Definition

International banking is the process in which financial institutions allow foreign clients--both companies and individuals---to use their services. Perhaps the most talked-about international banks are located in Switzerland. However, many other countries have fully developed international banking infrastructures. Many individuals and companies participate in international banking to minimize (or evade) their tax liability. This strategy, however, has certain disadvantages. In addition, several international organizations have made recent efforts to curb the use of international banks as tax havens.

Advantages
y

In general, mostly wealthy individuals and companies use international banks. While there are many benefits to international banking---particularly taxation---the process can be quite expensive. Some advantages of international banking include tax evasion, foreign direct investment, protection from lawsuits, the fostering of international trade and protection against fluctuating domestic interest rates. International banking also makes sense for companies that operate internationally.

Disadvantages
y

Despite the benefits of international banking, several disadvantages exist. First, if the country in which one banks becomes economically or politically unstable, he could absorb dire financial risks---like nationalization of his assets. Second, while offshore banking certainly falls into a gray area of U.S. law, if one is determined to be illegally sheltering money, the Internal Revenue Service imposes stiff penalties for such abuse. Currency exchange rates can fluctuate, thus potentially devaluing one's assets. Lecture 10: International banking The sessions so far have focused on banking in a domestic context. In this lecture we are going to look at the issues which arise from the internationalisation of banking, which has been a growing trend since the 1960s.After looking at the nature of international banking and reasons for its growth, we shall focus on risks. The most important risks are the problem of sovereign risk and the behaviour of the international interbank market (IIBM), although exchange rate risk can also pose difficulties. Definition of international banking Banking transactions crossing national boundaries International lending: all claims of domestic banks offices on foreign residents claims of foreign bank offices on local residents claims of domestic bank offices on domestic residents in foreign currency

Deposits similarly classified (by residence of bank or depositor, or currency) Eurocurrency deposits placed with banks outside the country whose currency the deposits are denominated in (not necessarily in euros!) Features of international banking y y y y y Key aspects: currency risk and complexity of credit risk besides typical banking risks Competition for market share among banks (typically spreads very narrow) Cyclical nature, with periodic crises Competition for bank loans from the international bond market (close substitutes for loans) Importance of international interbank market (IIBM) as source of liquidity and funding for banks, and risks arising Role of risk management activities (swaps, options, futures)

Historical evolution: y y y y y y y Origin in Renaissance (lending to kings) Active international lending and bond market in the 19th century (also trade financing) Decline in 20s and 30s as governments restricted international trade and financing Growth of trade and multinationals (MNEs) postwar Development of euromarkets in the 1960s (owing to regulatory differences) Abolition of capital controls after breakdown of Bretton Woods Waves of lending to EMEs (such as Latin America in 1970s, Asia in 1990s)

Reasons for international banking y y y y y 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 centres offering benefits to banks: Business contacts Location of customers Pool of skilled labour 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 centres.

Main financing activities: Key feature is nationality of issuer and investor differs (1) Syndicated lending credit facility offered simultaneously by a number of banks from more than one country who sign same loan agreement and stand equally in right of repayment. Lead manager does credit assessment and (delegated) monitoring. Unsecured but extensive covenants Use in finance of projects and mergers. (2) Eurobond issuance and trading bearer bonds issued in markets other than the country of issue. Unsecured and few covenants except negative pledge (no future borrowing at higher seniority), and usually call provisions . (3) Euronotes, international equity, international interbank market. International interbank market Market in short term placement of deposits at fixed rate between banks in different countries Initial function liquidity adjustment improve allocation of deposits . Additional functions risk management via derivatives, and funding per se Encouraged by low capital charges on lending to banks (Basel 1 set 20%) Structural current account surplus in some OECD countries Link to central banks and belief in availability of support (Basel concordat), giving less incentive to monitor. Risks in the international interbank market 1 (Bernard and Bisignano 2001) Lack of security (collateral) and low levels of information-gathering Link to moral hazard due to implicit guarantees by central banks Growing need for liquidity owing to growth in international trading and transactions (notably OTC derivatives can give rise to unexpected liquidity demands) Increase in backup lines of credit requiring funding if called Existence may lead banks to under invest in liquidity . Range of banks with low credit quality (e.g. East Asia) so long as lenders believe in implicit guarantee. Risks in the international interbank market 2 Subject to quantity and not price rationing due to low levels of information on credit risk, unlike even domestic interbank markets Short maturity making withdrawal easy Subject to sudden increases in credit rationing during periods of stress, due to asymmetric information and resultant adverse selection and moral hazard Potential for contagion and global transmission of shocks.

Multiple Deposit Creation and the Money Supply Process

Recall that money supply = cash in circulation + bank deposits Bank deposits, not cash, account for the vast majority of the money supply. This is the case even though cash deposits, and cash reserves, are the foundation of the banking system. The reason why the volume of bank deposits is so much larger than the total amount of cash is that banks practice Fractional reserve banking is when cash is deposited into a bank, the bank keeps only a small fraction of that cash as reserves and loans the rest of it out, at interest. Fractional reserve banking is closely related to the phenomenon of multiple deposit creation: when cash is deposited into a bank, the bank loans out most of that money, and most of the money loaned gets redeposited into the banking system, and gets mostly loaned out again, and redeposited, and so on. The chain of deposit creation, or excess reserves (ER) being loaned out and redeposited in the banking system, continues until the banks have basically no more excess reserves. Multiple deposit creation can also be understood as follows: When the Fed creates an additional $1 in bank reserves, total bank deposits (and hence the money supply) increase by a multiple of that amount. The multiplication of an initial change in reserves into a much larger change in bank deposits occurs because of the chain of deposit creation, in which excess reserves are loaned out and redeposited ad infinitum. ...

Offshore Banking
An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:
   

greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability

While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg andAndorra.

Advantages of offshore banking



Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability.

Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits. Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere. Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals. Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry, arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a "race to the bottom" in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.

Disadvantages of offshore banking



Offshore bank accounts are less financially secure. In a banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid, although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009. Both offshore and onshore banking centres often have depositor compensation schemes. For example The Isle of Man compensation scheme guarantees 50,000 of net deposits per individual depositor or 20,000 for most other categories of depositor and point out that potential depositors should be aware that any deposits over that amount are at risk. However only offshore centres such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapses. Onshore

depositors have been refunded in full regardless of what the compensation limit of that country has stated thus banking offshore is historically riskier than banking onshore.


Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.[3] Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers. Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail. Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy [5]. The Laffer curve demonstrates this tendency.


Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggeration.

EXIM
Export-Import Bank of India is the premier export finance institution of the country, set up in 1982 under the Export-Import Bank of India Act 1981. Government of India launched the institution with a mandate, not just to enhance exports from India, but to integrate the countrys foreign trade and investment with the overall economic growth. Since its inception, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment. Commencing operations as a purveyor of export credit, like other Export Credit Agencies in the world, Exim Bank of India has, over the period, evolved into an institution that plays a major role in partnering Indian industries, particularly the Small and Medium Enterprises, in their globalisation efforts, through a wide range of products and services offered at all stages of the business cycle, starting from import of technology and export product development to export production, export marketing, pre-shipment and post-shipment and overseas investment.

The Basel Committee on Banking Supervision (BCBS)[1] is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1975. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee also frames guidelines and standards in different areas - some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision[2]. The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, theNetherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. However, the BIS and the Basel Committee remain two distinct entities.[3] The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision (see bank regulation or "Basel III Accord", for example) in the expectation that member authorities and other nations' authorities will take steps to implement them through their own national systems, whether in statutory form or otherwise. The purpose of BCBS is to encourage convergence toward common approaches and standards. The Committee is not a classical multilateral organization, in part because it has no founding treaty. BCBS does not issue binding regulation; rather, it functions as an informal forum in which policy solutions and standards are developed.[4] The Committee is further sub-divided each of which have specific task forces to work on specific implementation issues:


The Standards Implementation Group(SIG)



Operational Risk Subgroup - addresses issues related to Advanced Measurement Approach for Operational Risk Task Force on Colleges - develops guidance on the Basel Committee's work on supervisory colleges Task Force on Renumeration - promotes the adoption of sound renumeration practices Standards Monitoring Procedures Task Force - develops procedures to achieve

greater effectiveness and consistency in standards monitoring and implementation The Policy Development Group(PDG)


Risk Management and Modelling Group - point of contact with the industry on the latest advances in risk measurement and management Research Task Force - facilitates economists from member institutions to discuss research on financial stability in consultation with the academic sector

Trading Book Group - reviews how risks in the trading book should be captured by regulatory capital Working Group on Liquidity - works on global standards for liquidity risk management and regulation Definition of Capital Subgroup - reviews eligible capital instruments Capital Monitoring Group - co-ordinates the expertise of national supervisor in monitoring capital requirements Cross-border Bank Resolution Group - compares the national policies, legal frameworks and the allocation of responsibilities for the resolution of banks with

 

significant cross-border operations The Accounting Task Force(ATF) - ensures that accounting and auditing standards help promote sound risk management thereby maintaining the safety and soundness of the banking system


Audit subgroup - explores key audit issues and co-ordinates with other bodies to

promote standards The Basel Consultative Group(BCG) - facilitates engagement between banking supervisors including dialogue with non-member countries

The present Chairman of the Committee is Stefan Ingves, Governor of the central bank of Sweden (Sveriges Riksbank)[5]. The Basel committee along with its sister organizations, the International Organization of Securities Commissions and International Association of Insurance Supervisors together make up the Joint Forum of international financial regulators.