chapter 21 international banking. chapter objectives n describe key regulations that reduced...
Post on 23-Dec-2015
218 Views
Preview:
TRANSCRIPT
Chapter ObjectivesChapter Objectives
Describe key regulations that reduced competitive advantages of banks in particular countries
Describe the risks of international banks Describe bank solutions to the international
debt crisis Describe how banks assess country risk when
they consider lending funds to foreign countries
International ExpansionInternational Expansion
Banks go global for several reasons Diversify among economies to become less
dependant on a single country’s conditions Do business face-to-face with multinational
corporations and their subsidiaries International expansion by U.S. banks
U.S. bank regulations limited interstate banking Expansion and growth via international banking
International ExpansionInternational Expansion
How U.S. banks expand overseas Establish branches Must first receive approval of the Federal Reserve
Board in the U.S. U.S. banks’ presence largest in the U.K. Deposits in foreign branches are not insured Agencies are an alternative that can make loans
but not accept deposits or provide trust services
International ExpansionInternational Expansion
Non-U.S. banks expand into the United States and focus on corporate rather than consumer banking Provide service to the subsidiaries of non-U.S.
corporations 1913 Edge Act creates corporations that specialize
in banking and foreign transactions allowing loans and accepting deposits only if specifically related to international transactions
Global Bank RegulationsGlobal Bank Regulations
Countries have a system of monitoring and regulating commercial banks
Division of regulatory power between the central bank and other regulators varies among countries Canada Europe Japan
Global Bank RegulationsGlobal Bank Regulations
Standardizing the rules with uniform regulations helps globalize the financial system
Playing field leveled by three regulatory changes The International Banking Act requiring all banks
within the U.S. follow the same rules Single European Act Uniform capital adequacy guidelines
Global Bank RegulationsGlobal Bank Regulations
Uniform regulations for banks operating in the U.S. International Banking Act of 1978 Prior to the Act, foreign banks had more flexibility
to cross state lines Forced foreign banks to identify one state as their
home state
Global Bank RegulationsGlobal Bank Regulations
Uniform regulations across Europe from the Single European Act of 1987
Capital can flow freely throughout Europe Banks can offer a wide variety of lending,
leasing and securities activities in Europe Regulations regarding competition, mergers
and taxes are similar throughout Europe Banks established in one European country
have the right to expand into any or all other European countries
Global Bank RegulationsGlobal Bank Regulations
Uniform capital adequacy guidelines Prior to 1988 standards differed around the
world This difference gave some a comparative
advantage 12 industrial countries agreed to standard
guidelines in 1988 Risk-weighting means higher capital for
riskier assets
Global Bank CompetitionGlobal Bank Competition
U.S. bank expansion in foreign countries is driven by several factors Locations where U.S. multinationals are expected
to expand Areas benefiting from expansion due to free trade
agreements Goal of the banks is to offer diverse services to
meet all the banking needs of corporate customers
Global Bank CompetitionGlobal Bank Competition
Non-U.S. bank expansion in the United States Japanese banks developed an extensive
presence in the U.S. Offer competitive corporate loans Lower fees for letters of credit Have a low cost of capital so can take on ventures
U.S. banks would not High saving rate in Japan provides deposit funds
for global expansion
Global Bank CompetitionGlobal Bank Competition
Impact of the Euro on bank expansion Introduction of a single currency stimulated
bank expansion Simplifies transactions to deal in one, rather than
several currencies Customers can more easily compare service costs Expansion via acquisition to capture economies of
scale
Global Bank CompetitionGlobal Bank Competition
Competition for investment banking services Banks compete to provide a variety of services
Swaps Foreign exchange Investment banking
Underwriting Brokerage
Banks expand both geographically and their product and service lines to capture economies
Impact of Eastern European Reform on Impact of Eastern European Reform on Global CompetitionGlobal Competition
Banks helped facilitate the trend toward privatization Provide direct loans to businesses Act as underwriters on bonds and stocks Provide letters of credit Provide consulting services
International trade Mergers Other corporate activities
Risks of Multinational BanksRisks of Multinational Banks
Credit Risk Credit Risk
Exchange Rate RiskExchange Rate Risk
Settlement RiskSettlement Risk
Interest Rate RiskInterest Rate Risk
Combining AllTypes of Risk
Risks of Multinational BanksRisks of Multinational Banks
Credit risk exists for U.S. banks making foreign loans because they may have less information than for domestic loans Regulations for the disclosure of financial
information differ among countries and are not as strict as in the U.S.
Ratios and industry norms differ among countries so benchmarking is difficult
Risks of Multinational BanksRisks of Multinational Banks
Managing credit risk May solve the problem by lending to large
corporations or government Performance of each branch in a particular country
linked to the performance to that country’s economy Diversify within a country across industries Diversify throughout the bank across countries
Risks of Multinational BanksRisks of Multinational Banks
Exchange rate risk Banks may agree to accept payment in a
currency other than the currency in which the loan is denominated
Convert funds received into the currency customers want to borrow
Assets and liabilities denominated in different currencies
Net out exposure
Risks of Multinational BanksRisks of Multinational Banks
Risk exists because banks may suffer losses as they settle their transactions
If one participant can not meet their obligations, counterparties will also be unable to meet their obligations
Central banks around the world are examining ways to stop the ripple effect
Risks of Multinational BanksRisks of Multinational Banks
Interest rate risk is even more challenging for the international bank because of its foreign currency balances
Risk depends on the currency denomination and the interest rates of loans and securities in various currencies
Minimize the risk by matching rate sensitivities of assets and liabilities for each currency
Risks of Multinational BanksRisks of Multinational Banks
Combining all types of risk means managing risk is complex
Tradeoffs exist because trying to minimize one of the risks may affect exposure in another area
Risks occur as the bank does daily business with multinationals and meets their needs Trying to control bank risks means they would not meet
customer needs Customers have many choices in this competitive market
International Debt CrisisInternational Debt Crisis
Reducing bank exposure to Lesser Developed Countries (LDC) debt is more difficult in an integrated global economy
Stagnant U.S. and European economies hurt LDCs in the early 1980s because the LDC’s dependence on export earnings
Strong dollar also hurt LDCs in the early 1980s because their loans were denominated in dollars
Countries simultaneously defaulted
International Debt CrisisInternational Debt Crisis
Commercial banks with LDC debt in the 1980s faced a crisis and had to decide between two alternatives Provide additional loans and incur the risk of
default of new as well as older loans Reject the request for additional funds and cause
default Banks and countries formed groups to
negotiate
International Debt CrisisInternational Debt Crisis
Exposure to LDC debt was concentrated in 9 money center banks which, if even one failed, would have caused a panic
Banks reduced their exposure by Selling LDC loans Using debt-for-equity swaps Boosting loan loss reserves
International Debt CrisisInternational Debt Crisis
The Brady plan developed between 1985 and 1988 was used to reduce LDC debt problems
The only chance Lesser Developed Countries had as a group to pay off loans was to improve their economic conditions
The plan allowed LDCs the chance to reform their economies
Banks were given the option of trading their loans to the World Bank and IMF
Asian CrisisAsian Crisis
Impact of bank lending on the Asian crisis The Asian crisis was caused in part by banks’
willingness to extend credit in Thailand Commercial developers in Thailand borrowed
without having to show projects were feasible Debt was at high interest rates and expensive Economic growth slowed and cash flows could
not cover local loans or foreign currency-based loans
Asian CrisisAsian Crisis
Spread of loan defaults throughout Asia Problems caused by a weak economy spread
throughout Asia Currencies weakened and investors withdrew
funds South Korean loans made without adequate
credit analysis resulted in defaults
Asian CrisisAsian Crisis
Impact on U.S. and European banks U.S. and European banks had exposure because
they made loans in Asia Bank stocks declined as a result of the losses
Country Risk AssessmentCountry Risk Assessment
Several factors of country risk including: Economic indicators
Changes in the consumer price index Real growth in gross domestic product Current account balances divided by exports
Country Risk AssessmentCountry Risk Assessment
Debt management Debt service and short-term debt divided by total
exports Ratio of total debt to GDP Short-term debt divided by total debt
Country Risk AssessmentCountry Risk Assessment
Political factors are measured subjectively and include a probability for each Destabilizing riots or civil unrest Increased terrorist activities Civil war Foreign war Government overthrow
Country Risk AssessmentCountry Risk Assessment
Structural factors are also measured subjectively Natural resource base Human resource base Leadership
Overall rating Assigns a score between 0 and 100 Grade assigned for both short and long term
Exhibit 21.2 Determining Country Risk Exhibit 21.2 Determining Country Risk RatingsRatings
Short-Term Horizon Medium-Term Horizon
Weighted WeightedWeight Grade Grade Weight Grade Grade
Debt management model .3 80 24 .3 70 21
Economic Indicator model .3 90 27 .2 70 14
Political rating model .2 60 12 .3 50 15
Structural rating model .2 75 15 .2 60 12
78 62
Exhibit 21.3 Converting Grade Into Exhibit 21.3 Converting Grade Into Country RatingCountry Rating
OverallGrade Rating Rating
91–100 AAA Excellent
81–90 AA
71–80 A
61–70 BBB Satisfactory quality, average risk
51–60 BB
41–50 B
31–40 CCC Low quality, high risk
21–30 CC
11–20 C
0 –10 D Excessive risk
Country Risk AssessmentCountry Risk Assessment
Discriminant analysis is used to examine country risk Discriminant analysis is a statistical technique
used to identify factors that are distinctly different between two groups
Used to try to identify factors that distinguish between countries with and without debt repayment problems
top related