To define a banking system as International or Global is quite difficult because there is no clear-defined Bank system model. We can make a certain classification by looking at the way in which foreign assets are funded and liabilities are managed. The international model of banking system relies more in Centralised funding which means that assets funds and liabilities (gathered mostly by bank domestic market) are shared among the main Bank units and then allocated to other member of the banking group. While Multinational or Global Banking has a more decentralised tendency which means that funds and liabilities are local claims. To diminish our uncertainties regarding the banking classification we can see the currency in which rely the bank assets and liabilities. In this way we can see the dependency on foreign exchange of the cross-border funding. International Banking is very dependent on foreign exchange rather than Global Banking which use local currencies and consequently eliminates transfer and exchange rate risks.
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Identify five ways in which a bank headquartered in the USA can fund loans to a borrower in Japan, and classify them as examples of international or global banking
Real life examples can give us a better understanding of Banking System models. We can take into account a Bank which its main offices are situated in USA. We can distinguish five ways where this bank can fund loans to a borrower located in Japan. Looking carefully the way this funding is done, we can make a certain classification as International or Global Banking.
USA customers deposit their money to Bank Head Office which follows these funds to Japan gives them as loans to Japan borrowers. Since this process involves cross-boundary it is considered as International Banking.
USA customers deposit their savings to Head Office which in turn deposits these funds at its Bank Unit in Japan. The Bank unit can give these funds as loans to Japan borrowers. This is also an International banking system.
Another way to move funds is that Head Office gets Japan deposits and in turn gives loans to Japan borrowers who need financing. So the whole process is done by the head office in USA without involvement of any bank unit or USA saver. This is International Banking classification again for the same reason.
If a Bank unit in Japan takes deposits from Japan savers and gives these funds as loans to Japan Borrowers then we are in the same country, so it called Global Banking system.
Still we have the same system as the last one when the USA saver deposit their saving to Bank units in Japan and the funds goes for Japan borrowers.
The ratio of locally funded foreign assets to total foreign assets is referred to in the reading. What value will this take for a pure global bank? What will be the value for a pure international bank?
Use the data provided in you case study to illustrate this.
The foreign assets, especially the ratio of cross-border assets to locally funded ones, is the best measurer to classify a banking system as International or Global. Since it is difficult to have a banking system totally Global, this measurer ratio would be, (total local assets)/(total foreign assets)=1. For banking system totally International this ratio would be 0. If we have another measurer ratio such as, (total cross-border assets)/(total foreign assets)=0 for Global Banking and 1 for International banking. These are the sides of the segment and the most of the banks relies between these sides.
Identify five reasons for the move away from international and towards global banking since 1980s.
According to BIS reporting data at the reference Global Banking System, we can see the movement that banking system had during certain different periods. If we choose a starting point such as year 1980 till now, we can see that Global banks has been expanded more than International ones. Especially US Banks local claims has been increased by 400% instead of the foreign claims which were increased by 55% (Bis Reporting Data table).
We can identify some reasons to explain how this shifting is done:
Most of Bank strategies tended to increase their assets and liabilities in foreign markets. This goal is achieved by trying to make the saving customers into more credit card holders or mortgage customers.
Another reason for the shift was by increasing the market of Bonds and Securities. So, the aim was to increase borrowers of local obligations or local government bonds.
The period of 80′ is known as Debt Crisis, where most of the banks couldn’t pay back their debts (region as Latin America was most hit by this crisis and also other well-developed countries). In such Market Risk, moving toward global banking was a good solution to reduce risk. Also, having different currencies in different countries makes the exchange of currencies very risky for bank transaction and funding. So, having the funds in a country and investing those funds there eliminates this kind of risk.
Acquisitions of cross border banks and by expanding existing operations was one of bank strategies that makes banks more and more global. If we look back at 90s the data show an increase of inflows in some developed countries by 21 % (UNCTAD (2001)) and this came by merging and acquisitions.
Another reason for expansion of Global Banking are the countries restriction which are becoming more and more easy in the meaning that they are becoming more opening to new financial institutions. Having lots of country boundaries like financial laws or any other restrictions makes the global system quite difficult to enlarge.
Why is Europe an exception?
use data from you case study
Reading through the article Global International Banking, we can see that the regions involved are mostly of USA or Asia. So, Europe it’s not so much involved in this kind of Globalisation. Even from the data in table 1 ( BIS Report 2001) we can see that Europe countries has a high number on international claims (Europe area shares almost 38.6 %of international claims vs all countries and Western Europe shares 62.2%)
This is possibly due to the main head offices which are located in Europe, in countries like London, Amsterdam, Zurich and Luxemburg and thus they tend to have more cross-border activities. These activities are also strongly related to Europe money market. The goal is to have cross-border funds in order to strength the position of Euro currency and also to increase local claims in Europe. Also many large business companies tend to have securities and obligations in other countries outside Europe using the funds raised up in Europe in euro currency. Such activity increases the competition between these large companies and tends to avoid main retail transactions in Europe countries. Also there are other factors that exclude Europe from this shifting towards global systems such as, Institutional ones. The existence of Cartel groups makes difficult the shift because of the fear of losing the group value. Also most of the Europe banks are affected by different regulatory systems, different tax and labour laws, accounting and reporting systems, and also having different country restrictions in Europe, impede the shifting to global systems.
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Distinguish between Transfer Risk and Country Risk. How does global banking diminish Transfer Risk?
Every banking system, International or Global involves certain kinds of risk such as Country Risk, Transfer Risk and other risks hanged on by the institution itself. Since these systems lay down in different countries, they face the countries restrictions e.g country economic, political, social. From this tendency comes factor such as interest rates, currency evaluation or other issues (not dependant on country economy, such as natural disasters) which may affect a lot the foreign investor. The risk that arises from the country, in which it is being invested, is called country risk. Part of such risk can be considered Transfer Risk. This is due to preclusion of exchanging the foreign currency to the country one to make transactions. The transfer risk is limited to country in the terms of the country’s demand for foreign currency and also to the foreign exchange which could fluctuate in different periods. Investing in one country and using those funds for loans or other possible investments, like global banking does, diminish the transfer risk in terms of currency devaluation. International banking involves funds transfer through the countries and in this way the transfer risk is at high levels.
During the Argentine crisis, USD deposits and USD loans were treated differently by the Argentine authorities. Deposits remained in USD, while loans could be repaid in pesos at a devaluated exchange rate. What are the implications of this for global banking strategies?
Include some data from the case study
When a country is in financial crisis, happens that lots of foreign investors move away, inflation goes up, unemployment arises and other effects take presence in that country like Argentina in our case. The Argentine government took a decision to treat bank deposit in USD and loan instalments to be paid in pesos. Having peso currency depreciated, makes that the exchange rate between Dollar and Peso to be high (more peso for one dollar). When the exchange rate is high, the effect it has on interest rate is that it goes down. by keeping at low level the interest rate of the country, more money will be in circulation, and more cash flows for any investment. In this kind of situation, Argentina can be attractive to new investors, especially global banks which operate locally. The government decision has an effect on local claims in local currency. In this way the peso currency gains strength foreign reserve in USD can be kept at the same level as the cash circulation. Since the ratio local claims versus international claims was 34% (table 1, BIS reporting (2001)) the government tented to increase such ratio. Argentina is a good example of shifting from international to global system because such a decision helps global strategies to be developed in this country and to diminish transfer risk.
Part Two: “Capital Flows in East Asia since the 1997 crisis”
In what sense can the net capital outflows from East Asia since the 1997 crisis be said to have supported the global economic and financial system in recent years? Explain your answer fully.
The 1997 was a year to be remembered for countries like Thailand, Malaysia, Indonesia and other countries that form the East Asia region. Due to lack of financial system and poor governance, those countries were affected by stock market devaluation, asset prices going down and also currency devaluation. Having such financial problems, lots of investors move away causing capital withdraws. But since then, gradually improvements have been made by passing from account deficit to account surplus valued at $88 billion. Current account balance surplus or deficit shows how well the net foreign assets of that region are and in the calculation are included government or private payments of the certain period.
The net capital flows from East Asia to other part of the world involved the creation of foreign exchange reserves. Viewing the data (BIS Quarterly Review (2003)) between two references of times 1998 and 2003, we can see that the region reserves has been growing time after time, increasing in this way the global reserve by almost 50%. But the usage of this reserve didn’t focus on region domestic investment but to other part of the world. The country, which played a great role in region recovery, was United States.
Having current account deficit in the same period, at about $240 billion (BIS Quarterly Review (2003)) United States imported for East Asia region a net value of $116 billion. In other word we can say that United States invested in Asian assets with high risk and the region gradually transferred the risk to global markets which want to diversify their investment portfolios.
Despite this growing there are some criticisms regarding how well can this reserve be used on the region itself and not to the rest of the world. But what are the benefits from the yield of the foreign exchange reserve comparing to the investment inside the region. What can be the profits in each case? The region main profits on the first case are by balance payments in order to have assets in financial markets at the rest of the world, and this is called risk free global market. The other case is to invest in the region, and in this way to improve the region’s financial market. Some critics believe that in the last case there will be much more profits than the first one and makes the reserve less rational.
Another critic is done to the net Capital outflows in the sense of externalities involved in the process. As we all now, Externalities are behaviours or any financial decision which don’t takes into account the country or region interest. In our discussion we can say that the resources of the region are putting into work for the other part of the world rather then for the private companies or corporate.
In what sense have the gross flows of capital into and out of East Asia involved “an international exchange of risk that is restoring and strengthening national and corporate balance sheets in the region and rendering the region’s economies more resilient”? Explain your answer fully.
Capital flows have two point of view in which has to be seen, capital inflows or capital entering in the region and capital outflows or capital going out of the region. Both ways of flows involves risk in the process, but this risk involves different counterparties. What is in common, is that Capital flows in East Asia has been influenced by so called, Foreign Direct Investments (FDI) which was the main source of capital inflows in the region and data shows that before the 1997 crisis the region was receiving almost 20% of global FDI. Even after the crisis, the region had some difficulties to attract new investments but still the FDI were at high level, especially in China. The main FDI for the region are USA, Japan and investments between the region’s countries. In 2002 East Asia was having 16% of net USA FDIs and 15% of Japan net FDIs. Also, having trade arrangement between region’s countries is one of the possible investments flows. Being in an international exchange of capital flows, it involves risk for sure and it comes in different forms such as, portfolio investments and bank channels.
Equities of portfolio in the region went down after the crisis, especially in Thailand (80% between 1996 and 1998 (Graph 5, BIS Quarterly Review (2003)). Gradually region equity market got some strength and local equities versus international equity began to be more correlated. This was due to exports, industrial production and the region economy as a whole.
Even, foreign bank lending to the region fell dramatically after the crisis. If we look at graph 6 (BIS Quarterly Review (2003)) we can see that Japanese banks reduce their claims on East Asia. Some of East Asia banks sold their debts to USA investor and other corporate bonds were sold in international market.
In contrast to counterparties involved in the inflow of capital process, the outflow process is through bank channels. After the crisis East Asia began to buy securities of US Treasuries, US Agencies and some European and Japanese government debts which we know that they are low risk. Also banks began to have deposits outside the region, in international banks.
Paying back low-risk debts and selling its own equities, East Asia was giving to the outside world secure capital and in turn its financial structures, such as corporate balance sheets were getting stronger. But if we compare the yield from capital inflows and the yield from capital outflows, data shows that East Asia during 1997-2002 is getting less than its giving. But, from this exchange of capital the region is getting liquidity.
But, how much could East Asia earn if the capital on gross basis have been invested in the region and not to flow outside it. Till now, only USA had more benefit by East Asia, and local market bond of the region has been left behind.
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