M. B. A.

II
INTERNATIONAL FINANCIAL MANAGEMENT

WORLD FINANCIAL MARKETS

AND INSTITUTUIONS

GUIDED BY
Ms. Jyoti Ghanchi
PREPARED BY
Barot Mit Rajendrakumar (Roll No: 1)

MARCH / APRIL 2015

S. K. SCHOOL OF BUSINESS AND MANAGEMENT,
HEMCHANDRACHARYA NORTH GUJARAT UNIVERSITY
PATAN

International Banking Market

1.1.

Introduction:

An International bank is a bank located outside the country of residence of the depositor,
typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages.
These advantages typically include:

greater privacy (see also bank secrecy, a principle born with the 1934
Swiss Banking Act)

little or no taxation (i.e. tax havens)

easy access to deposits (at least in terms of regulation)

protection against local, political, or financial instability

While the term originates from the Channel Islands being "international " from the United
Kingdom, and most international banks are located in island nations to this day, the term is used
figuratively to refer to such banks regardless of location, including Swiss banks and those of
other landlocked nations such as Luxembourg and Andorra.
International banking has often been associated with the underground economy and organized
crime, via tax evasion[ and money laundering; however, legally, international banking does not
prevent assets from being subject to personal income tax on interest. Except for certain people
who meet fairly complex requirements, the personal income tax of many countries makes no
distinction between interest earned in local banks and those earned abroad. Persons subject to US
income tax, for example, are required to declare on penalty of perjury, any international
bank accountswhich may or may not be numbered bank accountsthey may have. Although
international banks may decide not to report income to other tax authorities, and have no legal
obligation to do so as they are protected by bank secrecy, this does not make the non-declaration
of the income by the tax-payer or the evasion of the tax on that income legal.
Following September 11, 2001, there have been many calls for more regulation on international
finance, in particular concerning international banks, tax havens, and clearing houses such
as Clear stream, based in Luxembourg, being possible crossroads for major illegal money flows.
Defenders of international banking have criticize these attempts at regulation. They claim the
process is prompted not by security and financial concerns but by the desire of domestic banks
and tax agencies to access the money held in international accounts. They cite the fact that
international banking offers a competitive threat to the banking and taxation systems in
developed countries, suggesting that Organization for Economic Co-operation and
Development (OECD) countries are trying to stamp out competition

Reasons for International Banking

Migration of domestic customers, notably MNEs growing foreign activities Effects of

regulatory differences (structural and prudential) Input cost differences (e.g. in cost of domestic
funding) - Japanese in the past Comparative advantages in retail banking (Citibank)
Development of major financial centers offering benefits to banks:
Business contacts
Location of customers
Pool of skilled labor
Trades and professions
Liquidity and efficiency of markets (thick market externalities)
Interrelation of markets (e.g. derivatives and underlying) Potential for increasing returns
to scale and self sustaining growth of centres
There are many benefits to opening an international bank account, in particular if you travel or
work abroad and want to be able to manage your money in different currencies. We have pulled
together a list of the top five reasons we believe are key to opening an international account and
how they are beneficial to you:
1.
2.
3.

4.
5.

By having an account in a different currency or country you can react to currency

fluctuations to ensure your money is kept secure and continues to grow in a central location.
The ability to make payments in multiple currencies provides an easy way for you to pay
bills overseas, giving you greater flexibility when it comes to your financial arrangements.
The location of where your international account is held is often in a well regulated low
tax jurisdiction. This may mean you have the option to manage your money in a secure and
more tax efficient way.
Most international banking options allow 24/ 7 worldwide access to your money, which
lets you stay in control of your finances wherever you are in the world.
By having one central bank account, as opposed to several accounts for each currency,
you can take care of your finances in a simple and convenient way, which means less stress
and worry for you, and more time to enjoy your international lifestyle.

So there you have it, five reasons to open an international account. If you already have an
international account we want to hear from you! What are the main reasons you opened an
account and are they different from the reasons listed above?

Low Marginal Costs

Managerial and marketing knowledge developed at home can be used abroad with low
marginal costs.

Knowledge Advantage

The foreign bank subsidiary can draw on the parent banks knowledge of personal contacts and
credit investigations for use in that foreign market.

Home Nation Information Services

Local firms in a foreign market may be able to obtain more complete information on trade and
financial markets in the multinational banks home nation than is obtainable from foreign
domestic banks.

Prestige

Very large multinational banks have high perceived prestige, which can be attractive to new
clients.

Regulatory Advantage

Multinational banks are often not subject to the same regulations as domestic banks.

Wholesale Defensive Strategy

Banks follow their multinational customers abroad to avoid losing their business at home and
abroad.

Retail Defensive Strategy

Multinational banks also compete for retail services such as travelers checks, tourist and
foreign business market.

Transactions Costs

Multinational banks may be able to circumvent government currency controls.

Growth

Foreign markets may offer opportunities to growth not found domestically

Risk Reduction

Greater stability of earnings due to diversification

International Banking Services

It is possible to obtain the full spectrum of financial services from offshore banks, including:

Corporate administration

Credit

Deposit taking

Foreign exchange

Fund management

Investment management and investment custody

Letters of credit and trade finance

Trustee services

Wire- and electronic funds transfers

Not every bank provides each service. Banks tend to Polarise between retail services and private
banking services. Retail services tend to be low cost and undifferentiated, whereas private
banking services tend to bring a personalized suite of services to the client.

Types of International Banking Offices

Correspondent bank relationship

A correspondent bank relationship is established when two banks maintain a correspondent bank
account with one another. The correspondent banking system provides a means for a banks
MNC clients to conduct business worldwide through his local bank or its contacts.

Representative Offices

A representative office is a small service facility staffed by parent bank personnel that is
designed to assist MNC clients of the parent bank in its dealings with the banks correspondents.
It is a way for the parent bank to provide its MNC clients with a level of service greater than that
provided through merely a correspondent relationship.
Representative offices also assist with information about local business customs, and credit
evaluation of the MNCs local customers.

Foreign branch bank

A foreign branch bank operates like a local bank, but legally it is a part of the parent bank. As
such, a branch bank is subject to the banking regulations of its home country and the country in
which it operates. The primary reason a parent bank would establish a foreign branch is that it
can provide a much fuller range of services for its MNC customers through a branch office than
it can through a representative office

Subsidiary bank

A subsidiary bank is a locally incorporated bank that is either wholly owned or owned in major
part by a foreign subsidiary. An affiliate bank is one that is only partially owned, but not
controlled by its foreign parent. Both subsidiary and affiliate banks operate under the banking
laws of the country in which they are incorporated. U.S. parent banks find subsidiary and
affiliate banking structures desirable because they are allowed to engage in security
underwriting.

Edge Act banks

Edge Act banks are federally chartered subsidiaries of U.S. banks which are physically located in
the United States that are allowed to engage in a full range of international banking activities. A
1919 amendment to Section 25 of the Federal Reserve Act created Edge Act banks. The purpose
of the amendment was to allow U.S. banks to be competitive with the services foreign banks
could supply their customers. Federal Reserve Regulation K allows Edge Act banks to accept
foreign deposits, extend trade credit, finance foreign projects abroad, trade foreign currencies,
and engage in investment banking activities with U.S. citizens involving foreign securities. As
such, Edge Act banks do not compete directly with the services provided by U.S. commercial

banks. Edge Act banks are not prohibited from owning equity in business corporations as are
domestic commercial banks. Thus, it is through the Edge Act that U.S. parent banks own foreign
banking subsidiaries and have ownership positions in foreign banking affiliates.

Offshore banking center

An offshore banking center is a country whose banking system is organized to permit external
accounts beyond the normal economic activity of the country. Offshore banks operate as
branches or subsidiaries of the parent bank. The primary activities of offshore banks are to seek
deposits and grant loans in currencies other than the currency of the host government. In 1981,
the Federal Reserve authorized the establishment of International Banking Facilities (IBF). An
IBF is a separate set of asset and liability accounts that are segregated on the parent banks
books; it is not a unique physical or legal entity. IBFs operate as foreign banks in the U.S. IBFs
were established largely as a result of the success of offshore banking. The Federal Reserve
desired to return a large share of the deposit and loan business of U.S. branches and subsidiaries
to the U.S.

International Banking Facilities

An International Banking Facility (IBF) is a separate account established by a U.S. bank, or a
US branch/subsidiary of a foreign bank, or an Edge Act Corporation in the United States to offer
services to only non-US residents and institutions. The services offered include deposit and loan
services. (Note, an IBF is not necessarily a separate legal entity.)
Banks may maintain IBFs in their existing quarters, but the IBF's accounting must be separate
from the bank's main books. Deposit and loan services provided by IBFs are free of Federal
Reserve System reserve requirements, and are not insured by the Federal Deposit Insurance
Corporation. Thus, deposits may earn greater interest than deposits made by U.S. residents.
The IBF concept was initially proposed to the Federal Reserve Board of Governors by the New
York Clearing House association in July 1978. It took until June 18, 1981 until the Board of
Governors approved establishment of IBFs from December 3. [2] IBFs were established to attract
some of the money flowing out to offshore banking centers.

In the early 1980s, New York competed with other states, such as Florida, to attract IBF business.
For instance, New York exempted the income of an IBF from New York bank franchise tax.
Florida, in turn, exempted the income of Florida IBFs from Florida corporate income tax and
also allowed Florida IBFs to deduct their losses.

International Money Market