ER6eSMCh11.docx

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ER6eSMCh11

CHAPTER11INTERNATIONALBANKINGANDMONEYMARKET

ANSWERS&SOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMS

QUESTIONS

1.Brieflydiscusssomeoftheservicesthatinternationalbanksprovidetheircustomersandthemarketplace.

Answer:

Internationalbankscanbecharacterizedbythetypesofservicestheyprovidethatdistinguishthemfromdomesticbanks.Foremost,internationalbanksfacilitatetheimportsandexportsoftheirclientsbyarrangingtradefinancing.Additionally,theyservetheirclientsbyarrangingforforeignexchangenecessarytoconductcross-bordertransactionsandmakeforeigninvestmentsandbyassistinginhedgingexchangerateriskinforeigncurrencyreceivablesandpayablesthroughforwardandoptionscontracts.Sinceinternationalbankshaveestablishedtradingfacilities,theygenerallytradeforeignexchangeproductsfortheirownaccount.

Twomajorfeaturesthatdistinguishinternationalbanksfromdomesticbanksarethetypesofdepositstheyacceptandtheloansandinvestmentstheymake.LargeinternationalbanksbothborrowandlendintheEurocurrencymarket.Moreover,dependingupontheregulationsofthecountryinwhichitoperatesanditsorganizationaltype,aninternationalbankmayparticipateintheunderwritingofEurobondsandforeignbonds.

Internationalbanksfrequentlyprovideconsultingservicesandadvicetotheirclientsintheareasofforeignexchangehedgingstrategies,interestrateandcurrencyswapfinancing,andinternationalcashmanagementservices.Notallinternationalbanksprovideallservices.Banksthatdoprovideamajorityoftheseservicesareknownasuniversalbanksorfullservicebanks.

2.Brieflydiscussthevarioustypesofinternationalbankingoffices.

Answer:

Theservicesandoperationswhichaninternationalbankundertakesisafunctionoftheregulatoryenvironmentinwhichthebankoperatesandthetypeofbankingfacilityestablished.

Acorrespondentbankrelationshipisestablishedwhentwobanksmaintainacorrespondentbankaccountwithoneanother.Thecorrespondentbankingsystemprovidesameansforabank’sMNCclientstoconductbusinessworldwidethroughhislocalbankoritscontacts.

ArepresentativeofficeisasmallservicefacilitystaffedbyparentbankpersonnelthatisdesignedtoassistMNCclientsoftheparentbankinitsdealingswiththebank’scorrespondents.ItisawayfortheparentbanktoprovideitsMNCclientswithalevelofservicegreaterthanthatprovidedthroughmerelyacorrespondentrelationship.

Aforeignbranchbankoperateslikealocalbank,butlegallyitisapartoftheparentbank.Assuch,abranchbankissubjecttothebankingregulationsofitshomecountryandthecountryinwhichitoperates.TheprimaryreasonaparentbankwouldestablishaforeignbranchisthatitcanprovideamuchfullerrangeofservicesforitsMNCcustomersthroughabranchofficethanitcanthrougharepresentativeoffice.

Asubsidiarybankisalocallyincorporatedbankthatiseitherwhollyownedorownedinmajorpartbyaforeignsubsidiary.Anaffiliatebankisonethatisonlypartiallyowned,butnotcontrolledbyitsforeignparent.Bothsubsidiaryandaffiliatebanksoperateunderthebankinglawsofthecountryinwhichtheyareincorporated.U.S.parentbanksfindsubsidiaryandaffiliatebankingstructuresdesirablebecausetheyareallowedtoengageinsecurityunderwriting.

EdgeActbanksarefederallycharteredsubsidiariesofU.S.bankswhicharephysicallylocatedintheUnitedStatesthatareallowedtoengageinafullrangeofinternationalbankingactivities.A1919amendmenttoSection25oftheFederalReserveActcreatedEdgeActbanks.ThepurposeoftheamendmentwastoallowU.S.bankstobecompetitivewiththeservicesforeignbankscouldsupplytheircustomers.FederalReserveRegulationKallowsEdgeActbankstoacceptforeigndeposits,extendtradecredit,financeforeignprojectsabroad,tradeforeigncurrencies,andengageininvestmentbankingactivitieswithU.S.citizensinvolvingforeignsecurities.Assuch,EdgeActbanksdonotcompetedirectlywiththeservicesprovidedbyU.S.commercialbanks.EdgeActbanksarenotprohibitedfromowningequityinbusinesscorporationsasaredomesticcommercialbanks.Thus,itisthroughtheEdgeActthatU.S.parentbanksownforeignbankingsubsidiariesandhaveownershippositionsinforeignbankingaffiliates.

Anoffshorebankingcenterisacountrywhosebankingsystemisorganizedtopermitexternalaccountsbeyondthenormaleconomicactivityofthecountry.Offshorebanksoperateasbranchesorsubsidiariesoftheparentbank.Theprimaryactivitiesofoffshorebanksaretoseekdepositsandgrantloansincurrenciesotherthanthecurrencyofthehostgovernment.

In1981,theFederalReserveauthorizedtheestablishmentofInternationalBankingFacilities（IBF）.AnIBFisaseparatesetofassetandliabilityaccountsthataresegregatedontheparentbank’sbooks;itisnotauniquephysicalorlegalentity.IBFsoperateasforeignbanksintheU.S.IBFswereestablishedlargelyasaresultofthesuccessofoffshorebanking.TheFederalReservedesiredtoreturnalargeshareofthedepositandloanbusinessofU.S.branchesandsubsidiariestotheU.S.

3.Howdoesthedeposit-loanratespreadintheEurodollarmarketcomparewiththedeposit-loanratespreadinthedomesticU.S.bankingsystem?

Why?

Answer:

Competitionhasdriventhedeposit-loanspreadinthedomesticU.S.bankingsystemtoaboutthesamelevelasintheEurodollarmarket.Thatis,intheEurodollarmarketthedepositrateisaboutthesameasthedepositratefordollarsintheU.S.bankingsystem.Similarlythelendingratesareaboutthesame.Intheory,theEurodollarmarketcanoperateatalowercostthantheU.S.bankingsystembecauseitisnotsubjecttomandatoryreserverequirementsondepositsordepositinsuranceonforeigncurrencydeposits.

4.WhatisthedifferencebetweentheEuronotemarketandtheEurocommercialpapermarket?

Answer:

Euronotesareshort-termnotesunderwrittenbyagroupofinternationalinvestmentorcommercialbankscalleda“facility.”Aclient-borrowermakesanagreementwithafacilitytoissueEuronotesinitsownnameforaperiodoftime,generallythreeto10years.Euronotesaresoldatadiscountfromfacevalue,andpaybackthefullfacevalueatmaturity.Euronotestypicallyhavematuritiesoffromthreetosixmonths.Eurocommercialpaperisanunsecuredshort-termpromissorynoteissuedbyacorporationorabankandplaceddirectlywiththeinvestmentpublicthroughadealer.LikeEuronotes,Eurocommercialpaperissoldatadiscountfromfacevalue.Maturitiestypicallyrangefromonetosixmonths.

5.Brieflydiscussthecauseandthesolution（s）totheinternationalbankcrisisinvolvingless-developedcountries.

Answer:

TheinternationaldebtcrisisbeganonAugust20,1982whenMexicoaskedmorethan100U.S.andforeignbankstoforgiveits$68billioninloans.SoonBrazil,Argentinaandmorethan20otherdevelopingcountriesannouncedsimilarproblemsinmakingthedebtserviceontheirbankloans.Attheheightofthecrisis,ThirdWorldcountriesowed$1.2trillion!

Theinternationaldebtcrisishadoilasitssource.Intheearly1970s,theOrganizationofPetroleumExportingCountries（OPEC）becamethedominantsupplierofoilworldwide.Throughoutthistimeperiod,OPECraisedoilpricesdramaticallyandamassedatremendoussupplyofU.S.dollars,whichwasthecurrencygenerallydemandedaspaymentfromtheoilimportingcountries.

OPECdepositedbillionsinEurodollardeposits;by1976thedepositsamountedtonearly$100billion.Eurobankswerefacedwithahugeproblemoflendingthesefundsinordertogenerateinterestincometopaytheinterestonthedeposits.ThirdWorldcountrieswereonlytooeagertoassisttheequallyeagerEurobankersinacceptingEurodollarloansthatcouldbeusedforeconomicdevelopmentandforpaymentofoilimports.Thehighoilpriceswereaccompaniedbyhighinterestrates,highinflation,andhighunemploymentduringthe1979-1981period.Soon,thereafter,oilpricescollapsedandthecrisiswason.

Today,mostdebtornationsandcreditorbankswouldagreethattheinternationaldebtcrisisiseffectivelyover.U.S.TreasurySecretaryNicholasF.BradyofthefirstBushAdministrationislargelycreditedwithdesigningastrategyinthespringof1989toresolvetheproblem.Threeimportantfactorswerenecessarytomovefromthedebtmanagementstage,employedovertheyears1982-1988tokeepthecrisisincheck,todebtresolution.First,bankshadtorealizethatthefacevalueofthedebtwouldneverberepaidonschedule.Second,itwasnecessarytoextendthedebtmaturitiesandtousemarketinstrumentstocollateralizethedebt.Third,theLDCsneededtoopentheirmarketstoprivateinvestmentifeconomicdevelopmentwastooccur.Debt-for-equityswapshelpedpavethewayforanincreaseinprivateinvestmentintheLDCs.However,monetaryandfiscalreformsinthedevelopingcountriesandtherecentprivatizationtrendofstateownedindustrywerealsoimportantfactors.

TreasurySecretaryBrady’ssolutionwastooffercreditorbanksoneofthreealternatives:

（1）converttheirloanstomarketablebondswithafacevalueequalto65percentoftheoriginalloanamount;

（2）converttheloansintocollateralizedbondswithareducedinterestrateof6.5percent;or,（3）lendadditionalfundstoallowthedebtornationstogetontheirfeet.Thesecondalternativecalledforanextensionthedebtmaturitiesby25to30yearsandthepurchasebythedebtornationofzero-couponU.S.Treasurybondswithacorrespondingmaturitytoguaranteethebondsandmakethemmarketable.Thesebonds