outline introduction to the international capital market the players of the icm growth of the icm...
TRANSCRIPT
OutlineIntroduction to the international capital market
The players of the ICM
Growth of the ICM
Offshore banking and offshore currency trading
Growth of Eurocurrency trading
Importance of regulatory asymmetries
Introduction to the ICMDefinition: the market in which residents of
different countries trade assetsIt is not a single marketThere is no physical locationMost activity is in a network of world
financial centersThe ICM exists because of international tradeThe ICM also adds to the gains of trade by
lowering transaction costs
The Players of the ICMCommercial banks
Bulk of the ICMRun the international payments mechanismBroad range of financial activitiesFree to pursue goals overseas that they can’t do
domesticallyMultinational Corporations
Finance investments through foreign sources of funds
Use equity securities as well as debt securitiesDenominate their bonds in the foreign currency
The Players of the ICMNonbank Financial Institutions
Insurance companies, pension funds, mutual funds, hedge funds
Investment Banks Not banks; specialize in underwriting sales of stocks and bonds
by corporations and governments Glass-Steagall Act of 1932: commercial and investment banks
were required to remain separate within the U.S. until 1999 However, banks do not have such restrictions overseas
Central Banks and Other Government AgenciesCentral banks are routinely involved in the ICMGovernment agencies routinely borrow from abroadDeveloping countries and state-owned enterprises
borrow from foreign commercial banks
Growth of the ICMThe ICM has grown faster than world GDP since
1970Fewer barriers to private capital flows across
borders, especially in OECD countriesAdvances in communication technologiesThe demise of fixed exchange rates
Growth of the ICMThe Impossible Trinity
Free capital flows
Option 2
(Greece)
Option 1(U.S.)
Independent
monetary policy
Fixed exchange rate
Option 3(P.R. of China)
• A country can pick one side but must give up far corner• Under the Bretton-Woods system, every country had to choose between options 2 or 3• Without the Bretton-Woods system, countries could now pick option 1• This allowed for more free movement of capital and led to the growth of the ICM
Offshore Banking and Offshore Currency TradingOffshore banking – business that banks’ foreign offices
conduct outside of their home countriesBanks conduct foreign business through 3 institutions
Agency offices abroad arranges loans, transfers funds does not accept deposits
Subsidiary banks abroad A foreign bank is the controlling owner Subject to regulations in foreign country, but not subject to
regulations in the parent bank’s country Foreign branches
An office of the home bank in another country Carry out same business as local banks Subject to home and foreign banking regulations Branches often can take advantage of cross-border regulatory
differences
Offshore Banking and Offshore Currency TradingOffshore currency deposit – a bank deposit in a
currency other than that bank’s home country currencyFor example, dollar deposits in a bank in
FrankfurtOffshore currency deposits are often referred
to as “Eurocurrencies”The term “Eurocurrency” does not mean the
“euro” currencyEurocurrency trading happens all over the world
– not just in EuropeBanks that accept Eurocurrency deposits are
called Eurobanks – even if they’re not in Europe
Offshore Banking and Offshore Currency TradingRapid growth of offshore banking and currency
trading has been caused, in part, by an increase in international trade and the multinational nature of corporate activity
Firms involved in international trade require overseas financial services
Another reason for rapid growth is banks’ desire “to escape” domestic regulations and taxes
Banks shift some operations abroad and into foreign currencies
Depositors hold currency outside the issuing country also for political reasons
Growth of Eurocurrency TradingRemember . . . “Eurocurrency” DOES NOT MEAN the
“euro” currency!Eurodollars were born in the late 1950s to respond to
the needs caused by growing international tradeLondon started and is the leader in Eurocurrency
tradingEuropean firms involved in trade needed to hold
dollar deposits or borrow dollarsThose firms found it cheaper and more convenient to
deal with local banks familiar with their circumstances rather than do business with banks in the U.S.
Growth of Eurocurrency TradingEarly Eurodollar trading grew due to
regulations and political concernsFederal Reserve Regulation Q – imposed a
ceiling on interest rates U.S. banks could pay on time deposits
Cold War spurred growth of Eurodollar marketThe move to floating exchange rates slowed
growth of Eurocurrency markets
Importance of Regulatory AsymmetriesMajor factor behind the continuing
profitability of Eurocurrency tradingDomestic currency deposits are heavily
regulated to control money supplyBanks are given far more freedom in dealing
with foreign currenciesExample: reserve requirementsFinancial centers with the fewest government
restrictions on foreign currencies are the main Eurocurrency trading centers