Unit-1 PPT-01

 Banking activity crossing national borders is called as

international banking. In today’s ever changing competitive
world, the growth of economies depends upon a country’s linkage
with different nations and the opportunities to create more
international trade and financial activities. In this regard, the role
played by banks across the globe with more and more
international networking assumes importance.
 International markets, offer opportunities to the traders and
corporate and multinational companies, to expand their business,
 across different parts of the globe. International investors explore
more investment avenues for their investments. The international
markets in the financial sector offers a wide range of opportunities
for expansion of trade and financial activities across the borders of
nations.
 “International Banking” can be defined as a sub-set of
commercial banking transactions and activity having a cross-
border and/or cross currency element.
 International banking comprises a range of transactions that can
be distinguished from purely domestic operations by
 (a) the currency of denomination of the transaction,
 (b) the residence of the bank customer and
 (c) the location of the booking office.
Providing
loan
 According to Lewis & Davis (1987, p. 219), international banking is
a denotation of cross-border and cross currency facets of banking
business. They classify international banking into two main
activities; traditional foreign banking and euro currency banking;
where traditional banking involves transactions with non-
residents in domestic currency to allow trade finance and other
international transactions, whilst Euro currency banking involves
banks participating in foreign exchange transactions with both
residents and non-residents.
 Expansion: International Banking assists traders to expand their
business and trade activities beyond the boundaries of a nation.
Economic growth and conducive climate for carrying out the
business activities in new nations are the factors because of which
many enterprises are looking beyond the borders of their own
nations for their business growth. Competitive advantages in
respect of price, demand and supply factors, future growth
opportunities, cost of production and operating costs, etc., are
some of the other important factors for expansion of international
trade and finance.
 In view of this, the presence of banks across the nations have led
to the growth of international banking.
 Legal and Regulatory framework:- Flexible legal and regulatory
framework encourages traders and investors to enter into the
international markets. Quick approval to set up business, less
complicated compliance requirements and stable political
situations help many new players to enter into a number of
nations to expand their activities Also, due to lesser tax rates or no
taxes to be payable, certain tax havens play important roles as off
shore banking centers which encourages many
 international banking units to open their branches in such off
shore centers.
 Cost of Capital: The operating efficiency of an enterprise depends
upon the average cost of capital. Many companies enter into new
emerging markets to take advantages of the lower cost of capital
in such markets. Banks as a financial intermediary play an
important role as source of funds.
 Current account and Capital account transactions: Banks play
crucial role in export and import trade. By providing different types
of financial and non financial support, banks help enterprises,
corporate customers and individuals doing business in different
countries, by extending trade finance and investment opportunities.
Banks also facilitate movement of funds (inward and outward
remittances) through their network and correspondent banking
arrangements.
 Risks: Different risks paved ways for diversification, thereby global
investors look for alternative destinations to invest their savings with
twin objectives of safety of funds and better returns. In view of their
presence in different time zones, international banks also face
various risks.
 International monetary system has seen many changes over
centuries. Initially the barter system was used as a medium of
exchange to settle receipts and payments, on account of economic
activities.. Different items like precious stones, gold, paper, etc., have
been used as currency.
 Two important events which took place in international financial
markets during the last century (20th century) are: evolution of the
Gold Standard System, Fixed and Floating exchange rate system.
 The first half of the 20th century witnessed many issues, such as,
the First World War, 1929 Wall Street crash, the great depression,
the Second World War and most importantly, the failure of the
Gold Standard System. Many nations across the globe faced
financial crisis, and this led to the policy makers to address these
international financial issues. After the Second World War, in 1944,
44 Allied nations met at Bretton Woods, in New Hampshire of the
USA. The Bretton Woods Conference has thus become an
important milestone in the international banking system.
 The main objectives of the new monetary order were:
 – To establish an international monetary system with stable
exchange rates
 – To eliminate existing exchange controls
 – To aim to bring convertibility of all currencies
 The Bretton Woods Conference, created a new system popularly
called as “Bretton Woods System”
 Bretton Woods System paved the way for the formation of three
important multilateral International institutions viz., –
 – International Monetary Fund (IMF)
 – International Bank for Reconstruction and Development (IBRD) –
popularly known as “World Bank”
 – International Trade Organization
 It was created in 1945 and presently has 188 members. Its
Objectives are:
 (a) to promote international monetary cooperation,
 (b) to strive for stable exchange rates
 (c) to facilitate the balanced growth of international trade and
creation of employment opportunities
 (d) to assist in establishment of a multilateral payment system e.
to assist member countries in case of balance of payments crisis
 A Eurocurrency market is a market that provides banking services to a
variety of customer by using foreign currencies located outside of the
domestic marketplace.
 The concept does not have anything to do with the European Union
or the bank associated with the European member countries.
although the Origins of the concept are heavily derived from the
reason instead it represent any deposit of foreign currencies into a
domestic bank.
 for example if Japanese Yen is deposited into a bank in a United State
it is considered to be operating under the auspices of the Euro
currency market.
 The modern evolution of the Eurocurrency market may be said to
have begun in the early 1950 when the Soviet Union allegedly fearing
that the United States might block its dollar reserves, decided to
deposit its dollars in a Soviet owned Paris Bank.
 French were relatively neutral in the US-Russia Cold War. The French
Open the dollar account in a book and then transferred this balance
to its dollar account maintained in New York. The dollars so held with
the French bank outside USA gave rise to the concept of Euro dollar
and consequently the Euro currency market. The market which thus
originated in Paris has now London as it nerve center, the important
 important centres in Hong Kong and Singapore in Asia.
 As mentioned before the Euro currency market was born out of the
apprehension that USA could block funds of the Eastern block any
time in the event of the outbreak of War or deterioration of relations
between USA and those countries in the Eastern block getting
strained. Later, several other development contributed to the growth
of this market these are summarized as under-
 In 1957 the British government had placed restrictions on the use of
sterling for financing third country trade following the suez crisis and
the weakness of the pound sterling. This encouraged the British
bankers to turn to dollar lending to finance trade.
 In the late 1950s many European countries relaxed their exchange
control restoring thereby dollar convertibility. The US domestic
money market was reopened for the first time since the Great
Depression. This enabled the investor to move their money more
freely as also provided room for innovation to provide a new range of
options for borrower and lenders. In the year 1966, the net size of the
Euro currency market was estimated at US dollar 21 billion only, it has
today grown tens of millions of USD recording many fold increase.
 An offshore bank offering international banking is a bank located in
any country other than the account holder’s home country. An
account held in an offshore bank is therefore often described as an
offshore bank account. While international banking and offshore
bank accounts are often negatively perceived as a way to avoid
paying tax (which in fact is illegal), they boast legitimate financial
advantages for expats over domestic banking arrangements. Let’s
take a look at the advantages of international banking for expats.
 1. Tax efficiency - Some offshore locations have a reputation for low
or zero tax rates, which make them attractive banking options for
globe-trotting expats. Be aware, however, that as an offshore bank
account holder, you are still required to pay tax on interest earned
from offshore savings. After all, tax avoidance is illegal. The benefit
is that interest on savings is paid before deducting tax. This is of
course more favourable than countries such as the UK, for example,
where tax is deducted before adding interest. Taxation can be a tricky
area to navigate, not least because tax legislation continually changes
across both onshore and offshore jurisdictions.
 Also, the specific tax advantages to which you are entitled depend on
your personal circumstances. Keep in mind there are many
international tax intricacies to understand, such as reporting and
annual tax filing. To avoid falling foul of fines or penalties when it
comes to your offshore savings and tax obligations, always seek
professional advice before opening an offshore bank account.
 2. Convenience and greater flexibility- As with any domestic
bank account, you must meet the due diligence requirements
of opening an offshore account. However, you won’t need to
visit the bank in person. You can then access your offshore bank
account 24/7 from anywhere in the world either via a web
browser or mobile app. International bank accounts are often
available in multiple currencies, which is convenient if you need
to make or receive payments in different currencies – often a
key benefit for expats living and working globally.
 3. Investing- Investing from an international bank account is
relatively straightforward and can give you access to investment
opportunities that may not be available in your home country, or
where you currently reside. This is an attractive feature for expats
leading international lifestyles. Depending on your situation,
investing from an offshore account may offer you many advantages
including tax benefits, asset protection and greater privacy. Keep in
mind, however, that offshore investing attracts greater regulatory
scrutiny and higher costs. Most offshore banks offer tools to help you
build your investment portfolio.
 Your choice of offshore bank account, however, needs to be
structured around your risk profile and financial goals, so it’s wise to
seek professional advice before making a decision.
 4. Easy transfers and lower exchange risk -International bank
account holders can make transactions in more than one currency
including sterling, euros and US dollars. Making transferring funds
between countries plain sailing. Offshore accounts also generally
offer good exchange rates and allow you to move money between
accounts in different currencies without the fees.
 5. Lending and Credit- International banking is effectively a private
banking service, so lending and credit facilities are often more flexible
and tailored to your specific needs. You may find you have access to
much more competitive mortgage rates, particularly if the property is
in a mainstream market like the UK. International banking has many
advantages for expats and is worth considering; however, as with any
financial arrangement, it’s always best to talk to a financial adviser
before taking the plunge.
 The services and operations which an international bank undertakes
is a function of the regulatory environment in which the bank
operates and the type of banking facility established.
 A correspondent bank relationship- Established when two banks
maintain a correspondent bank account with one another. The
correspondent banking system provides a means for a bank’s MNC
clients to conduct business worldwide through his local bank or its
contacts.
 A representative office- 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 bank’s 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.
 A foreign branch bank- Operates as 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.
 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.
 Modes of Existence of Foreign Banks in India: In India, Foreign Banks
can exist in any one of the following modes, after getting the
requisite permission from Reserve Bank of India:
 (i) Branch/es
 (ii) a Wholly owned Subsidiary or
 (iii) a subsidiary with an aggregate foreign investment up to a
maximum of 74 per cent in a private bank.