Us Laws on International Banking

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					International Banking
                 Globalization
   Since 1970, there has     6
    been tremendous
                              5
    growth in international
    trade                     4

                              3

                              2

                              1

                              0
                                  1979 1986 1989 1992 1995 1998
                 Globalization
   Even more           400
    impressive is the   350
    growth in foreign   300
    exchange            250
                        200
                        150
                        100
                         50
                          0
                              1979   1989   1995
          International Banking
   Citigroup has over 50% of its assets ($600B)
    located outside the US. Citigroup provides
    banking and investment services in over 100
    countries around the world!
            International Banking
   Citigroup has over 50% of its assets ($600B)
    located outside the US. Citigroup provides
    banking and investment services in over 100
    countries around the world!
       General Motors has an established relationship to buy
        auto parts from a Mexican supplier. GM may find it
        convenient to have an account with Citibank in
        Mexico (Banamex)
            International Banking
   Citigroup has over 50% of its assets ($600B)
    located outside the US. Citigroup provides
    banking and investment services in over 100
    countries around the world!
       Honda has a manufacturing plant outside of
        Columbus, Ohio. It might be convenient for Honda to
        open an account with Deutschebank in the US to
        finance its US operations.
            International Banking
   Citigroup has over 50% of its assets ($600B)
    located outside the US. Citigroup provides
    banking and investment services in over 100
    countries around the world!
       Fidelity operates a global bond fund. It may be
        convenient for the to have several accounts around
        the world to manage the flow of interest payments.
        International Banking
 Facilitation of international transactions
 Managing exchange risk
 Avoiding Regulation (Eurodollars)
 Avoiding Taxes (Offshore Banking)
              Types of Banks
US Banks Abroad             Foreign Banks in the US
   Branches                    Branches
   Edge Act                    Agency Offices
    Corporations                US Subsidiary
   Foreign Subsidiary
   International Banking
    Facility
                   Eurodollars
   Since WWII, the dollar has become the premier
    international currency. Therefore, many foreign
    companies and governments hold dollars rather than
    their own currency.
   Further, to avoid interest rate restrictions, US banks
    began offering dollar denominated accounts at their
    foreign branches. These accounts became known as
    Eurodollar accounts.
   Euromarkets have expanded into Eurobonds, Euroloans,
    Euro Commercial paper. There is currently over $30
    Trillion in Eurodeposits around the world.
          Exchange Rate Risk
   In addition to information, liquidity, and
    interest rate risk, international banks must
    also deal with exchange rate risk.
                    An Example
           Assets
Cash Reserves: $2M                   Liabilities
                 E2M       Transaction Deposits
Securities (3%): $15M         Checking (0%): E10M
Loans                         Savings (2%): E10M
   Consumer:               Eurodollar Accounts: $10M
   Commercial (7%): $5M    Loans:
                     E20   Equity: $8.25M
   Real Estate (8%): E3M
Other:
                 An Example
  Dollar Assets: $22M
  Euro Assets: E25M * $1.25/E = $31.25M
  Total: $53.25M

  Dollar Liabilities: $20M
  Euro Liabilities: E20M * $1.25/E = $25M
  Total: $45M

Equity = $53.25M - $45M = $8.25M
        Exchange Rate Risk
 In addition to information, liquidity, and
  interest rate risk, international banks must
  also deal with exchange rate risk.
 Suppose that the dollar depreciates to
  $1.30
                 An Example
  Dollar Assets: $22M
  Euro Assets: E25M * $1.30/E = $32.5M
  Total: $54.5M

  Dollar Liabilities: $20M
  Euro Liabilities: E20M * $1.30/E = $26M
  Total: $46M

Equity = $54.5M - $46M = $8.5M
     Regulating International
            Banking
 In the US, monitoring/regulating of US
  banks is done by either the Fed, OCC or
  FDIC.
 British Banks in England are regulated by
  the Bank of England.
 Who regulates British banks in the US or
  US Banks in Britain?
      Regulating International
             Banking
 After 1978 (International Banking Act),
  foreign banks were subject to basically the
  same laws as US Banks, but were not
  subject to as much oversight.
 Prompted by the BCCI scandal in 1991,
  the US passed the Foreign Bank
  Supervision Act giving the Fed and OCC
  greater control over foreign banks.
         Bank For International
             Settlements
   Established in 1930 to handle German
    WWI reparations, the BIS has become a
    center for international cooperation.
     Played a central role in the Bretton Woods
      Exchange Rate System
     Integral in the Establishment of the Euro

   The BIS is like a central bank for central
    banks.
              Basle Accords
   In 1988, the G-10 countries established
    uniform worldwide standards for:
     Capital Requirements
     Off Balance Sheet Assessments
     Risk Weighting
     Interest rate sensitivity
     Problems with International
            Regulation
   The key issue is that the banking industry
    in Japan and Europe is Fundamentally
    different.
    Top Ten World Banks

Bank                                 Assets
                                     (Billions)
Citigroup (US)                       1,497
JP Morgan + Bank One (US)            1,097
Mizuho Financial Group (Japan)       1,080
Bank of America + First Union (US)   851
UBS (Switzerland)                    851
Sumitomo Mitsui (Japan)              844
DeutscheBank (Germany)               795
Mitsubishi Tokyo (Japan)             781
HSBC (UK)                            759
BNP Paribas (France)                 744
         European Banking
 Unlike the US, European Banks are
  allowed to engage in securities markets
  (universal banking)
 In fact, in Europe, banks are generally
  significant shareholders in European
  companies.
 Banks rely much more on equity than
  deposits.
               Japanese Banking
   Japanese industry is organized into industrial
    groups (keiretsu)
       Mitsubishi
       Mitsui
       Sumitomo
       Fuyo
       Daiichii
       Kangyo
       Sanwa
           Japanese Banking
   These “groups” are both vertically and
    horizontally integrated and are comprised
    of a very large number of companies:
     Sumitomo has 15 divisions ranging from
      electronics to mining to consumer goods.
     Sumitomo controls assets equal to $50T.
            Japanese Banking
   Each “group” has its own bank which
    handles its finances. This “main” bank
     Owns equity in member firms
     Monitors member firms
     Provides credit for member firms.

				
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