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customer needs and also to generate more fee and commission income. A similar example for the product cycle of companies would show a reliance on commercial banking credit and payment facilities while the firm is small and as it grows a broader array of corporate and investment banking services would be demanded. Given these aspects of the financial services industry it is hardly surprising that there has been a trend towards the creation of large financial services conglomerates and the acceptance of universal banking practice in many countries.

CHAPTER 4

International Banking

GETTING STARTED

Working in groups, consider the issues below. After you have reached some conclusions, share your ideas with the whole class.

1.Discuss why banks undertake international business?

2.Are there foreign banks operating in your country (the area you live in)? What are the forms of their presence in the local market?

VOCABULARY STUDY

1).Study the words below and explain their meaning within the text 2). Suggest Russian equivalents of these words

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countertrade

4.1 Introduction

The growth in foreign bank activity and international banking in general has been a major factor of financial system development. This chapter provides an insight into the main characteristics of international banking and highlights its diverse and dynamic features. The first part of the chapter defines what we mean by international banking, provides a brief history and then discusses the range of products and services offered by international banks. Here the focus is on banking services provided to large corporations - namely treasury management services, credit, debt and equity financing as well as trade finance and various risk management products. The chapter concludes by discussing features of country risk evaluation and notes the growing presence of foreign bank activity in a global setting.

4.2 What is international banking?

International banking refers to business undertaken by banks across national borders and/or activities that involve the use of different currencies. A more precise definition of international banking is provided by Lewis and Davis (1987, p. 221) who classify international banking into two main types of activity - traditional foreign banking and Eurocurrency banking. Traditional foreign banking involves transactions with non-residents in domestic currency that facilitates trade finance and other international transactions. Eurocurrency banking involves banks undertaking wholesale (large-scale) foreign exchange transactions (loans and deposits) with both residents and non-residents.

The definition above suggests that international banks are involved with financing trade, transacting foreign exchange business and making wholesale (large) shortterm Eurocurrency loans and deposits.

While banks engaged in international banking are typically involved in this type of activity, the definition is rather broad and does not really take account of the fact that many banks have operations in various countries. Traditional foreign banking and Eurocurrency banking, for instance, do not require that banks have a physical presence in a foreign country - such activity can be conducted within a single country. For example, UK banks can undertake domestic currency transactions with customers in Hong Kong without any physical presence in the latter. Similarly, wholesale Eurodollar loans (wholesale loans denominated in US dollars) can be made between banks based in London without any of these banks needing a physical presence in the United States.

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In order to account for the fact that many banks have physical operations in various countries a distinction is made between multinational and international banking. Multinational banking refers to banks having some element of ownership and control of banking operations outside their home market. The main feature of multinational banking is that it requires some form of foreign direct investment (FDI) by banks in overseas markets reflecting a physical presence. (As one can guess, the definition comes from the literature on multinational enterprises and FDI.)

One should note that international banking and multinational banking are terms that are used interchangeably to refer to banks that have global activities. For the purpose of this chapter we will use international banking as it is a more commonly used term, although one needs to be aware that the following sections discuss international activities of banks in their broadest sense.

4.3 A brief history of international banking

The origins of international banking date back over 4,000 years, when various civilisations used letters of credit and bills of exchange issued across sovereign boundaries to finance trade. The history of banks having a physical presence outside their home country is more recent, widely acknowledged as starting in the fifteenth century when Florentine bankers (notably the Medici family) established subsidiaries or foreign branches in other jurisdictions to help finance trade, scientific, military, artistic and other endeavours. From the fourteenth to the sixteenth centuries, Florence was regarded as the scientific and cultural capital of the Western world and the city gave birth to the Renaissance and modern European art. It has been argued that commercial and artistic developments were inextricably linked by a change in social attitudes that emphasised the creation of wealth and conspicuous consumption. This not only prompted the development of regional banking business but also encouraged international activity because financing requirements could not be met locally.

The modern era of international banking can be viewed as occurring in two distinct phases. The first phase commenced with the rise of colonialism during the nineteenth century and continued into the twentieth century. The second phase of international bank expansion was linked to the growth of US multinational firms and the changing financial regulatory landscape from the late 1950s and early 1960s onwards:

Colonial banking. British banks opened branches in their Australian, Caribbean and North American colonies in the 1830s. Further

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expansion took place starting from the 1850s onwards and by the end of the century British banks had operations in South Africa, Latin America, India and parts of Asia as well as in the Middle East and some European countries. Other colonial powers also expanded their banking activities in the latter part of the nineteenth century, particularly Belgian, French and German banks that set up operations in Latin America, Africa and China as well as in London. One noticeable difference between the British banks and their European counterparts was that the former established 'colonial banks', otherwise known as 'British overseas banks' or 'Anglo foreign banks' that only provided services outside Britain. In contrast the European banks undertook both domestic and foreign activity, often via the acquisition of banks or through the establishment of subsidiaries. In other words, European bank expansion overseas was more similar to the type of activity conducted nowadays - domestic banks acquiring foreign operations or setting up subsidiaries through which business could be undertaken whereas British banks were specifically set up to do banking only in the colonies. It should be noted that various Japanese and Canadian banks also developed international activities in the latter part of the nineteenth and early twentieth centuries.

Modern international banking. The expansion of banks overseas during the first half of the twentieth century was somewhat limited due to the decline of the British and other colonial empires, economic uncertainty brought about by the world wars, and the changing political landscape in many countries that sought to establish their own banking systems by restricting (even nationalising) foreign banks. It was not until the emergence of the United States as a major economic power and the growth of their multinational companies that the second wave of international banking activity took place. This occurred from the late 1950s and early 1960s onwards, when US banks began to expand overseas to meet the financial requirements of multinational firms, as well as to take advantage of cheaper financing outside the home market. US banks were subject to limits on how much interest they could pay on deposits (known as Regulation Q) and also had to maintain onerous reserve requirements. They found that by establishing subsidiaries outside the United States (typically in London) these operations were not subject to