Lecture 10: International banking The sessions so far have focused on banking in a domestic context. In this lecture we are going to look at the issues which arise from the internationalisation of banking, which has been a growing trend since the 1960s. After looking at the nature of international banking and reasons for its growth, we shall focus on risks. The most important risks are the problem of sovereign risk and the behaviour of the international interbank market (IIBM), although exchange rate risk can also pose difficulties.
Definition of international banking Banking transactions crossing national boundaries International lending: • all claims of domestic banks offices on foreign residents • claims of foreign bank offices on
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in cost of domestic funding) - Japanese in the past Comparative advantages in retail banking (Citibank) Development of major financial centres offering benefits to banks: • Business contacts • Location of customers • Pool of skilled labour • 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
Main financing activities: Key feature is nationality of issuer and investor differs (1) Syndicated lending – credit facility offered simultaneously by a number of banks from more than one country who sign same loan agreement and stand equally in right of repayment. Lead manager does credit assessment and (delegated) monitoring. Unsecured but extensive covenants Use in finance of projects and mergers. (2) Eurobond issuance and trading – bearer bonds issued in markets other than the country of issue. Unsecured and few covenants except negative pledge (no future borrowing at higher seniority), and usually call provisions (3) Euronotes, international equity, international interbank market – see below
Sovereign risks 1 Can occur for Eurobonds