prelecture topic 7 Flashcards
Three major services
1) Facilitate the imports and exports of their clients by arranging trade financing
2) serve their clients by arranging for foreign exchange necessary to conduct cross-border transactions and make foreign investments
3) assist their clients in Hedging exchange rate risk through forward and options contracts
What do international banks advice on
FX hedging strategies
Interest rate swap fincancing
Inter cash management services
(If a bank can give all these services, it is called as universal banks (or full-service banks)
Reasons for international banking
Low marginal cost
Knowledge advantage
home nation information service
Prestige
Regulation advantage
Wholesale defensive strategy
Retail defensive strategy
Transaction cost
Growth
Risk reduction
Advantages and disadvantages of corresponding banking relationships
Advantage: a bank can service its MNC clients at a low cost, without the need of having bank personnel physically located in many countries
Disadvantages: Is that the banks clients may not receive the same level of service
Representative offices
Ongoing corresponding banking relationship
The representative office of the us bank in buenos aires
Assist the MNC on local businesses, provide econmic information, credit evaluations etc.
Foreign branches
An extension of the US bank in argentina
it operates like a local bank there
Legally, it is part of the US bank (the parent bank carry the risks!)
SUbject to the regulations of both countries
Why to establish a foreign branch in buenos aires?
To provide better service to the MNC client
The bank can extent its credit limits and compete with the other banks better
Easy to check clearing and requirements of the MNC
Subsidiary and Affiliate bank
Locally incorporated bank
legal risk is its own, not carried by the US parent firm (the autonomous assets and liabilities)
the subsidiaries can be wholly or partially owned by the US parent company
If not controlled by the US parent firm, it is an affiliate
There are subject to argentinian regulations
Why subsidiary and affiliate banks are attractive for the US banks? -> Then you are allowed to underwrite securities in argentina + limited liability
types of international banking offices
correspondent bank
Representative offices
Foreign branches
Subsidiary and affiliate banks
Edge act banks (Skipped)
Offshore banking centers
types of risk
credit risk
Market risk
Operational risk
bank capital adequacy
refers to the amount of equity capital and other securities a bank holds as reserves against risky assets to reduce the probability of a bank failure
Three pillars of capital adequacy
Minimum capital requirements
Supervisory review process
Effective use of market discipline
Minimum capital requirements
e.g 8% risk weighted assets for as buffer. Not all assets have the same risk weights
COre capital (Tier1) and supplemental capital (tier 2) tier 1 and tier 2
Supervisory review process
Banks should measure their own risks, make stress tests and scenario analysis
Effective use of market discipline
Public discosure and transparency
Drawbacks of the basel accords
Concern 1: does it really safeguard against market risk from derivative trading?
Concern 2: the capital requirement 8% is arbitrary! credit risk fluctuates over time; and credit risk is not same for all banks
