Financial Markets: Distinguishing between international banking and global banking - Assignment Example

?Financial Markets Financial Markets Distinguishing between international banking and global banking is a difficult task owing to similarity of identities in their application as the two concepts look analogous in a general sense. However, when a micro level examination of the functioning of the fund management system is carried out, it is clear to identify the diverging point of both streams. Either banking system deals with assets and borrowers from a location other than the institutional head quarter of the bank. More phenomenally, the difference is identified between the fund raising and distribution stream of both of them while they deal with foreign deposits and borrowings. Straightly speaking, international banking deals with collection funds in favor of a target client in a foreign country while global banking refers to gathering funds for financing the claims of foreign borrowers from within the same country. Business transactions of both of them differ in the function fund distribution and risk allocation strategy. International banking borrows directly from another country; in this regard, the lender country collects funds by obtaining deposits from residents and transfers it on term bases. Global banking, on the other hand, recruits different bodies in the borrowing country for attracting potential local depositors and distribute the fund thereby. In the international banking deal, the funding system starts with a foreign saver and the deposit flows to the head office in the lending country. During transfer it is considered as an international loan and the currency exchanged is subject to value variations. Though this scenario is common in both aspects, it is more directly felt in international banking. b) A strict choice between both international and global banking has to be exercised while allocating fund flow on debt basis to a foreign country. Feasibility of Japan’s financial structure to repay the debt must be the first concern while considering the scope of a viable transaction in the money lending. There are five ways in which a fund transfer on debt basis is possible from a USA based banker to a Japan borrower. In the first banking option, i.e., in International Banking, savers among residents of the USA are invited for their investment in the process as deposits which reach the Head Office in the country and the amount collected can be transferred as loan across the border. The borrower who receives the money directly essentially has to be Japanese in this regard. On the other hand, savers’ deposit in various branches of the US owned banks travel in the similar way but when reaching the international banking process, the deposit must go to an American Banking franchise which allots the loan to the borrower. But the difference is felt when the bank regulates the fund according to the US norms. A USA banker can also receive deposit from the Japanese keeping a head office as the main frame and return the fund as loan to the borrower in another case of international banking. In this system, the functioning becomes easier between the two countries and cross border transaction is only subject to value exchange variables of the two currencies. In the global banking system, the head office’ interference is omitted as the loan amount is raised either solely by the US affiliate bank which raises fund from the depositors in Japan. And the final way is by the transfer of US saver’s deposit straightly US affiliate bank in Japan which goes as loan to the borrower. c) The positions mentioned by global banking systems take acute care for the consideration of currency values of different countries. From the analysis of functional banking strategy, it is easily ascertained that global banking has an edge over purely international banking. The asset value analysis is normally done with the aid of banking approximations adjusted with the BIS norms. Locally funded claims are expected to be at a lower value than the total value of local claims and liabilities gathered by the foreign bank’s local affiliate. In this policy formation the value of all locally funded foreign assets is expressed in terms of local currency value. Statistical data of the claims of BIS reporting banks as at the end-September 2001 reveals that the ratio of local claims over international claims stands at 0.39 with local investors claiming only 10 per cent with foreign bank claims covering 21 per cent of the total international claims. As shown in the statistics, the feasibility of local claims is on a higher rate in Asia-Pacific, Hong Kong SAR, Japan, United States, North America and Mexico regions when compared to the entire global asset management system. A continuous evaluation of international exchange value variability helps in fixing the risk of international banking. Conditions pertaining to risky markets also keep global marketing at a better position than international banking as the ratio of debt recovery is more feasible in it ever since the fund is locally raised. After consolidating all the adjustments and possible risks of negative trend of fluctuating exchange value, the total worth of locally funded foreign assets stands equal to total foreign assets in a pure global bank as the affiliate banks are required to collect funds potentially equal to loan amounts granted in the local country. The ratio of a pure international bank goes zero as it does not require collecting funds in terms of local currency value to facilitate the lending process. d) There has been a substantial reduction in the investment share of international banks as the investors withdraw their business with them and move toward global banks. The reasons for this tendency is primary derived from assumed trends in variability risk positioned in cross border exchanges basically. Categorically, the investment trend of international bank during 1980s marched towards balancing of assets and liabilities ratio in foreign markets by turning the depositors into credit card users and mortgage customers. They also facilitated the inverse action for the guaranteed transaction balancing in foreign markets. Global banks which facilitated the bond deals attracted the investors as the cross boarder feeding was eliminated to a great extend. Another feature that captured the attention of investors to global banking was the debt crisis faced b international markets during 1980s. Many of the investors who were levied payment moratorium chose global banking as a better option because the locally funded foreign assets enjoyed the exemption of this payment. Also, with the de novo entry policy into new foreign markets, global banks have created chances of expansion of merging and acquisition. This strategy helped potential investors to play a larger role in the international business. Among all the reasons of the shift, financial liberalization across the globe takes the first position. The relaxation of restriction of foreign ownership of local banks provided scope of affiliates to act between foreign investors and locally owned foreign assets. In this format, a customer in a foreign country was able to receive more intensive service from a bank outside the home country. A major scope of the shift from international bank to global bank was open with financial crises experienced by many of the state-owned banks or international banks owing to loan losses and the forcible condition of a their resultant privatization. This scenario led to the global purchasing of most of the privatized banks with maximum liberty to investors in their local interests in foreign assets. e). Although Europe had gone through various constraints of financial transactions at international and global banking as usual with any other region, it had every reason to stand outside the new regulations owing to many concerns. On exploring causes for the European exception, it is obvious that the largest financial zones of the globe lie across this continent. London, Amsterdam, Dublin Luxemburg and Zurich are in fact the hubs financial management through cross boarder banking. The main cause, though can be the excessive support to cross boarder claims, Europe still is not a hot favorite to global financial market even without relaxation in cross boarder pay offs. Large amount of international exchange through Europe is subject to a calculated cross-border claim in the integrated inter bank strategy with TARGET payment systems serving the euro areas to be more dominant than elsewhere. Another important factor that poses serious concern is the higher value of euro in the European regions where the integrated value system prevails. In the wake of raise of euros value, many European banks almost failed to facilitate the requirements of larger corporate borrowers against the increasing holdings of securities among different countries of euro regions. As a result of the increasing exchange value of euros in the global market, the investors and merger banks were limited to the countries within. As an over view, euro has only developed the investment trend among Europeans to invest largely in businesses and households through international banking as the functional management of them befitted the transactions related to deposits acquirement and lending in countries the euro areas. f) A shift from international to global banking is subject strategic negotiation of transfer risk to the wider levels of country risk. This is essential for the enforcement of feasibility of financial stability ensured by global bankers. Transfer risk is referred to as a narrow risk of handling the transactions associated with availability of foreign currency for managing the debt of the home country to a foreign country. Transfer risk is a more rigid one that deals with the facilitation and functioning of domestic currency exchange. In this way, a borrower is liable to pay back the debt in domestic currency as his is not permitted to exchange foreign currency for payment. The basic reason for the restriction of international payment by a different currency is basically the advanced feature of currency valuation differences between the two countries. On the other hand, country risk is a rather complex condition in which interactive functioning of changing legal environments as well as economic circumstances within a country. Country risk, as such, refers to increased intensity of tax and other operational liabilities to the country. There are so many factors that stand on the transactional path of banking with relevance to country risk. Government policies on financial decision like exchange control, variations in currency valuation or external pressures like variations in international exchange value of local currency. Country risk has had enough provisions against the factors of influence of investors in a foreign country. In high intensity regions, country risk poses quest for local deposits and lending on order to avoid transfer risk. Globalisation of banking however diminishes transfer risk by liberty of payment moratorium occurred in most of the cross border transactions. Usually the basic transaction strategies are done on the dollar basis. For example, a transaction done on behalf of the local borrower in terms of his repayment in the local currency is adjusted with the uniform currency and local affiliates of the foreign banks transfer the money at the current value of the local currency. Globalisation of banks also provides a greater scope of transfer risk management as the repayment of any amount in another country is considered under the risk boundaries of the depositor himself. g) Argentinean crisis can be referred to as the best example of implications global banking strategies. The unprecedented financial crisis that hit Argentina forced its government to implement new laws on financial management and banking. As a result, global banks which had affiliates in the country were forced to undergo payment moratorium on every transaction related to asset management and deposits in the form of securities and bonds. The policy of the government was so rigid that the deposits were advised to be valued at USDs and repayments were relaxed to be payable in pesos. The strategic advice of the global banking to give loans in dollars was initially looked provident. However, with enforcement of external as well as sovereign risks, the payment systems of revenue such as repayment of loans were liberalized and were demanded in a local currency. This initially helped many international banks to survive but without severe damages. Locally funded foreign assets suffered a very high intensity of value lows owing to the sudden policy changes that attributed both transfer and country risks. With raise of euro, and the European interventions in Latin American capital market, exchange rate of USD based banks deteriorated and the country risk factors piled up beyond manageable levels. Under this scenario, most locally funded foreign banks resolved to receive loan repayments in pesos against the deposits which where taken in USDs. B. Net capital outflows from East Asia since 1997’s crisis helped the economy boosting in both the region and the rest of the world. American foreign investment deficit was a better invitation for more foreign investments from potential countries of the Asian region through global liberty of banking policies. Since America was considered the financial head quarter of the world, the entire international exchanges were calculated on the basis of the feasibility of long term investments sort by this country by way of net capital investments largely from East Asian countries. The crisis paved way for more open policies of international investments which helped East Asia export a large amount of net capital to other part of the world. The external demand of such a fund flow encouraged the accumulation of great sums of money in the form of foreign securities, essentially aiming the American markets which were considered more potential borrowers then. As the financial market grew tremendously viable with the frequent transitions of higher risk capital to safer capital, the prospect of exporting long term investments at a lower risk of fund devaluation occurred against the higher risky investments like personal credit deposits and security schemes in the region. The banking strategy continued for time till it was criticized and then the East Asian countries imposed restrictions on long term investments in American markets and sales of securities and bonds in the local market. This was essentially aimed at focusing regulated fund flow for equating the demands of the western markets with consideration for growth of East Asian business market whereby economic development in franchise countries could have been possible. The crisis of 1997 forced and immediate withdrawal for foreign investors from East Asian markets with continued pressure for immediate repayment of debts and securities. This immediate termination of foreign banking prospects nurtured local banks by receiving investments and deposits from locally owned businesses and personal deposits. Post crisis years have shown a sudden raise in the current account surplus of East Asian market and the amount reached over $88 billion by 1999-2000 as against the deficit of it at $28.5 billion in 1995-96 financial assessment. As this spectrum of financial accumulation at every East Asian region in the form of investment in banks and business, the marginally side lined international debtors became potential international creditors. As the time passed, global renaissance of banking emerged and large banking as well as business organisations came toward East Asian countries for setting up their business interests in the form of locally managed foreign banks with less risk factors of debt liability. An overall restructuring of international financial sector was witnessed only with the 1997’s crisis. American bankers were the most potential beneficiaries of the new condition of East Asian market. The international exposure of Asian wealth in the form of net capital export was on the start with American entry. It is, however, noticeable that a vicious financial cycle is formed automatically when recession hits at global levels on internationally high end business giants. In such a context, even recession can be a boon for global realignment of value exchange variations across boarders. 2. b) East Asian international economic structure is more or less resilient as the wide region of political boundaries rely in self help and mutual help while selecting a promotional financial and trade strategy. East Asian two-way capital export policy is basically the reason for the interlinking strategy of international monetary management. Importing riskier capital at a large scale is a safer choice for boosting up cross border business income with many foreign investors is eager to implant their money in this region. Its norms of liquidity retention proposals include attracting or equity and subordinated debt flows and paying back debts and accumulating liquid assets. Equity management proposal in East Asia was mainly beneficial for China which had potential investors from within and out side the country followed by Korea reaching a new height in the subsequent years of the crisis. In this move, many failed banks were recapitalized and local investment was driven towards them for the rejuvenation. For a very large proportion of the export capital goods, New York was the largest buyer. A major source of the facilitation of capital inflow hailed from the investment of parties in private assets, while out flow was usually the resultant factor of freeing exchange market entry in agency securities. With the feasibility capital inflow – outflow reaching profitable standards, many foreign bankers including the US started using the East Asia region as a financial intermediary in international business as the zone was risk-free to liability. However, the introduction of more and more banking segments in the international market helped poor economies in the East Asia region improve their financial status and promoting by around 5 % to 10% of national level productivity. The restoration process of financial sector with the aid of international capital management shows a new renaissance in foreign exchange reserve holdings. The share of East Asia exclusive of Japan was $ 562.9 billions amounting to 34.6% in 1998 which rose to $908.8 billions, i.e, 40 % in 2002 while the share held by Japan was $203.2 billions, about 12.5% in 1998 and $443.1billions amounting to 19.5% in 2002. These two eminent economic power regions held around 60% of the total foreign exchange reserve holdings in the world. Overall, as the query suggests, the intervention of foreign investments to East Asian region was a substantial element in maintaining the economic equilibrium in the global levels of financial management. References McCauley, R. N. (June, 2003). “Capital flows in East Asia since the 1997 crisis”. BIS Quarterly Review. Retrieved from http://www.bis.org/publ/qtrpdf/r_qt0306e.pdf McCauley, R. N, Rudd, J. S & Wooldridge. (March, 2002). “Globalising international banking”. BIS Quarterly Review. Retrieved from http://www.bis.org/publ/qtrpdf/r_qt0203e.pdf Read More