Credit line

Credit Line

Organization of international banking

The banking industry is more “multinational” in nature than any other business. Nowadays, the giant international banks like Citicorp, Barclays, and Fuji Bank have presence in more countries, than giant corporations in other industries such as IBM, Sony and Philips.

With huge advancement in communications and information technology across the globe, corporal presence in important financial centers continues to be important. Developments in money and exchange markets can be better anticipated if the bank has its people on the spot, than relying on information relayed through financial information networks such as Reuters even though the latter may be quite up-to-the-minute. In making loans to foreign borrowers, information gathered and evaluated by the bank’s own staff is usually more reliable than that obtained from a correspondent bank or other local agencies. Finally, as a bank’s clients’ business becomes more multinational, it finds that it can serve its domestic clients better by making international payments on time; advising home clients on local business conditions, and so on, by being on the spot.

FORMS OF A BANK

A bank has several forms and degrees with multinational presence. These are briefly discussed below:

•Correspondent Banking

•Resident Representatives

•Bank Agencies

•Foreign Branches

•Foreign Subsidiaries

•Consortium Banks

Correspondent Banking

This is the oldest and the most informal form of international linkage among banks. Many large banks do not have offices or branches in foreign countries. Therefore, they maintain their accounts with local banks in those countries. The purpose is to facilitate payments and collections on behalf of their clients who may have business dealings with parties in the foreign country. For instance, banks in Europe affect dollar payments and collections for their clients through accounts the banks maintain with their correspondent banks in the US. Communications and settlements can be done through global networks and electronic funds transfer systems such as SWIFT and CHIPS. SWIFT is a short-form for ‘Society for Worldwide Inter-Bank Financial Telecommunications’, and CHIPS is an ellipsis for ‘Clearing House Inter-Bank Payments System’.

Resident Representatives

Many banks open their offices in foreign countries to provide information on local business conditions including creditworthiness of local business entities to their customers. These offices are not engaged in the usual banking business, viz. taking deposits and making loans. They are very small outfits. They keep in touch with the correspondent bank and render help when needed.

Bank Agencies

A bank agency is almost like a full-fledged bank except it does not deal with ordinary deposits. Activities like operating in the local money markets; foreign exchange markets; clearing drafts; and arranging loans are carried out on behalf of the home office.

Foreign Branches

A foreign branch is quite similar to a local bank. However, it is subject to local banking regulations. However, it is not incorporated under local laws. Its account books are consolidated with the parent bank tough it keeps separate books for performance evaluation and tax purposes. It carries out a complete range of banking business in the country where it operates. It is not considered a separate entity in the eyes of law, but it is recognized as a part of the parent bank. With foreign branches, international payments can be effected must faster than with a correspondent bank. Different countries lay different restrictions on opening of foreign branches, for e.g. in the US, geographical expansion of branch banking within the country.

Foreign Subsidiaries

A subsidiary bank is usually incorporated within the local area, but a foreign parent bank either partially or wholly owns it. It undertakes all types of banking business and for all practical purposes is indistinguishable from a local bank. Once again, countries differ in their degree of acceptance of foreign owned banking subsidiaries.

Consortium Banks

The Joint ventures of many international banks are mainly concerned with investments; underwriting of securities; and large loans. They do not allow deposits and do not deal with individual investors. Apart from making corporate and sovereign loans, they also acquire equity and are involved in mergers and takeover activities.

Many foreign banks are allowed to open their branches in India and conduct various types of banking business.

These can be:

•Accepting individual and corporate deposits

•Making consumer and corporate loans

•Dealing in foreign exchange

INTERNATIONAL REGULATION OF COMMERCIAL BANKS

Banks are mostly considered the most susceptible part of the financial system. Hence, they are subject to strict prudential control to ensure the integrity and soundness of the entire financial system. Controls are exercised in terms of the levels of liquidity banks must maintain, the character of assets in which they can deploy depositors’ funds, kinds of provisions they must make against doubtful loans and how much own capital – paid up capital, reserves, preference shares and so on – they must maintain for a given level of assets.

Till around mid-seventies, bank regulation was more or less the concern of individual monetary and regulatory authorities in each country. The Bankhaus Herstatt in Germany and the Franklin National Bank in New York in 1974 was a major failure due to the following reasons:

•Rise in oil price

•Generalized floating of major currencies

•Huge growth of funds recycled through the Euro market

This led the central bank governors of the ‘Group of Ten’ countries start the process whereby a uniform global approach to bank regulation could be approved. During the eighties, the rapid liberalization and integration intended that financial system of a country could not be immune to adverse developments in another part of the global system. In addition, a single country could not unilaterally tighten its own regulatory framework because this would result in international banks simply shifting their operations elsewhere.

In 1975, the governors of the “Group Ten” countries launched the Basle Committee on Banking Regulations and Supervisory Practices. The Basle Committee approached its task in several phases to bring about a greater degree of dialogue, information exchange, and cooperation amongst bank regulators around the World. A series of agreements called “Basle Concordats” have been arrived at. The process is continuing.

Sometime in 1989, the Basle Committee published its guidelines on capital adequacy. It provided a scheme for categorizing various bank assets according to their degree of risk, and a procedure for computing a measure of risk-weighted total assets. It recommended that a bank should attain and retain owned capital base of at least 8% of its risk adjusted total assets.

During the 1990s, the scope of commercial banks saw a rapid expansion in the inclusion of substantial activity in securities, derivatives, and insurance. The complexity of banks’ organizational forms and governance structure also increased markedly because of mergers and acquisitions. The Basle Committee wished to expand and thereby improve its capital adequacy guidelines to take account of market risks and operational risks, in addition to credit risks. The consideration of credit risks was the sole focus of the guidelines framed in 1988. The revised guidelines were published in January 2001 and are being debated in various forums.

Quick links