INTERNATIONAL BANKING

International Trade:
International trade is one of the significant reasons that started International Banking
Globally.International trade is the System by which the countries exchange their
goods and services. Countries trade with each other to obtain things that are better
quality, is expensive or simply Different from goods and services produced at home.
The Goods and services that a country buys from other countries are called imports,
and goods and services that are sold to other countries are called Exports.
While trade takes place mostly betwwen companies, governments and individuals
frequentlybuy and sell goods internationally, too. Most intrernational trade consisites
of the purchase and sell of industrial equipment, consumer goods, Oil and agriculture
products.in addition services such as Banking, insurance, transportation,
telecommunications engirneering and tourism accounter for one-fifth of the world
exprts in 1990.
Resaons for internatioinal Trade :
Satisfaction of diverse needs: The most important reason for
internationalization is serving the diverse needs of the customers. It may not
be possible for a country to produceor manufacture everything at home.
Hence these countries havr to expand tyheior business overseas in order tyo
satisfy the varying needs of such customers.
Economies of Scale: By carrying out business in both domestic as well as
foreign markets, the countries can enjoy the benefits of large scale
economies.
Wider choice: It enables the customer a wider choice in the selection of
product thereby giving them cost advantage as well.
Optimum utilisaation of resources: The resources cn be put to the
maximum use by increasing the scale of operations thereby ensuring more
returns from the same resources.
Interdependence of Nations: The theory of comparitivecost advantage
makles it clear that every nation will have depend upon each other nations as
no country can be self-sufficient. This interdependence also induces
international trade.



International Banking and Finance:
The International financial system is the worldwide framework of legal
agreements, institutions, and both formal and informal economic actors that together
facilitate international flows of financial capital for purposes of investment and trade
financing. It has evolved substantially since its emergence in the late 19th century
during the first modern wave of economic globalization,
[1]
marked by the
establishment of central banks, multilateral treaties, and intergovernmental
organizations aimed at improving the transparency, regulation, and effectiveness of
international markets.
[2]:74[3]:1
From the late 1800s to early 1900s, accelerated world
migration and enhanced communication technologies facilitated unprecedented
growth in international trade and investment, driving early financial globalization.
[2]:75
76
At the onset of World War I, trade and investment contracted as foreign exchange
markets became paralyzed by illiquidity in money markets. Countries sought to
defend against external shocks with protective trade policies and world trade virtually
halted by 1933, worsening the effects of the worldwide Great Depression until a
series of reciprocal trade agreements in the 1930s and 1940s slowly reversed trade
protectionism and reduced tariffs worldwide. Efforts to revamp the international
monetary system after World War II improved exchange rate stability, fostering
record growth in global finance. Overwhelming market pressures in the 1970s forced
central banks to choose among inflation, dubious capital controls, and flexible
exchange rates, until a series of currency devaluations and oil crises led most
countries to float their currencies.
The world economy became increasingly financially integrated in the 1980s and
1990s through capital account liberalization and financial deregulation. A series
of financial crises in Europe, Asia, and Latin America followed with contagious
effects due to greater exposure to volatile capital flows. The global financial
crisis which originated in the United States in 2007 and 2008 quickly propagated
among other nations and is recognized as the catalyst for the worldwide Great
Recession. A market adjustment to Greece's noncompliance with its monetary
union in 2009 ignited a sovereign debt crisis among European nations known as
the Eurozone crisis.
A country's decision to operate an open economy and globalize its financial capital
carries monetary implications captured by the balance of payments. It also
introduces exposure to risks unique to international finance, such as political
deterioration, regulatory changes, foreign exchange controls, and legal uncertainties
for property rights and foreign investment. Many groups and individuals participate in
the global financial system. General consumers and international
businesses undertake consumption, production, and investment. Governments and
intergovernmental organizations act as investors and as purveyors of international
trade, economic development, and crisis management. Regulatory bodies establish
financial regulations and legal procedures, while independent associations
coordinate standard practices and facilitate industry supervision. Professional
associations, policy think tanks, and research institutes collect and analyze data,
publish reports and policy briefs, and host public discourse on global financial affairs.
While the global financial system is edging toward greater stability, governments
must deal with differing regional or national needs and policies. Some nations are
trying to orderly discontinue unconventional monetary policies installed to alleviate
systemic pressures and cultivate recovery, while others are expanding their scope
and scale. Emerging market policymakers face a challenge of precision as they must
carefully institute sustainable macroeconomic policies during extraordinary market
sensitivity without provoking investors to retreat their capital to stronger markets.
Nations' inability to align interests and achieve international consensus on matters
such as banking regulation has perpetuated the risk of future global financial
catastrophes.

Features of International Banking:
1. Currency Risk: Since international banking involves exchange of two
different currencies in a transaction and the rate of exchange of their
currencies is volatile, there is always a risk that the currency rate may
fluctuate thereby ensuring loss the either party.
2. Complexity of credit risk: Besides of typical banking risk there is the risk of
default by the borrower in repayment of loans, which is popularly known as
Credit risk. The risk faced by International banks is more complex as it
involves currencies, regulatory, legal, political environment of two different
countries which makes the risk even more Complex.
3. Competition for market share among banks: Since the competition in the
international market is even stiffer owing to the presence of Large number of
banks as we established bond market, the spread (profit) is usually very
narrow.
4. Cyclical nature, with periodic crises: Since banks are located globally, they
are not only affected byy the economic environment at home but they are also
affected by the economic ups and downs in the foreign country where they
are located.
5. Importance of International interbank market (IIBM): Unlike in Indian
markets, in international markets interbank market serves as a very important
source of liquidity and funding for bank, and also for hedging the risk arising
out of international transactions.

History of International Banking:
The concept of international banking was started way back in 12
th
century by
Knights and Templars in Europe and middle east regions. The first International
Bankers were the Knights Templar, a secretive society created and sponsored by an
even more secret society known as the "Priory De Scion" during the time of the
Christian Crusades to recapture the Holy Lands from Muslim control. They created
for the first time safe deposit lockers where Lords would leave their treasure when
they went on for the pilgrimage to Jerusalem. They were the pioneers in developing
the crude form of cheque system which Lords carried with them to withdraw their
money in Jerusalem on the basis of their treasures deposited in Paris.
The other significant Impact was made by the Jewish Moneylenders who resided in
Amsterdam and whose group was popularly known as Elders of Zion who
financed the various factions during the revolution in England during the period of
1640 to 1689.
The Other Significant Contribution was made in the past by the House of the
Rothschild during eighteenth century. In 1750, Mayer Amschel bauer bought his
fathers banking business in Frankfurt and renamed it as Rothschild. Later on, Each
son of Mayer started their banking business
Emergence of financial globalization: 18701914:
The world experienced substantial changes prior to 1914 which created an
environment favorable to an increase in and development of international financial
centers. Principal among such changes were unprecedented growth in capital flows
and the resulting rapid financial center integration, as well as faster communication.
Before 1870, London and Paris existed as the world's only prominent financial
centers.Berlin and New York soon rose to eminence on par with London and Paris.
An array of smaller financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zurich, and Geneva. London remained the leading
international financial center in the four decades leading up to World War I.
[2]:7475[4]:3

The first modern wave of economic globalization began during the period of 1870
1914, marked by transportation expansion, record levels of migration, enhanced
communications, trade expansion, and growth in capital transfers.
[2]:75
During the
mid-nineteenth century, the passport system in Europe dissolved as rail transport
expanded rapidly. Most countries issuing passports did not require their carry, thus
people could travel freely without them.
[5]
The standardization of international
passports would not arise until 1980 under the guidance of the United
Nations' International Civil Aviation Organization.
[6]
From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these
travelers migrated to the United States while most of the rest
reached Canada, Australia, Argentina, and Brazil. Europe itself experienced an influx
of foreigners from 1860 to 1910, growing from 0.7% of the population to 1.8%. While
the absence of meaningful passport requirements allowed for free travel, migration
on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel
and the dominance of steam-powered boats over traditional sailing ships. World
railway mileage grew from 205,000 kilometers in 1870 to 925,000 kilometers in 1906,
while steamboat cargo tonnage surpassed that of sailboats in the 1890s.
Advancements such as the telephone andwireless telegraphy (the precursor
to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to
connect London and New York, while Europe and Asia became connected through
new landlines.
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker
Trust Company, forcing the trust to close on October 23, 1907, provoking further
reactions. The panic was alleviated when U.S. Secretary of the Treasury George B.
Cortelyou and John Pierpont "J.P." Morgan deposited $25 million and $35 million,
respectively, into the reserve banks of New York City, enabling withdrawals to be
fully covered. The bank run in New York led to amoney market crunch which
occurred simultaneously as demands for credit heightened from cereal and grain
exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed
to the crisis. The Bank of England had to sustain an artificially high discount
lending rate until 1908. To service the flow of gold to the United States, the Bank of
England organized a pool from among twenty-four different nations, for which
the Banque de France temporarily lent 3 million (GBP, 305.6 million in 2012 GBP
[9]
)
in gold.

Interwar period: 19151944
Economists have referred to the onset of World War I as the end of an age of
innocence for foreign exchange markets, as it was the first geopolitical conflict to
have a destabilizing and paralyzing impact. The United Kingdom declared war on
Germany on August 4, 1914 following Germany's invasion of France and Belgium. In
the weeks prior, the foreign exchange market in London was the first to exhibit
distress. European tensions and increasingpolitical uncertainty motivated investors
to chase liquidity, prompting commercial banks to borrow heavily from London's
discount market. As the money market tightened, discount lenders began
rediscounting their reserves at the Bank of England rather than discounting new
pounds sterling. The Bank of England was forced to raise discount rates daily for
three days from 3% on July 30 to 10% by August 1. As foreign investors resorted to
buying pounds for remittance to London just to pay off their
newly maturing securities, the sudden demand for pounds led the pound to
appreciate beyond its gold value against most major currencies, yet sharply
depreciate against theFrench franc after French banks began liquidating their
London accounts. Remittance to London became increasingly difficult and
culminated in a record exchange rate of $6.50 USD/GBP. Emergency measures
were introduced in the form of moratoria and extended bank holidays, but to no
effect as financial contracts became informally unable to be negotiated and export
embargoes thwarted gold shipments. A week later, the Bank of England began to
address the deadlock in the foreign exchange markets by establishing a new
channel for transatlantic payments whereby participants could make remittance
payments to the U.K. by depositing gold designated for a Bank of England account
with Canada's Minister of Finance, and in exchange receive pounds sterling at an
exchange rate of $4.90. Approximately $104 million USD in remittances flowed
through this channel in the next two months. However, pound sterling liquidity
ultimately did not improve due to inadequate relief for merchant banks receiving
sterling bills. As the pound sterling was the world's reserve currency and
leading vehicle currency, market illiquidity and merchant banks' hesitance to accept
sterling bills left currency markets paralyzed

Birth of the World Trade Organization: 1994
The Uruguay Round of GATT multilateral trade negotiations took place from 1986 to
1994, with 123 nations becoming party to agreements achieved throughout the
negotiations. Among the achievements were trade liberalization in agricultural goods
and textiles, the General Agreement on Trade in Services, and agreements on
intellectual property rights issues. The key manifestation of this round was
the Marrakech Agreement signed in April 1994, which established the World Trade
Organization (WTO). The WTO is a chartered multilateral trade organization,
charged with continuing the GATT mandate to promote trade, govern trade relations,
and prevent damaging trade practices or policies. It became operational in January
1995. Compared with its GATT secretariat predecessor, the WTO features an
improved mechanism for settling trade disputes since the organization is
membership-based and not dependent on consensus as in traditional trade
negotiations. This function was designed to address prior weaknesses, whereby
parties in dispute would invoke delays, obstruct negotiations, or fall back on weak
enforcement.
[7]:181[12]:459460[15]:47
In 1997, WTO members reached an agreement
which committed to softer restrictions on commercial financial services, including
banking services, securities trading, and insurance services. These commitments
entered into force in March 1999, consisting of 70 governments accounting for
approximately 95% of worldwide financial services.





Bank for International Settlements:
The Bank for International Settlements (BIS) (in French, Banque des rglements
internationaux (BRI)) is an international organization of central banks which "fosters
international monetary and financial cooperation and serves as a bank for central
banks".The BIS carries out its work through subcommittees, the secretariats it hosts
and through an annual general meeting of all member banks. It also provides
banking services, but only to central banks and other international organizations. It is
based in Basel, Switzerland, with representative offices in Hong Kong and Mexico
City.
The BIS was established on May 17, 1930 by an intergovernmental agreement
by Germany, Belgium, France, United Kingdom, Italy, Japan, United
States and Switzerland.
[3][4]

The BIS was originally intended to facilitate reparations imposed on Germany by
the Treaty of Versailles after World War I.
[5]
The need to establish a dedicated
institution for this purpose was suggested in 1929 by the Young Committee, and was
agreed to in August of that year at a conference at The Hague. A charter for the
bank was drafted at the International Bankers Conference at Baden Baden in
November, and its charter was adopted at a second Hague Conference on January
20, 1930. According to the charter, shares in the bank could be held by individuals
and non-governmental entities. The BIS was constituted as having corporate
existence in Switzerland on the basis of an agreement with Switzerland acting as
headquarters state for the bank. It also enjoyed immunity in all the contracting states.
Between 1933 and 1945 the BIS board of directors included Walther Funk, a
prominent Nazi official, and Emil Puhl, who were both convicted of war crimes at
the Nuremberg trials after World War II, as well as Hermann Schmitz, the director
of IG Farben, and Baron von Schroeder, the owner of the J.H.Stein Bank, which held
the deposits of the Gestapo. There were allegations that the BIS had helped the
Germans loot assets from occupied countries during World War II.
As a result of these allegations, at the Bretton Woods Conference held in July 1944,
Norway proposed the "liquidation of the Bank for International Settlements at the
earliest possible moment". This resulted in the BIS being the subject of a
disagreement between the American and British delegations. The liquidation of the
bank was supported by other European delegates, as well as the United States
(including Harry Dexter White, Secretary of the Treasury, and Henry
Morgenthau),
[6]
but opposed by John Maynard Keynes, head of the British
delegation.


Organization of central banks
As an organization of central banks, the BIS seeks to make monetary policy more
predictable and transparent among its 60 member central banks, except in the case
of Eurozone countries which forfeited the right to conduct monetary policy in order to
implement the euro. While monetary policy is determined by most sovereign nations,
it is subject to central and private banking scrutiny and potentially to speculation that
affects foreign exchangerates and especially the fate of export economies. Failures
to keep monetary policy in line with reality and make monetary reforms in time,
preferably as a simultaneous policy among all 60 member banks and also involving
theInternational Monetary Fund, have historically led to losses in the billions as
banks try to maintain a policy using open market methods that have proven to be
based on unrealistic assumptions.
Central banks do not unilaterally "set" rates, rather they set goals and intervene
using their massive financial resources and regulatory powers to achieve monetary
targets they set. One reason to coordinate policy closely is to ensure that this does
not become too expensive and that opportunities for private arbitrage exploiting
shifts in policy or difference in policy, are rare and quickly removed.
Two aspects of monetary policy have proven to be particularly sensitive, and the BIS
therefore has two specific goals: to regulate capital adequacy and make reserve
requirements transparent.

Regulates capital adequacy
Capital adequacy policy applies to equity and capital assets. These can be
overvalued in many circumstances because they do not always reflect current
market conditions or adequately assess the risk of every trading position.
Accordingly the BIS requires the capital/asset ratio of central banks to be above a
prescribed minimum international standard, for the protection of all central banks
involved.
The BIS's main role is in setting capital adequacy requirements. From an
international point of view, ensuring capital adequacy is the most important problem
between central banks, as speculative lending based on inadequate underlying
capital and widely varying liability rules causes economic crises as "bad money
drives out good" (Gresham's Law).




Encourages reserve transparency
Reserve policy is also important, especially to consumers and the domestic
economy. To ensure liquidity and limit liability to the larger economy, banks cannot
create money in specific industries or regions without limit. To make bank depositing
and borrowing safer for customers and reduce risk of bank runs, banks are required
to set aside or "reserve".
Reserve policy is harder to standardize as it depends on local conditions and is often
fine-tuned to make industry-specific or region-specific changes, especially within
large developing nations. For instance, the People's Bank of China requires urban
banks to hold 7% reserves while letting rural banks continue to hold only 6%, and
simultaneously telling all banks that reserve requirements on certain overheated
industries would rise sharply or penalties would be laid if investments in them did not
stop completely. The PBoC is thus unusual in acting as a national bank, focused on
the country not on the currency, but its desire to control asset inflation is increasingly
shared among BIS members who fear "bubbles", and among exporting countries that
find it difficult to manage the diverse requirements of the domestic economy,
especially rural agriculture, and an export economy, especially in manufactured
goods.
Effectively, the PBoC sets different reserve levels for domestic and export styles of
development. Historically, the United States also did this, by dividing federal
monetary management into nine regions, in which the less-developed western
United States had looser policies.















Non-Resident Accounts
Non-Resident bank accounts are those, which are maintained by Indian nationals and
Persons of Indian origin resident abroad, foreign nationals and foreign companies in
India. Bank branches can open ordinary non-resident accounts in the names of private
individuals provided initial deposits for opening the accounts are received from abroad in
an approved manner or the initial amount is tendered in foreign currency while on a visit
to India or transfer of funds from the existing non-resident account of the same person.