ES_Content_Mgmt/content/china/about/docs/factsheeten Jan09.pdf (Accessed: 27 April 2015) 10 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 11 KÖSE, A (2009) Foreign bank presence and domestic bank performance in Turkish banking system Available at: http://isletmeiktisadi.istanbul.edu.tr/wpcontent/uploads/2013/04/Yonetim-63-2009-1.pdf (Accessed: 26 April 2015) Litan, R E., Masson, P and Pomerleano, M (2001) Open Doors: Foreign Participation in Financial Systems in Developing Countries Washington, D.C.: Brookings Institution Press Madura, J (2008) Financial Institutions and Markets USA: Thomson Higher Education Mizan, A.N.K (2011) Factoring: a Better Alternative of International Trade Payment methods ASA University Review, 5(2), pp.247-64 Naaborg, I.J (2007) Foreign bank entry and performance The Netherlands: Eburon Academic Publishers Sharan, V (2012) International Financial Management New Delhi: PHI Learning Private Limited Standard Bank (2013) Risk and capital management report and annual financial statements 2013 Available at: https://www.jse.co.za/content/JSEAnnualReportsItems/20140429Standard%20Bank%20Group%20-%20Annual%20Financial%20Statement.pdf (Accessed: 29 April 2015) Wezel, T (2004) 'Foreign Bank Entry into Emerging Economies: An Empirical Assessment of the Determinants and Risks Predicated on German FDI Data', Discussion Paper Series 1: Studies of the Economic Research Centre Zhao, L (2009) The motivation and impact on the foreign banks entrance in China Master thesis: Lund University V Appendices Appendix Figure 1: China’s GBP growth from 1997 to 2007 Figure 2: China’s FDI growth from 1997 to 2007 Figures above showed that both of China’s GDP and FDI have dramatically increased especially after 2001 that China entered into WTO (Zhao, 2009, pp.25-26) UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 Appendix Figure 3: Country risk exposure by region and risk grade The model inputs are continuously updated to reflect economic and political changes in countries The model outputs are international risk grades that are calibrates to a country risk grade (CR) from CR01 to CR25 Countries rated CR08 and higher, referred to as medium- and high-risk countries, are subject to increased analysis and monitoring (Standard Bank, 2013, p.56) Figure 4: Top five medium- and high-risk country risk 12 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 Part B: Critically discuss the challenges regulators face when regulating international banks I Introduction International finance has changed dramatically over the past two decades as all nations eliminated barriers to cross-border capital flows and opened their domestic markets to foreign financial institutions (Oatley, 2001, p.36) These changes lead to the emergence and growth of international banking Banking no longer be regarded as traditional financial intermediaries (take deposits and make loans), having become intermingled with other financial activities, including securities business Such thing poses formidable problems for bank regulatory authorities who have to cope not only with a riskier banking system, but a banking system whose scope is wide (Dale, 1994, p.1) This study will discuss the challenges regulators face when regulating international banks II Main body The need for regulating international banks Of all the financial institutions, banks are heavily regulated especially international banks which operate cross border and hold a prominent share of the banking market in many countries Similar to banks, international banks is also regulated for two main reasons: to protect customers and to ensure the soundness and stability of the financial system Indeed, after the financial crisis over the years, it is concluded that there are two features of banking system that motivate for the entry of regulation: information asymmetry and systemic risk Asymmetric information results in adverse selection and moral hazard problem In the context of banking system, asymmetric information occurs between depositors and banks Depositors are unable to define the bank holding their deposit is good or bad bank until they cannot withdraw cash on demand It causes adverse selection as customers have little choices and have high demand in holding deposits as means of payment Besides, as key player in payment system, banks have incentives to use mobilizing funds from customers to invest in risky assets to earn profits, which so-called moral hazard On the other hand, banks also can be the victims of asymmetric information Borrowers have better information about level of risks they engaged when borrowing money from banks It is difficult for banks to appraise the investment project of customers when they intended to hide the risky action The presence of asymmetric information lessens confidence of public in banking system It should be noted that keeping customer confidence in banking system is important more than ever Banks operates mainly based 13 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 on deposits from individuals and institutions to make loan If depositors doubts about the health of bank holding their money, they may rush to withdraw cash from the bank A “wholesale run” occurs leading to risk of illiquid and poses a threat to international banking firms or even collapse in the worst case (Howells and Bain, 2007, p.362) The failure of one bank causes a loss of confidence in banking in general, creates bad debts for other banks and widespread collapse (risk of contagion or systemic risk) as the result of the interconnectedness of banking firms via wholesale money markets within national banking sectors and for international banks across national banking sectors (Hagendorff, 2010, p.98) Regulations applied to international banks Regulation is both internal and external but principally focuses on two strategies: prudential regulation and conduct of business regulation Prudential regulation attempts to minimize moral hazard It analyses a bank’s balance sheet for risks such as concentration, liquidity and capital adequacy Conduct of business regulation attempts to minimize asymmetric risk It examines banks internal operations (products and services offered) and industry operations (industry business practices such as short-term funding) to encourage active participation in financial markets and reduce systemic risk (Hall, 2015) Difficulties in regulating international banks The global financial crisis has recalled the important of accounting in the banking industry This is because it influences the level of capital and the measurement and disclosure of financial institution’s exposure As yet, there is no single accounting framework that is universally applied in all jurisdictions (Schwarz et al., 2014, p.5) Basically, there are two main accounting frameworks in the world: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) GAAP is used principally in the United States, and IFRS is used in European Union and many other countries (Logue, 2015) Having different rules under US GAAP and IFRS will mean a lack of comparability for investors between the result of banks reporting under the different frameworks, and increased costs of international banks that have to prepare figures under both accounting frameworks It is also a big challenge for regulators to collect and produce information about banks, which helps them to monitor the safety and soundness of the banking system (Auditandrisk, 2014) Another challenge for bank regulators derived from the existence of off-balance sheet entities Off-balance sheet banking activities encompass a variety of items including certain loan commitments, 14 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 certain letters of credit, and revolving underwriting facilities and derivative instruments (swaps, futures, forwards, and option contracts) (FDIC, 2004) Such activities earn fee income by transactions that are not recorded on a bank’s balance sheet (Hassan et al., 1993, p.69) Because off-balance sheet assets and liabilities were not included in financial statements, bank took leveraged positions that were hidden bank risk from regulators and investors Since regulators use the balance sheet as an anchor in their assessment of bank risk, they fail to provide a clear picture of the financial health of banks Especially banks’ off-balance sheet operations have grown rapidly in recent years, for example, in Germany alone, the trading volume has risen by more than thirty times since 1986 (Bundesbank, 1998, p.65) As a result, the risks of off-balance sheet could lead to sudden liquidity squeeze or surprise losses and cause of financial crisis in the worst case (Partnoy et al., 2015) Internal risk models have been increasingly used in the past years for ‘external purposes’: communicating information about an institution’s risks to creditors, shareholders, regulators, or rating agencies The regulation of banks in particular relies heavily on internal models to compute capital requirements more in line with a bank’s risk because the most accurate information regarding risks is likely to reside within a bank’s own internal risk measurement and management systems However, the problem is that bank reports an internal model to the regulator, who chooses a capital constraint depending on the report so banks tend to hide information and understate its risk and lend more It leads to the conflict between regulators and banks Therefore, bank regulators meet many difficulties in setting credit risk capital requirements (Colliard, 2012, p.2) Last difficulty mentioned is regulatory arbitrage Cross-country differences in banking regulations may encourage the flow of bank capital from markets that are heavily regulated to those markets that are less regulated This form of regulatory arbitrage suggests there may be a destructive “race to the bottom” in global regulations which restricts domestic regulator’s ability to limit bank risk-taking (Houston, 2012, p.1) International banking regulation reform The presence of national safety net regulations which encompasses deposit insurance arrangements and the lender of last resort functions can prevent bank run and contagion but it is not stable for international banks, as national authorities not incorporate crossborder externalities in their decision making (Schoenmaker, 2013, p.65) Basel Accord is a solution to the problem arising from the inadequacy of the safety net and considered as one 15 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 of the first attempts for international banking regulation Bank capital is a central element in Basel Accord It has two functions: is a cushion that helps to prevent bank failure and reduce bank moral hazard (Fiordelisi, 2015) The first capital accord was issued in 1988 by the Basel Committee on Banking Supervision This system provided for the implementation of a credit risk measurement framework with a minimum capital standard of eight percent by end-1992 Since 1998, this framework has been progressively introduced not only in G-104 countries but also in virtually all other countries with internationally active banks (Howels, 2010, p.206) The initial proposal was viewed as overly simple and crude By attempting to apply a “one size to fits all” policy, the Committee encouraged substantial arbitrage among risk classes by the banks, which weakened the effectiveness of the regulations Because of this criticism, the Basel Committee began to work on a broader and more sophisticated capital accord, Basel II (Hall and Kaufman, 2002, p.15) It is adopted in 2004 and stared to implement at the start of 2008 only by European banks Basel II has three pillars (the first deals with a banks’ core capital requirement associated with operational risk - Pillar 1, the second allows for supervisor discretion to adjust this requirement to allow for additional risk and particular circumstances - Pillar 2, and the third fosters market discipline - Pillar 3) (ANU, 2015) However, the financial crisis of 2007 to 2009 has revealed many weaknesses in Basel II Firstly it did not require banks to have sufficient amount of capital Secondly risk weights in standardized approach are heavily dependent on credit rating, which were unreliable in the run-up of financial crisis Thirdly, Basel II demands that banks hold less capital when times are good and hold more capital when times are bad thereby exacerbating credit cycles Because probability of default and expected losses for different classes of assets rises during bad times, Basel II may require more capital at exactly the time when capital is most short this has been a major concern after 2007-2009 crisis, bank's capital balances eroded, as a result there was cut back on lending, doing more harm to economy (Qureshi, 2015) As a result of this limitation, the Basel committee continued to work on new accord, Basel III It is issued in 2010 with the stricter on what constitutes capital (additional capital requirements like the conversion buffer and countercyclical buffer), introduces a minimum leverage ratio and creates two new liquidity ratios (the short-term Liquidity Coverage UK, US, Japan, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland 16 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 Ratio - LCR and the longer-term Net Stable Funding Ratio - NSFR) (refer to appendix) (Acharya, 2012, p.13) On the positive site, this newly toughened capital and liquidity requirements should made global financial system safer Unfortunately, enhanced safety will come at a cost, since it is expensive for banks to hold extra capital and to be more liquid As a result, loans and other banking services will become more expensive and harder to obtain and especially it reduce banks’ returns and increases problem of regulatory arbitrage The banking industry argues that Basel III will seriously harm the economy For example, the Institute of International Finance (IIF) calculated that the economies of the US and Europe would be 3% smaller after five years than if Basel III were not adopted (Elliott, 2010) At the same year 2010, US regulators have introduced the Dodd-Frank Act focusing on limits on leverage, heightened capital standards, and the restrictions on certain forms of risky trading (Webel, 2010) Similar to Basel III, DoddFrank Act also have some disadvantages like affecting the cost and availability of credit and securities lending and borrowing activities, adding uncertainty and complexity to financial sector as well as increasing regulatory burden especially on small banks, which weakens its competitive with other financial institutions (Alqatawni, 2013, p.5) Currently, UK and European regulators are focused on splitting Universial banks Some respondents favoured a split because they felt that the ‘too big to fail’ gurantee of universial banks distorted the market; whilst others argued against a split, for a variety of reasons including the impact on businesses needing access to a range of complex financial products as well as basic services (Lovegrove and Rose, 2011) III Conclusion Overall, the regulators face a lot of challenges when regulating international banks Each regulation imposed has its own advantages and disadvantages Therefore, it requires bank regulators modify and continue researching and capturing changes in international financial market for the purposes of coming up with creative tools to monitor international banks more effectively IV References Acharya, V.V (2012) 'The Dodd-Frank Act and Basel III: Intentions, Unintended Consequences, Transition Risks, and Lessons for India', Contemporary Banking in India, pp.1-66 Alqatawni, T (2013) The Impact of the Dodd-Frank Act on Small Banks MPRA Paper No 51109 17 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 ANU (2015) The Structure of Basel II Available at: http://press.anu.edu.au/agenda/016/01/mobile_devices/ch02s04.html (Accessed: 03 May 2015) Auditandrisk (2014) New standard will have "massive" effect on banks Available at: http://auditandrisk.org.uk/news/new-standard-will-have-massive-effect-on-banks (Accessed: 01 May 2015) Bundesbank (1998) Banks' internal management model and their prudential recognition Available at: https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Monthly_Report_Arti cles/1998/1998_10_risk_management.pdf? blob=publicationFile (Accessed: 01 May 2015) Citi (2015) Citi’s Smart Banking named Service Channel Innovation by IDC Financial Insights Available at: http://www.citi.com.cn/html/en/news/11/2011031401.html (Accessed: 27 April 2015) Citigroup (2013) Annual Report 2013 Available at: http://www.citigroup.com/citi/investor/quarterly/2014/ar13c_en.pdf (Accessed: 29 April 2015) Dale, R (1994) Issues in International Banking Regulation: Global Policies for Global Markets University of Southampton Elliott, D.J (2010) Basel III, the Banks, and the Economy Available at: http://www.brookings.edu/research/papers/2010/07/26-basel-elliott (Accessed: 03 May 2015) FDIC (2004) Off-balance sheet activities Available at: https://www.fdic.gov/regulations/safety/manual/section3-8.pdf (Accessed: 01 May 2015) Fiordelisi, F (2015) Lecture 2: Bank Regulation and Supervision Available at: http://host.uniroma3.it/facolta/economia/db/materiali/insegnamenti/548_6559.pdf (Accessed: 02 May 2015) Hagendorff, J (2010) International Banking UGB 322 United Kingdom: University of Sunderland Hall, M J B and Kaufman, G G (2002) 'International banking regulation', Structural Foundations of International Finance Halifax, Nova Scotia, 2002 Hall, R (2015) Assignment Revision, [Lecture to International Banking UGB322] University of Sunderland Hassan, M K., Karels, G V and Peterson, M O (1993) 'Off-Balance Sheet Activities and Bank Default-Risk Premia: A comparision of risk measures', Journal of Economics and Finance, 17(3), pp.69-83 Houston, J F., Lin, C and Ma, Y (2012) Regulatory Arbitrage and International Bank Flows HKIMR Working Paper No.15/2012 Howells, P and Bain, K (2007) Financial markets and institutions 5th edn London: Longman 18 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 Howels, P (2010) Financial Markets APC313 United Kingdom: University of Sunderland KÖSE, A (2009) Foreign bank presence and domestic bank performance in Turkish banking system Available at: http://isletmeiktisadi.istanbul.edu.tr/wpcontent/uploads/2013/04/Yonetim-63-2009-1.pdf (Accessed: 26 April 2015) Logue, A.C (2015) Comparing U.S GAAP and IFRS Accounting Systems Available at: http://www.dummies.com/how-to/content/comparing-us-gaap-and-ifrs-accountingsystems.html (Accessed: 01 May 2015) Lovegrove, S and Rose, N (2011) Independent Commission on banking: the UK approach to Glass-Steagall Available at: http://uk.practicallaw.com/1-5053691?q=&qp=&qo=&qe=#null (Accessed: 04 May 2015) Oatley, T (2001) 'The Dilemmas of International Financial Regulation Consequences of the 1988 Basle Accord Should Concern Those Who Want More International Regulation of Financial Institutions', Regulation Magazine, 23(4) Partnoy, F and Turner, L E (2015) Bring transparency to off-balance sheet accounting Available at: http://www.makemarketsbemarkets.org/modals/report_off.php (Accessed: 01 May 2015) Shah, S (2014) Banking Fundamentals Available at: https://www.academia.edu/7850627/Banking_Fundamentals (Accessed: 03 May 2015) Qureshi, M.U (2015) Basel Accord: Working and Limitations Available at: https://www.scribd.com/doc/263884149/Basel-Accord (Accessed: 03 May 2015) Schoenmaker, D (2013) Governance of International Banking: The Financial Trilemma United States of America: Oxford University Press Schwarz, C., Karakitsos, P., Merriman, N and Studener, W (2014) 'Why accounting matters: A central bank perspective', ECB: Occasional Paper Series No.153 , pp.1-35 Webel, B (2010) The Dodd-Frank Wall Street Reform and Consumer Protection Act: Issues and Summary CRS Report for Congress V Appendices Figure 1: The comparison of Basel II and Basel III capital requirements (Hall, 2015) 19 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 Figure 2: Differences between Basel II and Basel III requirements (Shah, 2014) 20 [...]... http://host.uniroma3.it/facolta/economia/db/materiali/insegnamenti/548_6559.pdf (Accessed: 02 May 2015) Hagendorff, J (2010) International Banking UGB 322 United Kingdom: University of Sunderland Hall, M J B and Kaufman, G G (2002) 'International banking regulation', Structural Foundations of International Finance Halifax, Nova Scotia, 2002 Hall, R (2015) Assignment Revision, [Lecture to International Banking UGB322] University of Sunderland Hassan, M K., Karels, G... threat to international banking firms or even collapse in the worst case (Howells and Bain, 2007, p.362) The failure of one bank causes a loss of confidence in banking in general, creates bad debts for other banks and widespread collapse (risk of contagion or systemic risk) as the result of the interconnectedness of banking firms via wholesale money markets within national banking sectors and for international. .. the emergence and growth of international banking Banking no longer be regarded as traditional financial intermediaries (take deposits and make loans), having become intermingled with other financial activities, including securities business Such thing poses formidable problems for bank regulatory authorities who have to cope not only with a riskier banking system, but a banking system whose scope is... it is not stable for international banks, as national authorities do not incorporate crossborder externalities in their decision making (Schoenmaker, 2013, p.65) Basel Accord is a solution to the problem arising from the inadequacy of the safety net and considered as one 15 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 of the first attempts for international banking regulation... will discuss the challenges regulators face when regulating international banks II Main body 1 The need for regulating international banks Of all the financial institutions, banks are heavily regulated especially international banks which operate cross border and hold a prominent share of the banking market in many countries Similar to banks, international banks is also regulated for two main reasons:... about banks, which helps them to monitor the safety and soundness of the banking system (Auditandrisk, 2014) Another challenge for bank regulators derived from the existence of off-balance sheet entities Off-balance sheet banking activities encompass a variety of items including certain loan commitments, 14 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 certain letters of credit,... customers when they intended to hide the risky action The presence of asymmetric information lessens confidence of public in banking system It should be noted that keeping customer confidence in banking system is important more than ever Banks operates mainly based 13 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 on deposits from individuals and institutions to make loan If depositors... analysis and monitoring (Standard Bank, 2013, p.56) Figure 4: Top five medium- and high-risk country risk 12 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 Part B: Critically discuss the challenges regulators face when regulating international banks I Introduction International finance has changed dramatically over the past two decades as all nations eliminated barriers to cross-border... Arbitrage and International Bank Flows HKIMR Working Paper No.15/2012 Howells, P and Bain, K (2007) Financial markets and institutions 5th edn London: Longman 18 UGB 322 - International Banking Nguyen Thi Kieu Anh - ID 149078874/1 Howels, P (2010) Financial Markets APC313 United Kingdom: University of Sunderland KÖSE, A (2009) Foreign bank presence and domestic bank performance in Turkish banking system... http://www.makemarketsbemarkets.org/modals/report_off.php (Accessed: 01 May 2015) Shah, S (2014) Banking Fundamentals Available at: https://www.academia.edu/7850627 /Banking_ Fundamentals (Accessed: 03 May 2015) Qureshi, M.U (2015) Basel Accord: Working and Limitations Available at: https://www.scribd.com/doc/263884149/Basel-Accord (Accessed: 03 May 2015) Schoenmaker, D (2013) Governance of International Banking: The Financial Trilemma United States ... International Banking Nguyen Thi Kieu Anh - ID 149078874/1 International Banking UGB 322 Nguyen Thi Kieu Anh - ID:149078874/1 Submission date: 15th May 2015 Number of words: 3,300 UGB 322 - International. .. need for regulating international banks 13 Regulations applied to international banks 14 Difficulties in regulating international banks 14 International banking regulation... 2015) Hagendorff, J (2010) International Banking UGB 322 United Kingdom: University of Sunderland Hall, R (2015) Assignment Revision, [Lecture to International Banking UGB322] University of Sunderland