OFFSHORE FINANCIAL CENTERS
OFFSHORE FINANCIAL CENTERS
So far we have alluded to the major financial centers of the world. The countries with large markets, such as the major OECD countries, have large domestic financial markets. This does not mean that they have large financial markets that deal in foreign currencies, however; neither does it mean that they have large offshore centers.
Center Characteristics
Offshore financial centers are cities or countries that provide large amounts of funds in a currency other than their own. These centers provide an alternate, and usually cheaper, source of funding for MNEs so that they don't have to rely strictly on their own national markets. Generally these markets in these centers are regulated in a different, and usually more flexible, way than are the domestic markets. The centers have one or more of the following characteristics as well:
1. There is a large foreign-currency (Eurocurrency) market for deposits and
loans (e.g., London).
2. The market of the center is a large net supplier of funds to the world
financial markets (e.g., Switzerland).
3. The market of the center is an intermediary or pass-through for inter-
national loan funds (e.g., Bahamas, Cayman Islands).
4. The center has economic and political stability.
5. There is an efficient and experienced financial community.
6. The center has good communications and supportive services.
7. There is an official regulatory climate favorable to the financial industry, in the sense that it protects investors without unduly restricting financial institutions.11
These centers can be considered as operational centers where extensive banking activities are carried out; or booking centers, where little actual banking activities take place but where transactions are recorded in order to take advantage of low (or no) tax rates and secrecy. London is an example of an operational center, and the Cayman Islands is an example of a booking center. Although there are many offshore financial centers, the seven most important ones are London, the Caribbean (servicing especially Canadian and y s banks), Switzerland, Singapore, Hong Kong, Bahrain (for the Middle East), and New York.
Specific Centers
London is a crucial center because it offers a variety of services and has a large
domestic as well as offshore market. The Caribbean centers (primarily the
Bahamas, Cayman Islands, and Netherlands Antilles) are essentially offshore
locations for the New York banks. Switzerland has been a primary source of
funds for decades, offering stability, integrity, discretion, and low costs. Sin-
gapore has been the center for the Asian dollar market since 1968, thanks to
a variety of government regulations that have facilitated the flow of funds, its strategic geographic location, and its strong telecommunications links with the rest of the world. Hong Kong is critical because of its unique status vis-avis the United Kingdom and China and its geographic proximity to the rest of the Pacific Rim. However, Singapore is beginning to take over much of Hong Kong's business because of insecurity concerning the 1997 takeover of Hong Kong by China. Bahrain, an island nation in the Persian Gulf, is the financial center of petrodollars (dollars generated from the sale of oil) in the
Middle East. Even though oil prices had a period of weakness in the mid-1980s, a tremendous amount of revenue is generated by the oil producers. In addition, the increase in prices that accompanied the Gulf conflict in 1990-1991 should increase the flow of petrodollars again.
So far we have alluded to the major financial centers of the world. The countries with large markets, such as the major OECD countries, have large domestic financial markets. This does not mean that they have large financial markets that deal in foreign currencies, however; neither does it mean that they have large offshore centers.
Center Characteristics
Offshore financial centers are cities or countries that provide large amounts of funds in a currency other than their own. These centers provide an alternate, and usually cheaper, source of funding for MNEs so that they don't have to rely strictly on their own national markets. Generally these markets in these centers are regulated in a different, and usually more flexible, way than are the domestic markets. The centers have one or more of the following characteristics as well:
1. There is a large foreign-currency (Eurocurrency) market for deposits and
loans (e.g., London).
2. The market of the center is a large net supplier of funds to the world
financial markets (e.g., Switzerland).
3. The market of the center is an intermediary or pass-through for inter-
national loan funds (e.g., Bahamas, Cayman Islands).
4. The center has economic and political stability.
5. There is an efficient and experienced financial community.
6. The center has good communications and supportive services.
7. There is an official regulatory climate favorable to the financial industry, in the sense that it protects investors without unduly restricting financial institutions.11
These centers can be considered as operational centers where extensive banking activities are carried out; or booking centers, where little actual banking activities take place but where transactions are recorded in order to take advantage of low (or no) tax rates and secrecy. London is an example of an operational center, and the Cayman Islands is an example of a booking center. Although there are many offshore financial centers, the seven most important ones are London, the Caribbean (servicing especially Canadian and y s banks), Switzerland, Singapore, Hong Kong, Bahrain (for the Middle East), and New York.
Specific Centers
London is a crucial center because it offers a variety of services and has a large
domestic as well as offshore market. The Caribbean centers (primarily the
Bahamas, Cayman Islands, and Netherlands Antilles) are essentially offshore
locations for the New York banks. Switzerland has been a primary source of
funds for decades, offering stability, integrity, discretion, and low costs. Sin-
gapore has been the center for the Asian dollar market since 1968, thanks to
a variety of government regulations that have facilitated the flow of funds, its strategic geographic location, and its strong telecommunications links with the rest of the world. Hong Kong is critical because of its unique status vis-avis the United Kingdom and China and its geographic proximity to the rest of the Pacific Rim. However, Singapore is beginning to take over much of Hong Kong's business because of insecurity concerning the 1997 takeover of Hong Kong by China. Bahrain, an island nation in the Persian Gulf, is the financial center of petrodollars (dollars generated from the sale of oil) in the
Middle East. Even though oil prices had a period of weakness in the mid-1980s, a tremendous amount of revenue is generated by the oil producers. In addition, the increase in prices that accompanied the Gulf conflict in 1990-1991 should increase the flow of petrodollars again.
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