INDEX

1. Introduction of International Banking.

2. History of International Banking.
2.1 Reasons for growth.

3. Organisational features of International Banking.

3.1 Correspondent Banking.

3.2 Resident Representatives.

3.3 Bank Agencies.

3.4 Foreign Branches.

3.5 Foreign Subsidiaries and Affiliates.

3.6 Consortium Banks .

4. International Inter-Bank Business.

4.1 Functions of inter-bank market.

5. International Private Banking.

6. Need for Regulation of International Banking.
7. Regulatory Arbitrage.
7.1 Euro-Currency Markets.

7.2 Offshore Banking Units.

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 Introduction to International Banking.
Banks are the key players in the financial system of a country. They
perform the function of financial intermediation in an effective
manner.

Banks in many nations have internationalized their operations since

1970. The quantum of operations has increased in such a manner that
the concept evolved into a subject in itself. International banking and
multinational banking can be used interchangeably. Multinational
banking signifies the presence of banking facilities in more than one
country. According to Aiber,”International banking" is defined as a
sub-set of commercial banking transactions and activity having a
cross-border and/or cross- currency element.

International banking comprises a range of transactions that can be

distinguished from purely domestic operations by

i. The currency of denomination of the transaction,

ii. The residence of the bank customer, and
iii. The location of the banking office.

A deposit or a loan transacted in local currency between a bank in its

home country and a resident of that same country is termed as pure
domestic banking. Thus, the term international banking is used to
refer to the cross—currency facets of banking business.

Euro-currency market is an example of a typical international banking

community. The euro-currency market conventionally encompasses
all deposit and loan operations of a bank transacted in a currency
other than that of the nation where the office is located. Euro-currency
banking involves intermediation in foreign currencies and the relative
freedom from local reserve requirements and monetary regulation.
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History of International Banking.
The origin of international banking dates back to the second century
BC when Babylonian temples under the code of Hammurabi,
safeguarded the idle funds of the affluent and extended loans to
merchants to finance the movement of goods.

Similarly, during the period 500-300 BC, banks in Greece regularly

advertized interest for deposits and routinely handled foreign money
payments.

Later during the Roman civilization, a variety of financial instruments

like bills of exchange were legalized to encourage trade between
regions.

By 1920s, American banking institutions dominated international

lending, and the European nations were the major borrowers. There
was perfect international Banking system existing till the time of the
First World War.

But post-First World War period was characterized by a series of

bank failures, default and violent contractions in international trade
and investment. These developments shattered confidence in
international lending. Banking across national borders came to a
grinding halt in the early 1930s and did not resume till the Second
World War.

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2.1 Reasons for the growth of international
banking.
There are a number of explanations or theories provided to support
the growth in international banking operations.

International banking theories explain the reasons behind the bank’s

choice of a particular location for their banking facilities, maintaining
a particular organizational structure, and the underlying causes of
international banking. Certain theories/explanations are listed below;

1."Follow-the—leader" explanation suggests that banks expand across

national borders to continue to serve customers by establishing
branches or subsidiaries abroad. This is mostly done in the context of
monopolistic competition, so that they can take advantage of the
differentiation of their services package from those provided by
different banks.

2. Expansion abroad has a pervasive effect on competition. Many a

time banks operating under intense competition in the home markets
are forced to develop low cost technologies for financial
intermediation without proper incentives; therefore they try to exploit
their competitive advantage in other markets.
 

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ORGANIZATIONAL FEATURES OF
INTERNATIONAL BANKING.
International banks are organized in various formal and informal ways
from simply holding account with each other to holding common
ownership. Given below are some forms of banking organizations that
exist across the world.

3.1 Correspondent Banking

This represents an informal linkage between banks and its customers
in different countries. The term ‘correspondent’ is derived from the
mail or cable communications that the banks use for setting customer
accounts The linkage is set-up when banks maintain correspondent
accounts with each other Many a time large banks have correspondent
relationships with banks in almost every country in which they do not
have an office of their own. This informal linkage facilitates
international payments and collection for customers.

3.2 Resident Representatives

Often banks open overseas business offices in order to help their
customers in foreign countries. These banking offices do not accept
local deposits or provide loans. The main objective of these offices is
to provide information about local business practices and conditions,
including the creditworthiness of potential customers and the banks’
clients. The resident representatives usually keep in touch with the
local correspondent banks and provide help when needed. 

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3.3 Bank Agencies
An agency is similar to a bank except that it does not handle ordinary
retail deposits. The agencies mostly deal in the local currency markets
and in the foreign exchange markets, arrange loans, clear bank drafts
and cheques, and channel foreign funds into financial markets.

3.4 Foreign Branches

These are operating banks, except that the directors and owners tend
to reside elsewhere. These are subject to both local banking rules and
the rules at home. These branches, most of the times, offer quality
services and safety that are provided by a large bank to customers in
small countries. 

3.5 Foreign Subsidiaries and Affiliates

A foreign subsidiary is a locally incorporated bank that is owned
either completely or partially by a foreign patent. Foreign subsidiaries
do all types of banking, and it may be very difficult to distinguish
them from an ordinary locally owned bank. Foreign affiliates are
similar to subsidiaries locally incorporated but they are joint ventures,
and no individual foreign owner has control.

3.6 Consortium Banks

They are joint ventures of the larger commercial banks. They often
involve six or more partners from different countries.

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INTERNATIONAL INTERBANK BUSINESS
Interbank market is the mainstay of international banking market.
Nearly sixty to seventy percent of all international banking market
comes from other banks. The large interbank market makes the
market look essentially a wholesale market for banks. It enables banks
to fund rapidly growing loan portfolios.

The international interbank business either takes the form of a deposit

or a loan. The existence of the foreign exchange market (which deals
in currencies) has enhanced the operating efficiency of the interbank
market.

4.1Functions of interbank Market

Linkages of regions and interest rates.

Liquidity and risk management.

Breaking up of maturity transformation.

Spreading risks among different institutions. 

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INTERNATIONAL PRIVATE BANKING
Private banks are entering the international scene and are creating a
lot of competition in the banking system. Thus evolved the concept of
INTERNATIONAL PRIVATE BANKING.

International private banking is counseling service for different

people. The services offered by banks internationally focus either on
the asset or liability side of the balance sheet or on a combination of
both. International private banking is becoming an integral part of the
banking system across the world.

International private banking consists of banking services primarily

provided for non-residents. Investment options for the clients include:

i. Equity Portfolio Management,

ii. Fixed Income Portfolio,

iii. Balanced Portfolio,

iv. Offshore Mutual Fund, and

v. Short-term Portfolio Management.

Private banks operating internationally help in arriving at customizing

solution for

lasting assets protection.

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Some of the services offered by the International
private banks:
• Banks lend their international clients certain small amounts that
are backed by assets for short time periods. Generally banks
operating internationally do not provide unsecured loans as part
of their business, but certain institutions provide trade financing
and other forms of transactional or corporate lending activities.

• The objective of private international banks is to build a

portfolio appropriate to each client’s needs by managing
effectively the inter-relationship among risk, return, liquidity
and confidentiality. The banks provide clients with access to
financial assistance.

• Private international banks also provide wide-ranging personal

services for international clients on similar lines as those
provided for domestic clients.

• Private international banks also provide ancillary services such

as circular letters of credit, forex, bill paying, traveler’s cheques,
mail holding or forwarding and safe deposit boxes as per their
financial requirements/needs.
 

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Need for Regulation of International Banking
Since international banking activities take place between parties,
that are not in the same country, the international banks are exposed
to regulations of the host country as well as the country in which the
borrower is located. To aid the banks operating internationally from
dual regulations, a need to regulate the international banking system
as a whole was felt.

The international banking system is underlined by procedures,

customs, instruments and organizational setting that provide a
workable multilateral payment arrangement among different
countries.

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REGULATORY ARBITRAGE: Birth of
Offshore Banking And Euro-Currency
Markets.
The gaps that arise either deliberately or unintentionally as a
result of regulations, give rise to arbitrage opportunities in banking,
Two developments have taken place under this — euro-currency and
offshore banking units.

7.1 Euro-Currency Markets

Euro-currency markets came into existence in the early 1950s
when the Soviet Union allegedly fearing that the United States might
block its dollar reserves, decided to deposit its dollars in a Soviet
owned Paris bank, Banque Commerciale Pour. They evolved from the
concept of euro—dollars (the dollars held with a bank outside USA),
Later many other reasons prompted the growth of euro—currency
markets. 

7.2 Off-shore Banking Units

Offshore banking units normally comprise sub—offices of
multinational banks set- up to freely transact in international
currencies especially with non—residents. Offshore banking units
offer attractive rates of interest as they are generally exempted from
all types of fiscal levies and monetary controls.

The main feature, of an offshore center is the physical presence of

a banking unit, which undertakes the bulk of everyday transactions.
They also serve as an important link for global markets thus
facilitating channeling of funds from major international financial
centers to borrowers at other centers. Since, offshore centers cannot
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act as close substitutes to one another, it is not possible to close down
an offshore banking unit even if certain concessions are withdrawn
and the location center becomes less attractive. 

The main pre-requisites for setting up a successful offshore banking

center are political and economic stability. Some of the fundamental
pre-requisites are:

The existence of a major domestic financial market.

A team of experienced, expert support specialists in the field.

A well-defined background of statutory laws.

A system free from restrictions and currency fluctuations, at

least as far as non-resident transactions are concerned.

An efficient, highly developed, cost-effective

telecommunication network.

The capability of leasing exclusive channels of communication

for assessing international data and carrying out treasury
operations.

The presence of regulatory and fiscal incentives such as "no

obligation" system for maintaining reserves with the Central
Bank.

The absence of withholding tax on depositors’ interest income

and income tax. 

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