| 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.
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