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usually insured with a specialist insurance firm to achieve a higher credit rating for the different tranches (parts) of the CDO. Depending on the underlying assets, CDOs are also known as collateralised bond or loan obligations.

4.7 Increasing role of foreign banks in domestic banking systems

Over recent years there has been a substantial growth of foreign bank activity in many banking markets. The increased presence of foreign banks reflects the global liberalisation of financial systems that has encouraged new entry plus the desire of banks to seek out new sources of profit internationally. The growth of new markets in China, southeast Asia and in the transition economies of eastern Europe has prompted a wave of foreign bank expansion. In addition, as non-financial companies seek to source production and distribution facilities in a global marketplace this has also encouraged banks to follow suit. Banks not only operate in many different countries but they also do locate various parts of their operations in various parts of the world - call and IT centres in India being a noticeable example.

In various countries such as New Zealand, Luxembourg and Bostwana nearly all the banks are foreign - for example in New Zealand foreign banks (mainly Australian) control over 99 per cent of the domestic banking system. In the United Kingdom foreign banks account for slightly below 53 per cent of total banking sector assets.

Much of the foreign bank activity undertaking in domestic banking systems relates to traditional commercial banking business, namely deposit and loans business. (For instance, in Chapter 14 we note that foreign banks operating in the new EU Member States of central and eastern Europe mainly operate in the domestic retail market and compete head-on with domestic operators.)

Remember that at the start of this chapter we explained that international banking relates to banks doing business across borders and/or with foreign currencies and that this can encompass all types of banking activity - retail banking, corporate banking, investment banking, and so on. The focus of most of this chapter has been on banks providing international banking services to large firms as the products and services on offer tend to be different from those provided to domestic retail and small firm customers. However, one should always be aware that international banking (despite generally being commonly viewed as banking relationships with large multinational companies) also includes retail and other commercial banking business in foreign markets and that these activities barely differ from domestic retail operations.

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REVISION QUESTIONS

1.In what ways does traditional foreign banking differ from Eurocurrency banking?

2.Why do banks go overseas? What are the main theories on the rationale for international baking?

3.Explain the main strategic reasons why banks may wish to establish foreign operations.

4.What do correspondent banking relashionships involve?

5.Explain why banks engage in syndicated loans.

6.Outline the main type of bonds that an international banking institution can issue.

7.What is Euroequity issue?

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