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home regulations - so US banks could pay more interest on dollar deposits and could do more dollar lending at finer terms via their overseas subsidiaries as these were not subject to the home regulations. US banks were attracted to London because substantial dollar deposits were located there - some say that this was because the anti-communist sentiment in the United States (characterised by the so-called 'McCarthy witch hunts' from 1947 to 1954) encouraged the Russian, Chinese and other governments to move large-scale dollar funds out of New York to London as they thought these might be frozen. In any event, US banks flocked to London and, to a lesser extent, other major financial centres (e.g., Paris) during the 1960s. This was the birth of the Eurocurrency markets - markets where wholesale foreign currency deposits and lending takes place. US banks continued to dominate international banking during the 1970s, although from the late 1970s and throughout the 1980s Japanese banks replaced them as the major international lenders (reflecting the growth of Japanese multinational companies over the period). The 1990s witnessed a decline in the relative importance of Japanese banks on the international scene due to problems in their home market, and their position was replaced by European banks that have expanded their international operations as a result of various factors (including the creation of the European Union's single market).

4.5 Types of bank entry into foreign markets

When undertaking business in foreign markets banks have a number of choices regarding the structure of their activities. The choice of structure depends on a broad range of considerations including the amount of investment the bank wishes to undertake, tax issues, and other factors. The five main types of structure that banks can choose include:

1)correspondent banking;

2)representative office;

3)branch office;

4)agency;

5)subsidiary.

4.5.1Correspondent banking

The lowest level of exposure to the foreign market can be achieved through a correspondent banking relationship. This simply involves using a bank located in

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the overseas market to provide services to a foreign bank. Typically banks will use correspondent banks to do business in markets where they have no physical presence and as such these types of services are widely used by smaller banks. Box 4.2 illustrates the correspondent banking services provide by one of Canada's largest banks - the Canadian Imperial Bank of Commerce (CIBC).

It can be seen that the sort of services offered via a correspondent banking relationship relate mainly to the offer of payment and other transaction services as well as various trade credit facilities. Correspondent banks such as CIBC earn a fee from the foreign banks for providing these services. It should be clear that foreign banks only have a minimal exposure to foreign markets via correspondent banking relationships.

4.5.2Representative office

Banks can obtain slightly greater exposure to a foreign market via a representative office. Representative offices are usually small and they cannot provide banking business - that is they cannot take deposits or make loans. Representative offices are used to prospect for new business and they usually only act as marketing offices for parent banks. Typically a bank will set up a representative office in risky markets as the cost of running such small offices is negligible and they can easily be closed if commercial prospects are not good.

4.5.3 Branch office

Establishing a branch office usually indicates a higher level of commitment to the foreign market compared with the representative office. A branch is a key part of the parent bank and acts as a legal and functional part of the parent's head office. In many respects a foreign branch is similar to a domestic branch although the former is likely to have more autonomy in making commercial decisions tailored to the specific features of the foreign market. Branches can perform all the functions that are allowed by the banking authorities of the host country, namely taking loans and making deposits, as well as selling other types of products and services.

Branches are the most common form of foreign bank expansion as the costs are less than establishing a wholly owned subsidiary and they enable banks to conduct a full range of business activity.

In December 2004 of the 476 foreign banks operating in the United States, 231 had branch operations with assets amounting to $1,130 billion followed by 67 subsidiaries with assets of some $398 billion. In addition, the United States hosted 130 representative offices and 45 agencies. The latter held over $22.8 billion of assets. Foreign banks accounted for 18.1 per cent of total US banking sector assets,

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15.3 per cent of deposits and 10.5 per cent of lending in the United States. With regard to lending, foreign banks tend to focus on company lending - reflected by the fact that their share of total business loans stood at 21.5 per cent by December 2004.

Box 4.2 Canadian Imperial Bank of Commerce (CIBC) correspondent banking services

CIBC is a leader in payment processing, and is a major provider of funds transfer services for correspondent banks globally. CIBC's main correspondent banking services include:

a)Current account services, including multicurrency accounts, a full range of statements, and pooling services.

b)Payment services in all major currencies to any bank or other beneficiary, anywhere in Canada or through our subsidiaries in the Caribbean. These include: treasury settlement, cash settlement of securities, customer transfers to beneficiaries in Canada, disbursements, international bulk payments and pension payments.

c)Cash letter clearing services, including clean collections.

d)Documentary business such as letters of credit, documentary collections and guarantees.

Customer service teams are specialists in the investigation of client account activities, including payments, cash letters, collections, compensation claims, mail and pension payments, drafts and money orders.

CIBC delivers account and wire payment services reliably and efficiently and has made the bank a valued partner to banks throughout the world. In addition CIBC has strengths in related areas such as trade finance and institutional trust and custody services.

CIBC has established strong clearing relationships with a multitude of banks around the globe. It has been providing correspondent banking services to foreign banks for nearly a century.

Source: Adapted from http://www.cibc.com/ca/correspondent-banking.

4.5.4 Agency

Agencies are similar to branches in that they form an integral part of the parent bank. They lie somewhere between branches and representative offices as they can do less than the former and more than the latter. For example, in the United States a foreign bank agency cannot take deposits but is allowed to lend.

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4.5.5Subsidiary

A subsidiary is a separate legal entity from the parent bank, has its own capital and is organised and regulated according to the laws of the host country. Where branches and agencies expose the whole capital of the parent bank to risk from overseas activity, the risk exposure of a subsidiary is limited by its own capital exposure. (Of course, if a foreign bank subsidiary faced difficulties the regulators would expect the parent bank to provide support - although legally they do not have to do this given that subsidiaries have separate corporate identities.)

Subsidiaries may be the result of acquisition or organic start-ups - they also tend to be costly as the business has to be capitalised separately from the parent. One main advantage of having a subsidiary is that it generally signals a stronger commitment to do business in a country compared with other forms of entry and reflects the foreign companies' more positive assessment of future prospects for the market. In addition, subsidiaries are usually allowed to undertake a broad range of banking business subject to the rules and regulations of the host country. For example, prior to 1999 US commercial banks were prohibited from undertaking full-scale investment banking business in their home market so many of the largest banks established subsidiaries overseas where they could undertake this type of business.

4.6 International banking services

Section 4.5 described the different forms of bank entry into foreign markets and from this it should be clear that banks can offer a wide range of different types of banking and financial services via their international operations. One of the difficulties in describing types of international banking activity relates to its diversity. Traditionally the role of banks in providing services to multinational companies has been emphasised as the main feature of international banking, but as many banks have expanded overseas their customer provision now spans the full spectrum of services ranging from niche retail banking products to wholesale investment and commercial banking activity. Bearing this in mind, the following sections focus on banking products and services provided to international business.

4.6.1Products and services to international business

All international businesses are served by a variety of financial service firms including mainly commercial banks, investment banks and asset finance firms. The core banking products and services are similar (but not exclusively) to those offered to large corporate clients, which were reviewed in Section 3.5.2. These typically focus on the following range of needs: