Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
6Chapter SixInternational Banking and Money Market
Chapter Objective:
This chapter serves to begin our discussion of world
financial markets and institutions,
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? The World’s Largest Banks
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
? Types of International Banking Offices
? Correspondent Bank
? Representative Offices
? Foreign Branches
? Subsidiary and Affiliate Banks
? Edge Act Banks
? Offshore Banking centers
? International Banking Facilities
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
? Types of International Banking Offices
? Capital Adequacy Standards
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
? Types of International Banking Offices
? Capital Adequacy Standards
? International Money Market
? Eurocurrency Markets
? Eurocredits
? Forward Rate Agreements
? Euronotes
? Euro-Medium-Term Notes
? Eurocommercial Paper
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
? Types of International Banking Offices
? Capital Adequacy Standards
? International Money Market
? International Debt Crisis
? History
? Debt-for-Equity Swaps
? The Solution,Brady Bonds
? The Asian Crisis
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Banking Services
? International Banks do everything domestic banks
do and:
? Arrange trade financing.
? Arrange foreign exchange.
? Offer hedging services for foreign currency receivables
and payables through forward and option contracts.
? Offer investment banking services (where allowed).
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
The World’s 10 Largest Banks
Bank of America U.S.
Citigroup U.S.
HSBC Holdings U.K.
Crédit Agricole Group France
Chase Manhattan U.S.
Industrial & Commercial Bank of China China
UBS Switzerland
Deutsche Bank Germany
Wells Fargo U.S.
Bank One U.S.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Managerial and marketing knowledge developed at
home can be used abroad with low marginal costs.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? The foreign bank subsidiary can draw on the parent
bank’s knowledge of personal contacts and credit
investigations for use in that foreign market.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Local firms in a foreign market may be able to obtain
more complete information on trade and financial
markets in the multinational bank’s home nation than is
obtainable from foreign domestic banks.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Very large multinational banks have high perceived
prestige,which can be attractive to new clients.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Multinational banks are often not subject to the same
regulations as domestic banks.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Banks follow their multinational customers abroad to
avoid losing their business at home and abroad.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Reasons for International Banking
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Retail Defensive Strategy
? Multinational banks also compete for retail services such as
travelers checks,tourist and foreign business market.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Retail Defensive Strategy
? Transactions Costs
? Multinational banks may be able to circumvent
government currency controls.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Retail Defensive Strategy
? Transactions Costs
? Growth
? Foreign markets may offer opportunities to growth not
found domestically
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Retail Defensive Strategy
? Transactions Costs
? Growth
? Risk Reduction
? Greater stability of earnings due to diversification.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Types of International
Banking Offices
? Correspondent Bank
? Representative Offices
? Foreign Branches
? Subsidiary and Affiliate Banks
? Edge Act Banks
? Offshore Banking Centers
? International Banking Facilities
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Correspondent Bank
? A correspondent banking relationship exists when
two banks maintain deposits with each other.
? Correspondent banking allows a bank’s MNC
client to conduct business worldwide through his
local bank or its correspondents.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Representative Offices
? A representative office is a small service
facility staffed by parent bank personnel that
is designed to assist MNC clients of the
parent bank in dealings with the bank’s
correspondents.
? Representative offices also assist with
information about local business customs,
and credit evaluation of the MNC’s local
customers.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Foreign Branches
? A foreign branch bank operates like a local bank,
but is legally part of the the parent.
? Subject to both the banking regulations of home country
and foreign country.
? Can provide a much fuller range of services than a
representative office.
? Branch Banks are the most popular way for U.S,
banks to expand overseas.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Subsidiary and Affiliate Banks
? A subsidiary bank is a locally incorporated bank
wholly or partly owned by a foreign parent.
? An affiliate bank is one that is partly owned but
not controlled by the parent.
? U.S,parent banks like foreign subsidiaries
because they allow U.S,banks to underwrite
securities,
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Edge Act Banks
? Edge Act banks are federally chartered
subsidiaries of U.S,banks that are physically
located in the U.S,that are allowed to engage in a
full range of international banking activities.
? The Edge Act was a 1919 amendment to Section
25 of the 1914 Federal Reserve Act.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Offshore Banking Centers
? An offshore banking center is a country whose
banking system is organized to permit external
accounts beyond the normal scope of local
economic activity.
? The host country usually grants complete freedom
from host-country governmental banking
regulations.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Offshore Banking Centers
? The IMF recognizes
? the Bahamas
? Bahrain
? the Cayman Islands
? Hong Kong
? the Netherlands Antilles
? Panama
? Singapore
? as major offshore banking centers
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
―Shell‖ Branches
? Shell branches need to be nothing more than a
post office box.
? The actual business is done by the parent bank at
the parent bank.
? The purpose was to allow U.S,banks to compete
internationally without the expense of setting up
operations ―for real‖.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Banking Facilities
? An international banking facility is a separate set
of accounts that are segregated on the parents
books.
? An international banking facility is not a unique
physical or legal identity.
? Any U.S,bank can have one.
? International banking facilities have captured a lot
of the Eurodollar business that was previously
handled offshore.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Capital Adequacy Standards
? Bank capital adequacy refers to the amount of
equity capital and other securities a bank holds as
reserves.
? There are various standards and international
agreements regarding how much bank capital is
―enough‖ to ensure the safety and soundness of
the banking system.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Capital Adequacy Standards
? While traditional bank capital standards may be
enough to protect depositors from traditional
credit risk,they may not be sufficient protection
from derivative risk.
? For example,Barings Bank,which collapsed in
1995 from derivative losses,looked good on paper
relative to capital adequacy standards.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Money Market
? Eurocurrency is a time deposit in an international
bank located in a country different than the
country that issued the currency.
? For example,Eurodollars are U.S,dollar-denominated
time deposits in banks located abroad.
? Euroyen are yen-denominated time deposits in banks
located outside of Japan.
? The foreign bank doesn’t have to be located in Europe.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Most Eurocurrency transactions are interbank
transactions in the amount of $1,000,000 and up.
? Common reference rates include
? LIBOR the London Interbank Offered Rate
? PIBOR the Paris Interbank Offered Rate
? SIBOR the Singapore Interbank Offered Rate
? A new reference rate for the new euro currency
Eurocurrency Market
? EURIBOR the rate at which interbank time deposits of
are offered by one prime bank to another.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Eurocredits
? Eurocredits are short- to medium-term loans of
Eurocurrency.
? The loans are denominated in currencies other
than the home currency of the Eurobank.
? Often the loans are too large for one bank to
underwrite; a number of banks form a syndicate to
share the risk of the loan.
? Eurocredits feature an adjustable rate,On
Eurocredits originating in London the base rate is
LIBOR.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Forward Rate Agreements
? An interbank contract that involves two parties,a
buyer and a seller.
? The buyer agrees to pay the seller the increased
interest cost on a notational amount if interest
rates fall below an agreed rate.
? The seller agrees to pay the buyer the increased
interest cost if interest rates increase above the
agreed rate.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Forward Rate Agreements,Uses
? Forward Rate Agreements can be used to,
? Hedge assets that a bank currently owns against interest
rate risk.
? Speculate on the future course of interest rates.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Euronotes
? Euronotes are short-term notes underwritten by a
group of international investment banks or
international commercial banks.
? They are sold at a discount from face value and
pay back the full face value at maturity.
? Maturity is typically three to six months.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Euro-Medium-Term Notes
? Typically fixed rate notes issued by a corporation.
? Maturities range from less than a year to about ten
years.
? Euro-MTNs is partially sold on a continuous basis
–this allows the borrower to raise funds as they
are needed.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Eurocommercial Paper
? Unsecured short-term promissory notes issued by
corporations and banks.
? Placed directly with the public through a dealer.
? Maturities typically range from one month to six
months.
? Eurocommercial paper,while typically U.S,dollar
denominated,is often of lower quality than U.S,
commercial paper—as a result yields are higher.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Debt Crisis
? Some of the largest banks in the world were
endangered when loans to sovereign governments
of some less-developed countries.
? At the height of the crisis,third world countries
owed $1.2 trillion.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Debt Crisis
? Like a great many calamities,it is easy to see in
retrospect that:
? It’s a bad idea to put too many eggs in one basket,
especially if:
? You don’t know much about that basket.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
End Chapter Six
reserved,
INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
6Chapter SixInternational Banking and Money Market
Chapter Objective:
This chapter serves to begin our discussion of world
financial markets and institutions,
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? The World’s Largest Banks
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
? Types of International Banking Offices
? Correspondent Bank
? Representative Offices
? Foreign Branches
? Subsidiary and Affiliate Banks
? Edge Act Banks
? Offshore Banking centers
? International Banking Facilities
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
? Types of International Banking Offices
? Capital Adequacy Standards
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
? Types of International Banking Offices
? Capital Adequacy Standards
? International Money Market
? Eurocurrency Markets
? Eurocredits
? Forward Rate Agreements
? Euronotes
? Euro-Medium-Term Notes
? Eurocommercial Paper
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Chapter Six Outline
? International Banking Services
? Reasons for International Banking
? Types of International Banking Offices
? Capital Adequacy Standards
? International Money Market
? International Debt Crisis
? History
? Debt-for-Equity Swaps
? The Solution,Brady Bonds
? The Asian Crisis
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Banking Services
? International Banks do everything domestic banks
do and:
? Arrange trade financing.
? Arrange foreign exchange.
? Offer hedging services for foreign currency receivables
and payables through forward and option contracts.
? Offer investment banking services (where allowed).
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
The World’s 10 Largest Banks
Bank of America U.S.
Citigroup U.S.
HSBC Holdings U.K.
Crédit Agricole Group France
Chase Manhattan U.S.
Industrial & Commercial Bank of China China
UBS Switzerland
Deutsche Bank Germany
Wells Fargo U.S.
Bank One U.S.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Managerial and marketing knowledge developed at
home can be used abroad with low marginal costs.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? The foreign bank subsidiary can draw on the parent
bank’s knowledge of personal contacts and credit
investigations for use in that foreign market.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Local firms in a foreign market may be able to obtain
more complete information on trade and financial
markets in the multinational bank’s home nation than is
obtainable from foreign domestic banks.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Very large multinational banks have high perceived
prestige,which can be attractive to new clients.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Multinational banks are often not subject to the same
regulations as domestic banks.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Banks follow their multinational customers abroad to
avoid losing their business at home and abroad.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Reasons for International Banking
? Low Marginal Costs
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Retail Defensive Strategy
? Multinational banks also compete for retail services such as
travelers checks,tourist and foreign business market.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Knowledge Advantage
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Retail Defensive Strategy
? Transactions Costs
? Multinational banks may be able to circumvent
government currency controls.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Home Nation Information Services
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Retail Defensive Strategy
? Transactions Costs
? Growth
? Foreign markets may offer opportunities to growth not
found domestically
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Prestige
? Regulatory Advantage
? Wholesale Defensive Strategy
? Retail Defensive Strategy
? Transactions Costs
? Growth
? Risk Reduction
? Greater stability of earnings due to diversification.
Reasons for International Banking
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Types of International
Banking Offices
? Correspondent Bank
? Representative Offices
? Foreign Branches
? Subsidiary and Affiliate Banks
? Edge Act Banks
? Offshore Banking Centers
? International Banking Facilities
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Correspondent Bank
? A correspondent banking relationship exists when
two banks maintain deposits with each other.
? Correspondent banking allows a bank’s MNC
client to conduct business worldwide through his
local bank or its correspondents.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Representative Offices
? A representative office is a small service
facility staffed by parent bank personnel that
is designed to assist MNC clients of the
parent bank in dealings with the bank’s
correspondents.
? Representative offices also assist with
information about local business customs,
and credit evaluation of the MNC’s local
customers.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Foreign Branches
? A foreign branch bank operates like a local bank,
but is legally part of the the parent.
? Subject to both the banking regulations of home country
and foreign country.
? Can provide a much fuller range of services than a
representative office.
? Branch Banks are the most popular way for U.S,
banks to expand overseas.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Subsidiary and Affiliate Banks
? A subsidiary bank is a locally incorporated bank
wholly or partly owned by a foreign parent.
? An affiliate bank is one that is partly owned but
not controlled by the parent.
? U.S,parent banks like foreign subsidiaries
because they allow U.S,banks to underwrite
securities,
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Edge Act Banks
? Edge Act banks are federally chartered
subsidiaries of U.S,banks that are physically
located in the U.S,that are allowed to engage in a
full range of international banking activities.
? The Edge Act was a 1919 amendment to Section
25 of the 1914 Federal Reserve Act.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Offshore Banking Centers
? An offshore banking center is a country whose
banking system is organized to permit external
accounts beyond the normal scope of local
economic activity.
? The host country usually grants complete freedom
from host-country governmental banking
regulations.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Offshore Banking Centers
? The IMF recognizes
? the Bahamas
? Bahrain
? the Cayman Islands
? Hong Kong
? the Netherlands Antilles
? Panama
? Singapore
? as major offshore banking centers
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
―Shell‖ Branches
? Shell branches need to be nothing more than a
post office box.
? The actual business is done by the parent bank at
the parent bank.
? The purpose was to allow U.S,banks to compete
internationally without the expense of setting up
operations ―for real‖.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Banking Facilities
? An international banking facility is a separate set
of accounts that are segregated on the parents
books.
? An international banking facility is not a unique
physical or legal identity.
? Any U.S,bank can have one.
? International banking facilities have captured a lot
of the Eurodollar business that was previously
handled offshore.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Capital Adequacy Standards
? Bank capital adequacy refers to the amount of
equity capital and other securities a bank holds as
reserves.
? There are various standards and international
agreements regarding how much bank capital is
―enough‖ to ensure the safety and soundness of
the banking system.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Capital Adequacy Standards
? While traditional bank capital standards may be
enough to protect depositors from traditional
credit risk,they may not be sufficient protection
from derivative risk.
? For example,Barings Bank,which collapsed in
1995 from derivative losses,looked good on paper
relative to capital adequacy standards.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Money Market
? Eurocurrency is a time deposit in an international
bank located in a country different than the
country that issued the currency.
? For example,Eurodollars are U.S,dollar-denominated
time deposits in banks located abroad.
? Euroyen are yen-denominated time deposits in banks
located outside of Japan.
? The foreign bank doesn’t have to be located in Europe.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
? Most Eurocurrency transactions are interbank
transactions in the amount of $1,000,000 and up.
? Common reference rates include
? LIBOR the London Interbank Offered Rate
? PIBOR the Paris Interbank Offered Rate
? SIBOR the Singapore Interbank Offered Rate
? A new reference rate for the new euro currency
Eurocurrency Market
? EURIBOR the rate at which interbank time deposits of
are offered by one prime bank to another.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Eurocredits
? Eurocredits are short- to medium-term loans of
Eurocurrency.
? The loans are denominated in currencies other
than the home currency of the Eurobank.
? Often the loans are too large for one bank to
underwrite; a number of banks form a syndicate to
share the risk of the loan.
? Eurocredits feature an adjustable rate,On
Eurocredits originating in London the base rate is
LIBOR.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Forward Rate Agreements
? An interbank contract that involves two parties,a
buyer and a seller.
? The buyer agrees to pay the seller the increased
interest cost on a notational amount if interest
rates fall below an agreed rate.
? The seller agrees to pay the buyer the increased
interest cost if interest rates increase above the
agreed rate.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Forward Rate Agreements,Uses
? Forward Rate Agreements can be used to,
? Hedge assets that a bank currently owns against interest
rate risk.
? Speculate on the future course of interest rates.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Euronotes
? Euronotes are short-term notes underwritten by a
group of international investment banks or
international commercial banks.
? They are sold at a discount from face value and
pay back the full face value at maturity.
? Maturity is typically three to six months.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Euro-Medium-Term Notes
? Typically fixed rate notes issued by a corporation.
? Maturities range from less than a year to about ten
years.
? Euro-MTNs is partially sold on a continuous basis
–this allows the borrower to raise funds as they
are needed.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
Eurocommercial Paper
? Unsecured short-term promissory notes issued by
corporations and banks.
? Placed directly with the public through a dealer.
? Maturities typically range from one month to six
months.
? Eurocommercial paper,while typically U.S,dollar
denominated,is often of lower quality than U.S,
commercial paper—as a result yields are higher.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Debt Crisis
? Some of the largest banks in the world were
endangered when loans to sovereign governments
of some less-developed countries.
? At the height of the crisis,third world countries
owed $1.2 trillion.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
International Debt Crisis
? Like a great many calamities,it is easy to see in
retrospect that:
? It’s a bad idea to put too many eggs in one basket,
especially if:
? You don’t know much about that basket.
Irwin/McGraw-Hill Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
End Chapter Six
