Ms 424

http://mbaignoumaterial.blogspot.
com/
Please send your documents/contribution at kvrajan6@gmail.com .
Send documents in *.pdf or *.doc format only. Your contribution is vital for success of this blog’s mission.
Thanks Rajan VK.
ASSIGNMENT
Course Code : MS - 424
Course Title : International Banking Management
1. Explain the reasons for growth of international baking and discuss the organizational forms of
international banking.
Reasons for international banking
Migration of domestic customers, notably MNEs growing foreign activities Effects of
regulatory differences (structural and prudential) Input cost differences (e.g. in cost of domestic
funding) - Japanese in the past Comparative advantages in retail banking
(Citibank) Development of major financial centers offering benefits to banks:
• Business contacts
• Location of customers
• Pool of skilled labor
• 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 centers
Types of International Banking
At the heart of international finance are international banks, which come in different
structures and roles. "The Handbook of International Banking" notes that
international banks have helped pave the way for the globalization of finance. Since
people across the world hold diverse interests and pursuits in the financial world, it is
natural that global banks conform to a diversity of roles to accommodate the nature
of international banking.
Roles
International bank types can be categorized by the services they perform. For
example, retail banks--also known as commercial banks--serve consumers with basic
transaction services such as withdrawals and deposits. Retail banks have been
internationalized by incorporating investment banking features, giving their clients
access to global markets for investing.
Modes
The mode in which a bank exercises its role may qualify a bank as being
international. The University of Michigan cites different types of banks, each
possessing a distinct banking manner, namely: correspondent banks, representative
1
http://mbaignoumaterial.blogspot.com/
Thanks Rajan VK.
offices, foreign branches, subsidiaries and affiliates, Edge Act banks and offshore
banking centers.
Correspondent Banks
Correspondent banking implies a relationship between at least two banks, including
those in differing countries. Multinational corporations (MNCs) may utilize these
banks for conducting global business, according to the University of Michigan.
Correspondent banks are usually small, and may have representative offices serving
MNCs outside of the bank's home country.
Foreign Branch Bank

These banks operate in countries foreign to the parent bank to which they are legally
tied. They must abide by banking regulations established in the home and host
countries, according to Investopedia.com.
Subsidiaries and Affiliates

A subsidiary bank is incorporated in one country, but is either partially or completely
owned by a parent bank in another country. An affiliate works in a similar manner
except it is not wholly owned by a parent company and operates independently.
Edge Act Banks

This designation applies to certain U.S. banks, and is based on a 1919 constitutional
amendment. While physically located in the United States, Edge Act banks conduct
business internationally under a federal charter.
Offshore Banking Center

A "Swiss bank account," commonly referred to in Hollywood movies, is an example
of an offshore banking center's services. According to the University of Michigan,
these centers are actually countries with banking systems allowing foreign accounts
that function independent from the country's banking regulations.
2
Thanks Rajan VK.
2. What is the rationale of capital adequacy? Discuss the steps taken by RBI in recent times to
strengthen the capital adequacy ratios of Indian Banks.
Capital adequacy ratios ("CAR") are a measure of the amount of a bank's core capital expressed
as a percentage of its assets weighted credit exposures.
Capital adequacy ratio is defined as
TIER 1 CAPITAL -A)Equity Capital, B) Disclosed Reserves
TIER 2 CAPITAL -A)Undisclosed Reserves, B)General Loss reserves, C)Subordinate Term

Debts
where Risk can either be weighted assets ( ) or the respective national regulator's minimum
total capital requirement. If using risk weighted assets,
≥ 10%.[1]
The percent threshold varies from bank to bank (10% in this case, a common requirement for
regulators conforming to the Basel Accords) is set by the national banking regulator of different
countries.
Two types of capital are measured: tier one capital (T1 above), which can absorb losses without
a bank being required to cease trading, and tier two capital (T2 above), which can absorb losses
in the event of a winding-up and so provides a lesser degree of protection to depositors
Types of capital
The Basel rules recognize that different types of equity are more important than others. To
recognize this, different adjustments are made:
1. Tier I Capital: Actual contributed equity plus retained earnings.

3
Thanks Rajan VK.
2. Tier II Capital: Preferred shares plus 50% of subordinated debt.
Different minimum CAR ratios are applied: minimum Tier I equity to risk-weighted assets may be
4%, while minimum CAR including Tier II capital may be 8%.
There is usually a maximum of Tier II capital that may be "counted" towards CAR, depending on
the jurisdiction
Steps taken by RBI in recent times to strengthen the capital adequacy ratios of Indian
Banks.
Objectives of CAR : The fundamental objective behind the norms is to strengthen the
soundness and stability of the banking system.
Capital Adequacy Ratio or CAR or CRAR : It is ratio of capital fund to risk weighted assets
expressed in percentage terms i.e.
Minimum requirements of capital fund in India:

* Existing Banks 09 %
* New Private Sector Banks 10 %
* Banks undertaking Insurance business 10 %
* Local Area Banks 15%
Tier I Capital should at no point of time be less than 50% of the total capital. This implies
that Tier II cannot be more than 50% of the total capital.
Capital fund
Capital Fund has two tiers - Tier I capital include

*paid-up capital
*statutory reserves
*other disclosed free reserves
4
Thanks Rajan VK.
*capital reserves representing surplus arising out of sale proceeds of assets.

Minus
*equity investments in subsidiaries,
*intangible assets, and
*losses in the current period and those brought forward from previous periods
to work out the Tier I capital.
Tier II capital consists of:

*Un-disclosed reserves and cumulative perpetual preference shares:
*Revaluation Reserves (at a discount of 55 percent while determining their value for
inclusion in Tier II capital)
*General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk assets:
*Investment fluctuation reserve not subject to 1.25% restriction
*Hybrid debt capital Instruments (say bonds):
*Subordinated debt (long term unsecured loans:
Risk weighted assets - Fund Based : Risk weighted assets mean fund based assets such as
cash, loans, investments and other assets. Degrees of credit risk expressed as percentage
weights have been assigned by RBI to each such assets.
Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-balance
sheet items has to be first calculated by multiplying the face amount of each of the off-
balance sheet items by the credit conversion factor. This will then have to be again
multiplied by the relevant weight age.
Reporting requirements:
Banks are also required to disclose in their balance sheet the quantum of Tier I and Tier II
capital fund, under disclosure norms.
An annual return has to be submitted by each bank indicating capital funds, conversion of
off-balance sheet/non-funded exposures, calculation of risk -weighted assets, and
calculations of capital to risk assets ratio,
5
Thanks Rajan VK.
3. What do you understand by deployment of resources? Study the balance sheet of any two
banks and find out how these banks are deploying resources.
Deployment of resources
One resource management technique is resource deployment. It aims at smoothing the stock of
resources on hand, reducing both excess inventories and shortages.
The required data are: the demands for various resources, forecast by time period into the future
as far as is reasonable, as well as the resources' configurations required in those demands, and
the supply of the resources, again forecast by time period into the future as far as is reasonable.
The goal is to achieve 100% utilization but that is very unlikely, when weighted by important
metrics and subject to constraints, for example: meeting a minimum service level, but otherwise
minimizing cost.
The principle is to invest in resources as stored capabilities, then unleash the capabilities as
demanded.
A dimension of resource development is included in resource management by which investment

in resources can be retained by a smaller additional investment to develop a new capability that
is demanded, at a lower investment than disposing of the current resource and replacing it with
another that has the demanded capability.
Comparing community bank balance sheet: Community bankers face a perplexing choice about
the allocation of their resources: Do you plow them into new lines of business or keep them in
6
Thanks Rajan VK.
traditional banking functions. It's great to pursue new business lines, particularly in light of financial
modernization legislation that opens the door to numerous possibilities. But might the focus on new
business lines jeopardize the bank's existing business. If a banker puts too much energy into
opening an insurance agency, might the banker's service level tied to traditional banking products
suffer. On the other hand, can a bank achieve the profit levels shareholders demand if it remains
solely focused on traditional credit products that produce a seemingly ever-narrowing net interest
spread.
One way to answer the question is to seek input from the market. Does your market - made up of customers
and potential customers - want you to offer more services, or does it want you to focus on a narrow offering
of traditional bank products. The information of the commercial bank to focus on banking. When asked if
they wanted adjunct products and services from their bank, 14 small business owners participating in the
focus bank group unanimously said "no." The business owners, whose companies range in size from $1
million in annual sales to $10 million, all said they want their local bank to "stick to banking." One business
owner said "a bank trying to be all things to all people doesn't do anything well." Another stated that too
many additional "supermarket" services made the bank "inefficient."
4. What are the various risks faced by the banks? Explain how they are managed?
A bank has many risks that must be managed carefully, especially since a bank uses a large
amount of leverage. Without effective management of its risks, it could very easily become
insolvent. Although banks share many of the same risks as other businesses, the major risks that
especially affect banks are liquidity risk, interest rate risks, credit default risks, and trading risks.
Liquidity Risk
Liquidity is the ability to pay, whether it is to pay a bill, to give a depositor their money, or to
lend money as part of a credit line. A basic expectation of any bank is to provide funds on
demand, such as when a depositor withdraws money from a savings account, or a business
presents a check for payment, or borrowers may want to draw on their credit lines. Another need
for liquidity is simply to pay bills as they come due.
7
Thanks Rajan VK.
Asset Management
The primary key to using asset management to provide liquidity is to keep both cash and liquid
assets. Liquid assets can be sold quickly for what they are worth minus a transaction cost or
bid/ask spread. Hence, liquid assets can be converted into a means of payment for little cost.
The primary liquidity solution for banks is to have reserves, which are also required by law.
Reserves are the amount of money held either as vault cash or as cash held in the bank's account
at the Federal Reserve, often referred to as federal funds. It can also include cash that a bank has
in an account at a correspondent bank.
Liability Management
A bank can increase liquidity by borrowing, either by taking out a loan or by issuing securities.
Banks predominantly borrow from each other in an interbank market known as the federal funds
market where banks with excess reserves loan to banks with insufficient reserves. Banks can
also borrow directly from the Federal Reserve, but they only do so as a last resort.
Banks are big users of a debt instrument known as a repurchase agreement (aka repo), which is
a short-term collateralized loan where the borrower exchanges collateral for the loan with the
intent of reversing the transaction at a specified time, along with the payment of interest.
Credit Risks
Credit default risk occurs when a borrower cannot repay the loan. Eventually, usually after a
period of 90 days of nonpayment, the loan is written off. Banks are required by law to maintain
an account for loan loss reserves to cover these losses.
Banks reduce credit risk by screening loan applicants, requiring collateral for a loan, credit risk
analysis, and by diversification.
8
Thanks Rajan VK.
Collateral for a loan greatly reduces credit risk not only because the borrower has greater
motivation to repay the loan, but also because the collateral can be sold to repay the debt in case
of default.
A bank can also reduce credit risk by diversifying making loans to businesses in different
industries or to borrowers in different locations.
Interest Rate Risk
A bank's main source of profit is converting the liabilities of deposits and borrowings into assets
of loans and securities. It profits by paying a lower interest on its liabilities than it earns on its
assets the difference in these rates is the net interest margin.
However, the terms of its liabilities are usually shorter than the terms of its assets. In other
words, the interest rate paid on deposits and short-term borrowings are sensitive to short-term
rates, while the interest rate earned on long-term liabilities is fixed. This creates interest rate
risk, which, in the case of banks, is the risk that interest rates will rise, causing the bank to pay
more for its liabilities, and, thus, reducing its profits.
So for a bank to determine its overall risk to changing interest rates, it must determine how its
income will change when interest rates change. Gap analysis and duration analysis are 2
common tools for measuring the interest rate risk of bank portfolios.
Reducing Interest Rate Risk
Banks could reduce interest rate risk by matching the terms of its interest rate sensitive assets to
it liabilities, but this would reduce profits. It could also make long-term loans based on a
floating rate, but many borrowers demand a fixed rate to lower their own risks. In addition,
floating-rate loans increase credit risk when rates rise because the borrowers have to pay more
each month on their loans, and, thus, may not be able to afford it. This is best exemplified by the
many homeowners who defaulted because of rising interest rates on their adjustable rate
mortgages (ARMs) during the 2007 – 2009 credit crises.
9
Thanks Rajan VK.
Increasingly, banks are using interest rate swaps to reduce their credit risk, where banks pay the
fixed interest rate they receive on their assets to a counterparty in exchange for a floating rate
payment.
Trading Risk
Generally, greater profits can be made by taking greater risks. A bank's leverage ratio is limited
by law, but it can try to earn greater profits by trading securities. Although United States banks
cannot, by law, own stocks, they can buy debt securities and derivatives. For this, banks hire
traders for a separate department that specializes in trading securities.
Foreign Exchange Risk
International banks trade large amounts of currencies, which introduces foreign exchange risk,
when the value of a currency falls with respect to another. A bank may hold assets denominated
in a foreign currency while holding liabilities in their own currency. If the exchange rate of the
foreign currency falls, then both the interest payments and the principal repayment will be worth
less than when the loan was given, which reduces a bank's profits.
Banks can hedge this risk with forward contracts, futures, or currency derivatives which will
guarantee an exchange rate at some future date or provide a payment to compensate for losses
arising from an adverse move in currency exchange rates. A bank, with a foreign branch or
subsidiary in the country, can also take deposits in the foreign currency, which will match their
assets with their liabilities.
Sovereign Risk
Many foreign loans are paid in U.S. dollars and repaid with dollars. Some of these foreign loans
are to countries with unstable governments. If political problems arise in the country that
threatens investments, investors will pull their money out to prevent losses arising from
sovereign risk. In this scenario, the native currency declines rapidly compared to other
currencies, and governments will often impose capital controls to prevent more capital from
leaving the country. It also make foreign currency held in the country more valuable; hence,
10
Thanks Rajan VK.
foreign borrowers are often prohibited from using foreign currency, such as U.S. dollars, in
repaying loans in an attempt to conserve the more valuable currency when the native currency is
declining in value.
Operational Risk
Operational risk arises from faulty business practices or when buildings, equipment, and other
property required to run the business are damaged or destroyed. For instance, banks in the
vicinity of the World Trade Center suffered considerable losses as a result of the terrorist attacks
on September, 11, 2001, which knocked out power and communications in the surrounding area.
Barings Bank collapsed because its audit controls did not detect the calamitous losses suffered
by its rogue trader, Nick Leeson, early enough to prevent its collapse.
Many types of operational risk, such as the destruction of property, are covered by insurance.
However, good management is required to prevent losses due to faulty business practices, since
such losses are not insurable.
5. Discuss the various financial innovations happening in International Banking.
Innovation derives organization to grow, prosper & transform in sync with the changes in
the environment, both internal & external. Banking is no exception to this. In fact, this sector
has witnessed radical transformation of late, based on many innovations in products, processes,
services, systems, business models, technology, governance & regulation. A liberalized &
11
Thanks Rajan VK.
globalized financial infrastructure has provided had provided an additional impetus to this
gigantic effort.
The pervasive influence of information technology has revolutionaries banking. Transaction

costs have crumbled & handling of astronomical brick & mortar structure has been rapidly
yielding ground to click & order electronic banking with a plethora of new products. Banking
has become boundary less & virtual with a 24*7 model. Banks who strongly rely on the merits
of ‘relationship was banking’ as a time tested way of targeting & servicing clients have readily
embraced Customer Relationship Management (CRM), with sharp focus on customer centricity,
facilitated by the availability of superior technology. CRM has, therefore, has become a new
mantra in service management, which in both relationship based & information intensive.
Thanks to the regulatory changes & financial innovation, large banks have now become
complex organizations engaged in wide range of activities in the US & some parts of Europe.
Banking is now a one-stop provider with a high degree of competition & competence. Banking
has become a part of financial services. Risk Management is no longer a mere regulatory issue.
Basel-2 has accorded a primacy of place to this fascinating exercise by repositioning it as the
core banking. We now see the evolution of many novel deferral products like credit risk
management tool that enhances liquidity & market efficiency. Securitization is yet another
example in this regard, whose strategic use has been rapidly rising globally. So is outsourcing.
The retail revolution with accent on retail loans in the form of housing loans & Consumer loans
literally dominating the banking globally is yet another example of product & service
innovation. Various types of credit & debit cards & indeed e-cash itself, which has the potential
to redefine the role of monetary authorities, are some more illustrious examples.
It is Customary to describe the unfolding world as of unprecedented change, of a whirlwind of

ideas, of explosive growth of since-based technology. Prospects for continued escalation of
change are awesome: the world’s knowledge based now doubles every eight years, but by 2020,
the doubling time is estimated to be slashed to 76 days. A strong momentum and apparent
inevitability of globalization strongly suggest an accentuation of the pace of development. Such
contextual changes received. An impetus through increasing integration of the productive
process, rapid technological advances, splashing of legal & institutional barriers to global trade
& a smother flow of global capital.
12
Thanks Rajan VK.
Michale E Porter demonstrated that in an industry, the nature of the competition is embodied in the
treat of new extent, the treat of substitute product or services, the bargaining power of suppliers/
buyers and the rivalry among existing competitors. The significance of introducing a steady stream
of innovative products for banks emanates from its potential to salubriously impact all these factors.
Management theories & practice are characterized by a bewildering diversity of opinions. But the
view, that the challenge to innovate is urgent & continuous, enjoys a fair measure of consensus
across the development spectrum. In the present world, where all elements are critically in ferment,
launching of innovative products by strong business analytic tools, optimized processes & a modern
centralized IT system is central to ensuring short-term survival, achieving long-term prosperity &
eventually gaining competitive advantages.
An appropriate approach to the growth matrix in an era of change, where the convergence or real &
virtual worlds has become a part of our daily lives, requires a clear understanding of micro-
economic framework, education & training policies, trade & competition policy & socio-economic
milieu. To what extent can difference in innovation explained the observed difference in growth,
profitability & financial performance of industries & even firms within the same industry? How has
innovation be instrumental in influencing the Indian experience of development of banks? What
lesson can be gleaned from the recent Indian experience & that of other countries? What should be
the road map for innovation? This article attempts a brief look at some such issues of growing
concerns & provides insight into the impact of the driving forces and factors, behind innovation, on
Indian with particular reference to banks.
Discontinuity – The New Disequilibria:
Everything in business is always in flux & flow. Engel’s stressed, “equilibrium is inseparable from
motion & all equilibrium is relative & temporary”. The quickening of change (Table 1), however,
caused discontinuity & ripples of concern on the boardrooms. But it is necessary to realize, as
powerfully argued by Gary Hamel, “We stand on the threshold of a new age – the age of revolution.
For the first time in history we can work backward from our imagination rather than forward from
out past”.
TABLE 1: DIMESIONS OF INNOVATION

13
Thanks Rajan VK.
Innovation Impact on Business

Markets Local to Global - Investments in Identifying
& Servicing New markets

Customers Acceptance to delight - Listening to Consumers.
- Knowing &Understanding
their needs.
- Fulfilling Customer’s
Requirements.
Competition - Increased Competition - Squeeze in margins leading
- Shortage to surplus Economy to cost cuttings.
- Consolidating &
Convergence.
Technology Gradual change to quantum- Innovational Shareholders
Change
Transparency.
Society Demanding Rights - Corporate Governance
- Concern for social
Obligations.
Historically, innovations in society have always been preceded by the flow of ideas, which provide
the cutting Edge of development. In contemplating the challenges, the approaches of those
enterprise, which successfully weathered the challenges of this volatile era, shows that innovation is
not only power but also the key to sustained economic success. While the debate over innovation in
the world of business has raged for long, innovation has now rapidly emerged as a critical lament of
the growth strategy.
Despite the multi-layered any multi-dimensional aspect of ubiquitous change, most organization
still disconcertingly confine themselves to incremental improvement & innovation without trying to
alter the rules of the game, bring about breakthrough innovation. What is prognostically alarming is
that most companies in the given industry or market tend to follow the same unwritten rules for
conducting business with limited deviations from de facto strategies. This is reflected by the fact
that though agglomeration & the location of innovative activities are closely related, important
sectoral clusters like textiles (Triupur), diamond-cutting (Surat), hosiery (Ludhiana), call centers
14
Thanks Rajan VK.
(Gurgoan), auto-companies & automobiles (Chennai), with the notable exception of banglore (IT)
are largely confined to incremental innovations.
Further the blistering pace of change quickly renders existing strategies obsolete necessitating
frequent course corrections. An urgent policy appraisal is, therefore, impulses in banks by radical
and discontinuous innovative measures for enhanced performance in this turbulent era.
‘The Innovation Imperative – Accelerating Growth beyond Technologies and Geographies:’
Traditionally, innovation has been defined with focus on traditional concepts of industry research &
development & the commercialization of new products and/or process technologies. But the
definition of innovation as “acceptance of & readiness to change across the organization, dedication
to continuous improvement processes, willingness to experiment and explore novel ways, building
new relationship & alliance, establishing new approaches to markets, channels, customers, pricing
strategies & new & varied approaches to organization, measurement and performance
measurement” is generally a acceptable.
The history of the growth of financial development, as indeed of all other development, is
intertwined with the growth of innovation. Compelling & incontrovertible cross-country evidence
prove that successful innovation is crucial to the competitive edge of all businesses. But innovation
is particularly important for banking & finance companies. Innovation, which transcends invention,
represents the point of convergence of invention & insight. Organizational ethos needs to stress
innovation as a key driver of growth that surprises & delights the customer with new, differentiated
& relevant benefits. This is not a cliché but defining characteristics of the modern cooperate saga.
15

Ms 424

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Ms 424

Transféré par

Droits d'auteur :

Formats disponibles

http://mbaignoumaterial.blogspot.

Types of International Banking

Foreign Branch Bank

Subsidiaries and Affiliates

Edge Act Banks

Offshore Banking Center

Capital adequacy ratio is defined as

TIER 1 CAPITAL -A)Equity Capital, B) Disclosed Reserves

TIER 2 CAPITAL -A)Undisclosed Reserves, B)General Loss reserves, C)Subordinate Term

1. Tier I Capital: Actual contributed equity plus retained earnings.

2. Tier II Capital: Preferred shares plus 50% of subordinated debt.

Minimum requirements of capital fund in India:

Capital Fund has two tiers - Tier I capital include

*capital reserves representing surplus arising out of sale proceeds of assets.

Tier II capital consists of:

A dimension of resource development is included in resource management by which investment

Interest Rate Risk

Reducing Interest Rate Risk

Foreign Exchange Risk

5. Discuss the various financial innovations happening in International Banking.

The pervasive influence of information technology has revolutionaries banking. Transaction

It is Customary to describe the unfolding world as of unprecedented change, of a whirlwind of

Discontinuity – The New Disequilibria:

TABLE 1: DIMESIONS OF INNOVATION

Innovation Impact on Business

& Servicing New markets

- Shortage to surplus Economy to cost cuttings.

- Concern for social

‘The Innovation Imperative – Accelerating Growth beyond Technologies and Geographies:’

Vous aimerez peut-être aussi