What is an international bank? How do international banks compete? The banking system became internationalised in the 1960s and since then it has been one of the most dramatic trends in the economy. The other two major trends in international and domestic banking are globalisation and securitisation. There are three definitions of an international bank according to Prof. Aliber. A bank may be said to be international if it uses branches or subsidiaries in foreign countries to conduct business.
Secondly, a bank may be said to be international if it relates to the currency denomination of the loan or deposit independent of the location of the bank. And the last way of defining international banking is by the nationality of the customer and the bank. The definition for international banking includes location of parent banks and their banking facilities, residency of customers and currency denomination. The existence of international bank service activity is explained by the international trade theory.
Banks engage in international banking activities because of the theory of comparative advantage. When a country produces a good or a service at its highest efficiency in that particular country it is said to have comparative advantage. The economic welfare of a country will therefore increases if that country will export its good or service in which it has comparative advantage and imports other goods or services where they are relatively more efficient compared to its goods or services.
At firm level, firms engage in international trade because of competitive advantages in order to make the most out of the arbitrage opportunities. International banking markets perform a financial-intermediation function similar to that of domestic banking markets i. e. banks in these markets gather deposits from surplus-spending units and lend them to deficit-spending units. The only difference is that in international banking it happens across national boundaries. Therefore foreign exchange risk and foreign-country risk has to be taken into consideration.
Eurocurrency market is made of banks which accept deposits and extend credits in currencies other than the currency of the country they are located in. This market is very important because it has integrated in the international financial markets. The Eurocurrency market is very efficient and offers very good interest rates and therefore the customers will be better off. The international payment system is a system which refers to all the procedures that banks use in order to transfer funds and receive payments from abroad.
Normally, major banks act as clearing agents not only for individual customers but also for smaller banks and financial institutions. SWIFT, FEDWIRE and CHIPS and CHAPS are the main electronic system payments used. From these systems, SWIFT has shown to be the most popular electronic fund transfer system because it offers real-time settlement 24 hours a day. Along with them, large banks uses their own systems in order to facilitate internal payments. The main types of international bank lending are: * Development loans.
These loans are granted to less developed countries. Development loans are a special kind of loans because they are given to countries which do not have access to commercial credit markets. These countries are not charged commercial interest rate on these loans. Development loans are provided to finance infrastructure construction, such as highways, telecommunications facility, water and electricity systems, schools. The loan decreases as the country develops. The World Bank and regional developed banks grant these loans.
These banks are not commercial ones and commercial banks are only involved on temporary basis. Project financing. This type of financing is provided to developed countries. This is done with sponsors which will be countries that have interest in seeing the project taking place. Project financing rest on three main items which are: that the income should be sufficient to service the debt, the asset value of the project should be sufficient to pay the capital amount the project should liquidate and that sponsors provide a long-term guarantee.