FINM8007 Chap.10 International Banking and Money Markets
International Banking and Money Markets
How banks operate across borders
International banks add trade finance, foreign exchange, hedging and, where allowed, investment banking to ordinary banking.
This chapter compares correspondent relationships, representative offices, foreign branches, subsidiaries, offshore centres, shell branches and international banking facilities, and the motives that take banks abroad.
The Eurocurrency market and its risks
It then explains Eurocurrency deposits and loans, reference rates and their replacements, syndicated Eurocredits and the short-term instruments built on them, and uses the Asian crisis and the global financial crisis to weigh the benefits of foreign banks against credit booms and contagion.
How this topic is examined
No marked solutions are released for this week, so build answers from the lecture’s structure.
On organisation, name the form and its regulator; on the Eurocurrency market, give the definition and the floating-rate mechanics of a syndicated loan; and on global banking, write a balanced answer that sets the benefits of foreign banks against credit booms, cherry-picking and contagion, with the Asian crisis and the global financial crisis as evidence.
How it connects
Eurocurrency rates are the interest rates used in the parity formulas of Chapter 5, the forward rate agreements and Eurodollar futures here are cousins of the hedging instruments in Chapter 8, and syndicated loans sit beside the bond and equity routes of Chapter 11 as the third external source of funds named in Chapter 9.
What this chapter covers
- 01
Services international banks add
- 02
Branches, subsidiaries and other forms
- 03
Why banks go international
- 04
Eurocurrency deposits and loans
- 05
Reference rates and replacements
- 06
Syndicated Eurocredits
- 07
The Asian crisis
- 08
Contagion in the GFC
Worked example · free
Compute the interest on a floating-rate syndicated loan
- 1Loan rate for the period: 3.90% + 1.10% = 5.00% p.a.
- 1Interest: 150,000,000 × 5.00% × 90/360 = $1,875,000.
- 1Each bank’s share: 1,875,000 ÷ 3 = $625,000.
Key terms
- Correspondent Bank
- A bank that holds deposits with a foreign bank so each can serve the other’s clients.
- Foreign Branch
- An overseas bank office with no separate legal identity from the parent bank.
- Eurocurrency
- A deposit or loan in a currency other than that of the country where the bank operates.
- Eurocredit
- A syndicated floating-rate bank loan made in a Eurocurrency.
- Offshore Banking Centre
- A jurisdiction that allows external banking business largely free of local banking regulation.
International Banking and Money Markets FAQ
Does a Eurocurrency deposit have to be in Europe?
No. The prefix only means the deposit is in a currency other than that of the country where the bank sits, so a yen deposit in Singapore is a euroyen deposit and a dollar deposit in London is a eurodollar deposit.
Why are large loans syndicated?
A single lender may lack the capital or the specialist expertise for a very large loan, or want to limit its exposure to one borrower. A syndicate shares the risk and lets each bank take part in deals too large for its own balance sheet.
How can foreign banks harm a host economy?
In weak institutional settings their inflows can feed credit booms that end in busts, they may cherry-pick the best borrowers, and a shock in their home country can make them pull capital out of the host just when it is needed.
What replaced LIBOR as a reference rate?
Overnight rates in each currency: SOFR in the United States, SONIA in the United Kingdom, ESTR in the euro area, SARON in Switzerland and TONAR or TIBOR in Japan. Floating-rate loans now reset against these rates instead of the old interbank offered rate.
Exam move
Put the bank forms on a line from least to most local presence and note which regulator governs each; then compute interest on one floating loan over two resets. Finish by summarising each crisis in three sentences: the inflow, the weakness it exploited and the channel that spread the losses.
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