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Globalisation and Liberalisation, Brief History of International Banking

Banks in many nations have internationalised their operations since 1970. International banking is defined as a sub-set of commercial banking transactions and activity having a cross-border and/or crosscurrency element. International banking comprises of a range of activities: i) The currency of denomination of the transaction ii) The residence of the bank customer, and iii) The location of the banking office.

Globalisation & Liberalisation

Globalisation has affected the financial markets in the world almost entirely.

Causes of Globalisation:

Deregulation abroad Greater institutionalisation abroad Success of Euromarkets Integration of markets Technology and know-how

Consequences of Globalisation
Increased cross-border investment Wider range of alternatives for clients Market complexities Need for larger firms Greater commitment to overseas capital Greater risk exposure

Globalisation & Liberalisation

This displacement of banks as the main conduit for depositing and borrowing money has led to the globalisation of the financial markets; This global integration is driven by worldwide search on the part of investors and issuers for more favourable returns and lower cost of funds respectively. In the process, the banks have assumed the mighty work of catering to the needs of borrowers and lenders worldwide.

Globalisation & Liberalisation

Foremost among the global trends in the worlds financial industry are consolidation and convergence. In order to cut costs, domestic banks are entering into strategic cross-border deals with banks and insurance companies in other countries.

Significant liberalisation of domestic banking and capital market regulation, and opening of closed economies to an increasing range of borrowers have led to the deregulation of economies. The increasing domination of securities markets by financial institutions managed by professional bankers has led to the institutionalization of markets.

The nineteenth century witnessed many innovations in the international lending, leading to trade financing and investment banking. Investment banking consisted of the placement of long-term funds in the fixed interest securities on agency or undertaking basis to enable infrastructural and industrial development. By 1920s, American banking institutions dominated international lending, and the European nations were the major borrowers.

Banking across national borders came to a grinding halt in the early 1930s and did not resume till the Second World War. After this, internationalisation of banking operations was started by major commercial banking institutions in USA, UK, Canada, France, Germany, Switzerland and Japan. International banking speeded up after the first oil crisis in 1973. Progress in the telecommunications sector across the world supplemented the growth of international banking.

Characteristics of international banking

The number of participants, which at the beginning of the period were mainly American banks, has considerably widened to include German, UK, Japanese, French and Italian banks operating directly or through foreign branches and subsidiaries. The foreign component of total assets of the international banks has grown at a rate considerably above average. Nearly three quarters of the deficit of less developed countries are financed by commercial banks operating internationally.

The amount of individual loans has risen considerably thus increasing the default risk from individual borrowers. The maturities have risen considerably. Average maturities are now about ten years. Banks have started diversifying their sources of funds along with the assets.

Organisational features of IB
Correspondent banking: This represents an informal linkages between banks and its customers in different countries. The linkage is set up when banks maintain correspondent accounts with each other. Many a time large banks have correspondent relationships with banks in almost every country in which they do not have an office of their own. It allows banks to relieve their customers from maintaining any personnel or offices overseas.

Resident Representatives: Often banks open overseas business offices in order to help their customers in foreign countries. These banking offices do not accept local deposits or provide loans. The main objective of these offices is to provide information about local business practices and conditions, including the credit worthiness of potential customers and the banks clients. The resident representatives usually keep in touch with the local correspondent banks and provide help when needed.

Bank Agencies: An agency is similar to a bank except that it does not handle ordinary retail deposits. The agencies mostly deal in the local currency markets and in the foreign exchange markets, arrange loans, clear bank drafts and cheques, and channel foreign funds into financial markets. They also arrange long-term loans for customers and act on behalf of the home office to keep it directly involved in important foreign financial markets.

Foreign Branches: These are operating banks, except that the directors and owners tend to reside elsewhere. These are subject to both local banking rules and the rules at home. The books of a foreign branch are incorporated with those of the parent bank, although the foreign branch will also maintain separate books for revealing separate performance, and for tax purposes etc., The existence of foreign branches provides faster service to customers in different countries by offering great advantage over the lengthy clearing process that can occur via correspondents.

Foreign subsidiaries and Affiliates: A foreign branch is part of a parent organisation which is incorporated in a different country, whereas a foreign subsidiary is a locally incorporated bank that is owned either completely or partially by a foreign parent. Foreign subsidiaries do all types of banking. Foreign affiliates are similar to subsidiaries locally incorporated but they are joint ventures, and no individual foreign owner has control.

Consortium Banks: They are joint ventures of the larger commercial banks. They often involve six or more partners from different countries. They are mainly concerned with investment, and they arrange large loans and underwrite stocks and bonds. They do not accept deposits, and the deal with only large corporations. They take equity positions and they arrange takeovers and mergers.