Important Dimensions of International Banking
Important Dimensions of International Banking
International banks must face a wide variety of issues, and a large number of key developments have taken place in recent years; we will focus here on the following areas that have an impact on MNEs and their operations worldwide: the expansion of services, market access and changing market conditions, and profitability.
Expansion Of Services
The market for financial services has virtually skyrocketed for banks in recent years. The major functions that are especially suited for the international banks are:
1. export and import financing;
2. foreign-exchange trading;
3. debt and equity financing in domestic and Euromarkets;
4. international cash management, especially electronic funds transfer across national borders;
5. financial engineering for corporate clients; and
6. the supply of information and advice to clients.
Although there are at least these six areas in which banks can offer services for corporate clients, banks do not necessarily excel in every area. Where they cannot provide services themselves, they must operate through correspondent banks at home and abroad. For example, many of the regional banks in the United States attempt to provide export and import financing and foreign-exchange trading for their local clients, but they usually work through large money center banks to effect the trades.
Banks also attempt to establish niches where they feel they can develop a comparative advantage. Bankers Trust, for example, established the following strategy in 1983: "Bankers Trust will combine the on-balance-sheet capability of a commercial bank with the intermediary skills and entrepreneurial spirit of an investment bank. We want to accomplish what we believe to be the challenge of the 1980s—worldwide merchant banking."29 Bankers Trust sold off lines of business that were not compatible with those objectives and has been very successful in the investment-banking market. BT managers feel that their success is in combining corporate banking functions with investment banking in the Eurodebt and equity markets as well as in foreign exchange and other financial services.
Foreign-exchange trading is a key service provided by the large international banks. In 1990, Euromoney identified Citicorp as the best foreign-exchange house in the world in the 1980s. It trades actively in 50 different international money centers in 90 different currencies. In 1988 its net income from foreign exchange was double that of the nearest competitor. Its offices worldwide allow it to gather information about foreign-exchange movements more effectively than any other bank.30
Debt" and equity financing blurs the line between commercial and investment banking. A commercial bank lends money to its clients and often makes syndicated loans as well, where it arranges a loan involving many different banks, both foreign and domestic. The top four banks in syndicated
loans are Citicorp, J. P. Morgan, Chase Manhattan, and Manufacturers Hanover—all U.S.-based banks. Syndication involves one of the lead banks structuring a loan that involves several other banks—often from different countries. The loans can be advertised, or they can be by invitation only.
An investment bank provides funding for corporations by helping them raise funds in both debt and equity markets. In the United States, commercial banks are not allowed to engage directly in equity securities, so the large investment companies, such as Goldman Sachs, are not bank related. Most of the leaders in the Euromarkets are investment banks, which will be discussed in the next section. Bankers Trust, however, is an example of a U.S. commercial bank that has also developed a successful investment-banking strategy and is very active in Eurodollar and Eurobond issues. It does so through BT Securities, which is separate from its commercial banking operations.
International cash management has exploded in growth in recent years because of the introduction of electronic data interchange (EDI). EDI provides for the movement of money and information electronically, cutting down on the paper flow and speeding up the transaction time of data transfers. Banks are a key element in this process, but this service was not developed adequately until the early 1970s; prior to that, transfers of funds between European countries could take several days to several weeks, even when cable transfers were used.
In an effort to eliminate the time lag in carrying out international money transfers by mail or telex, a number of banks organized the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in 1973. SWIFT has grown from an initial membership of 239 banks in 15 countries to over 1200 banks in more than 50 countries. SWIFT services primarily involve processing transactions such as customer transfers, foreign-exchange confirmation, bank transfers, and documentary credits. A special-message text language allows banks to "talk" to each other by computer in a common language. This added capability greatly facilitates information transfers.31
Another important institution is the Clearing House Interbank Payment System (CHIPS), an international electronic check-transfer system that moves money between major U.S. banks, branches of foreign banks, and Edge Act subsidiaries of out-of-state banks. The system handles a large volume of transactions per day and most of the foreign-exchange trade and Eurodollar transactions. CHIPS has speeded up the settling of its transactions to the close of each business day rather than the next business day as was the custom.32
Financial engineering is a term that has surfaced in recent years as a result of the creative design of financial instruments by the international banks. Since the stock-market crash of 1987, there has been significant volatility in the financial markets. Foreign exchange, bonds, equities, and commodities are underlying transactions that have seen big swings in prices and returns, especially over the past few years. As a result, banks have developed
the derivatives market, a market designed to protect underlying transactions. Examples of derivatives are forward contracts, futures, options, and swaps. Vanilla derivatives are simple uses of the derivatives to hedge exposure. However, banks have developed complex, custom-tailored derivatives and applied them to unique situations for the firms. Thus the financial-engineering dimension of commercial and investment banks is one of creativity and flexibility. It has become an important element in the strategy of large banks such as Bankers Trust and Citicorp.
International banks must face a wide variety of issues, and a large number of key developments have taken place in recent years; we will focus here on the following areas that have an impact on MNEs and their operations worldwide: the expansion of services, market access and changing market conditions, and profitability.
Expansion Of Services
The market for financial services has virtually skyrocketed for banks in recent years. The major functions that are especially suited for the international banks are:
1. export and import financing;
2. foreign-exchange trading;
3. debt and equity financing in domestic and Euromarkets;
4. international cash management, especially electronic funds transfer across national borders;
5. financial engineering for corporate clients; and
6. the supply of information and advice to clients.
Although there are at least these six areas in which banks can offer services for corporate clients, banks do not necessarily excel in every area. Where they cannot provide services themselves, they must operate through correspondent banks at home and abroad. For example, many of the regional banks in the United States attempt to provide export and import financing and foreign-exchange trading for their local clients, but they usually work through large money center banks to effect the trades.
Banks also attempt to establish niches where they feel they can develop a comparative advantage. Bankers Trust, for example, established the following strategy in 1983: "Bankers Trust will combine the on-balance-sheet capability of a commercial bank with the intermediary skills and entrepreneurial spirit of an investment bank. We want to accomplish what we believe to be the challenge of the 1980s—worldwide merchant banking."29 Bankers Trust sold off lines of business that were not compatible with those objectives and has been very successful in the investment-banking market. BT managers feel that their success is in combining corporate banking functions with investment banking in the Eurodebt and equity markets as well as in foreign exchange and other financial services.
Foreign-exchange trading is a key service provided by the large international banks. In 1990, Euromoney identified Citicorp as the best foreign-exchange house in the world in the 1980s. It trades actively in 50 different international money centers in 90 different currencies. In 1988 its net income from foreign exchange was double that of the nearest competitor. Its offices worldwide allow it to gather information about foreign-exchange movements more effectively than any other bank.30
Debt" and equity financing blurs the line between commercial and investment banking. A commercial bank lends money to its clients and often makes syndicated loans as well, where it arranges a loan involving many different banks, both foreign and domestic. The top four banks in syndicated
loans are Citicorp, J. P. Morgan, Chase Manhattan, and Manufacturers Hanover—all U.S.-based banks. Syndication involves one of the lead banks structuring a loan that involves several other banks—often from different countries. The loans can be advertised, or they can be by invitation only.
An investment bank provides funding for corporations by helping them raise funds in both debt and equity markets. In the United States, commercial banks are not allowed to engage directly in equity securities, so the large investment companies, such as Goldman Sachs, are not bank related. Most of the leaders in the Euromarkets are investment banks, which will be discussed in the next section. Bankers Trust, however, is an example of a U.S. commercial bank that has also developed a successful investment-banking strategy and is very active in Eurodollar and Eurobond issues. It does so through BT Securities, which is separate from its commercial banking operations.
International cash management has exploded in growth in recent years because of the introduction of electronic data interchange (EDI). EDI provides for the movement of money and information electronically, cutting down on the paper flow and speeding up the transaction time of data transfers. Banks are a key element in this process, but this service was not developed adequately until the early 1970s; prior to that, transfers of funds between European countries could take several days to several weeks, even when cable transfers were used.
In an effort to eliminate the time lag in carrying out international money transfers by mail or telex, a number of banks organized the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in 1973. SWIFT has grown from an initial membership of 239 banks in 15 countries to over 1200 banks in more than 50 countries. SWIFT services primarily involve processing transactions such as customer transfers, foreign-exchange confirmation, bank transfers, and documentary credits. A special-message text language allows banks to "talk" to each other by computer in a common language. This added capability greatly facilitates information transfers.31
Another important institution is the Clearing House Interbank Payment System (CHIPS), an international electronic check-transfer system that moves money between major U.S. banks, branches of foreign banks, and Edge Act subsidiaries of out-of-state banks. The system handles a large volume of transactions per day and most of the foreign-exchange trade and Eurodollar transactions. CHIPS has speeded up the settling of its transactions to the close of each business day rather than the next business day as was the custom.32
Financial engineering is a term that has surfaced in recent years as a result of the creative design of financial instruments by the international banks. Since the stock-market crash of 1987, there has been significant volatility in the financial markets. Foreign exchange, bonds, equities, and commodities are underlying transactions that have seen big swings in prices and returns, especially over the past few years. As a result, banks have developed
the derivatives market, a market designed to protect underlying transactions. Examples of derivatives are forward contracts, futures, options, and swaps. Vanilla derivatives are simple uses of the derivatives to hedge exposure. However, banks have developed complex, custom-tailored derivatives and applied them to unique situations for the firms. Thus the financial-engineering dimension of commercial and investment banks is one of creativity and flexibility. It has become an important element in the strategy of large banks such as Bankers Trust and Citicorp.
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