Copyright © 2002 Pearson Education, Inc. Slide 16-1.


Chapter 16

Banking in the International Economy


Organization of International Banks

International banks provide services to those engaged in international trade.

Like domestic banks, international banks accept deposits and lend.

International banks lower transactions costs and lower information costs.

International financial regulation can lead to innovation in banking.


Overseas Organization of U.S. Banks

Some banks operate wholly owned branches around the world.

Edge Act corporations can perform only international banking services.

U.S. banks can own a controlling interest in foreign financial service companies.

International banking facilities can do business only with foreigners.


Organization of Foreign Banks in the United States

An agency office can transfer funds from abroad and make loans in the United States.

A foreign bank branch is a full-service bank with the name of the foreign bank.

A subsidiary U.S. bank is treated as a U.S. bank but need not have the foreign bank name.


Managing Exchange Rate Risk

International banks are exposed to exchange rate risk in their foreign transactions.

International banks manage exchange rate risk to minimize fluctuations in net worth.

Banks can avoid risk by matching the denomination of assets and liabilities.

Banks can hedge against exchange rate risk by using financial futures or options.


Services Provided by International Banks

Bank trading increases liquidity and efficiency of markets.

Banks trade to reduce customer’s costs for transactions and their own exchange rate risk.

Banks also arrange currency swaps. Banks help firms move funds from country to

country. Banks provide bankers’ acceptances.


Figure 16.1 Information Services and

Bankers’ Acceptances


Figure 16.2 International Banking Services


The Rise of Euromarkets Before World War II, the pound served as the

international transaction currency. A Eurodollar is a dollar-denominated deposit

in a bank outside of the U.S. British banks, trying to avoid rules on the use

of pounds, created the Eurodollar market. Much of international banking is done in

banking centers called Euromarkets.


Loans in Euromarkets

The typical Euroloan is a floating-rate obligation of relatively long maturity.

Euroloans usually are quite large. They are often handled by loan syndication,

with each bank holding a fraction of a loan.


Financial Regulation in International Banking

In the 1980s, several central banks suggested international regulation of banking activities.

Efforts to coordinate capital standards for commercial banks began in Basel in 1987.

In the late 1990s, policymakers continue to argue for changes in deposit insurance.

More international linkages have led central banks to discuss their roles in crises.

Copyright © 2002 Pearson Education, Inc. Slide 16-1.

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