Brief History of International Banking

8/13/2019 Brief History of International Banking

1/27

A BRIEF HISTORY OF

INTERNATIONAL BANKING

Business 4039

International Banking


2/27

International Banking

Linked to the development of world trade, theprocess of urbanization, and the rise of thenation-state.

Essential prerequisites for internationalbanking is

The rule of lawPolitical stabilityLarge-scale economies with depth and scopeto support major international banking hubs


3/27

Early Banking first references

Babylonian Empire (1728 1686 B.C.)Code of Hammurabi contains 150 paragraphspertaining to loans, interest, pledges andguarantees, standardizing procedures.


4/27

Creation of Money

Chinese probably invented money.Lydians in Anatolia (modern day Turkey) whoinvented money in the west.

A standardized unit of currency would simplifytransactions. (640 to 630 B.C.) they mintedcoins.

Money and sea travel throughout theMediterranean, Indian Ocean and the FarEast supported the growth of trade.


5/27

Roman Empire (1 st Century AD)

The power and breadth of the Roman Empirecontrolled piracy and provided uniform,formalized and predictable legal environment.Construction of sea ports and shippinginfrastructure underwrote the development oftrade further.


6/27

Importance of History

Much of what we see today is the product of history You should see in this chapter how the evolution ofbanks, trade, economic, political and socialdevelopment are all intertwined.The evolution of banking is inextricably linked to thedevelopment of the global economy especially intrade, industrial development and infrastructure.Reflect on the importance of confidence (a conceptintroduced in chapter 1) and rule of law to theextension of credit, the creation and trade of financialinstruments.


7/27

The History of Banking

Early Banking- Principles of lending (1728 1686 B.C.) the Code of

Hannurabi a code containing 150 paragraphs that pertainto loans, interest, pledges and guarantees.

- Creation of money (640 630 B.C.) Lydians in ancient Anatolia (Turkey) a standardized coin made from electrum(unit of commerce) to simplify transactions.

- Greco-Roman banking in support of trade involved smithsand collectors, money changers and inspectors of currency.

- Roman Empire (1 st Century AD) again trade in a stable,

far-flung empire- Italy (middle ages) because of its central location, Italian

city-states emerged as the first international banking centersusing coins (florin in Forence 1252 and ducat in Venice)


8/27


9/27

JP Morgan

What trend did J.P. Morgan discern early in the1980s yetnot manage to take advantage of?

The eventual repeal of the Glass Steagall Act and the trendtoward disintermediation (ie. the move to universal banking)Lew Preston observed that their traditional clients wereabandoning wholesale lending and defecting to the capitalmarkets.

Sothey decided to recreate the commercial bank as aninvestment bank.


10/27

Rothschilds

Who were the Rothschilds and what innovations didthey initiate to support their banking activities?

One of the most prominent German banking families in the mid-1700s.

The five sons of Mayer allowed the growth of their business toParis, Vienna, Naples, London and Frankfurt.They found that superior information could make the differencebetween massive profits and losses.They constructed their own international intelligence network:

Fast packets AgentsCarrier pigeonsCouriers


11/27

Bretton Woods Conference

Conference held in 1944 in Bretton Woods,New Hampshire near the conclusion ofWWII

New International monetary order designedto avoid falling into the same mess thatoccurred following WWI

Weaknesses in international monetaryorganizations allowed the great depressionand contributed to the emergence of theNazi Regime


12/27

Bretton Woods Agreement

Established:International Monetary Fund (IMF)World Bank

General Agreement on Tariffs and Trade(GATT) - now the World Trade Organization


13/27

Bretton Woods.

Promote international monetary cooperation by establishing andmaintaining exchange rate stabilityThe chief features of the Bretton Woods system were anobligation for each country to adopt a monetary policy thatmaintained the exchange rate by tying its currency to the U.S.dollar and the ability of the IMF to bridge temporary imbalancesof payments.On August 15, 1971, the United States unilaterally terminatedconvertibility of the dollar to gold. As a result, "[t]he BrettonWoods system officially ended and the dollar became fully 'fiatcurrency,' backed by nothing but the promise of the federalgovernment.


14/27

International Monetary Fund

Primary MissionPromote international monetary cooperation by establishing andmaintaining exchange rate stability

Also to facilitate the expansion and balanced growth ofinternational trade and provide confidence to members tocorrect maladjustments in their balance of payments withoutresorting to measures detrimental to national or internationaleconomic order. (ie. devalue currency)The combined effect of the IMF was to help shorten the duration

of and lessen the degree of disequilibrium in the internationalbalance of payments.
http://www.imf.org/external/index.htmhttp://www.imf.org/external/index.htm


15/27

World Bank

Initially to provide long-term loans forreconstruction following the end of WW II.

Also provide loans for economic development

of the newly independent nations in Africa, Asia and Carribean.Over time World Bank extended technicalexpertise to developing economies.
http://www.worldbank.org/http://www.worldbank.org/


16/27

World Bank Mission Today

The World Bank is a vital source of financial and technicalassistance to developing countries around the world. Ourmission is to fight poverty with passion and professionalism forlasting results and to help people help themselves and theirenvironment by providing resources, sharing knowledge,building capacity and forging partnerships in the public andprivate sectors.We are not a bank in the common sense; we are made up oftwo unique development institutions owned by 187 membercountries: the International Bank for Reconstruction andDevelopment (IBRD) and the International Development

Association (IDA).
http://go.worldbank.org/SDUHVGE5S0http://go.worldbank.org/SDUHVGE5S0http://www.worldbank.org/ida/http://www.worldbank.org/ida/http://www.worldbank.org/ida/http://www.worldbank.org/ida/http://go.worldbank.org/SDUHVGE5S0http://go.worldbank.org/SDUHVGE5S0


17/27

Key Concepts

Bretton Woods AgreementInternational Monetary Fund (IMF)World BankGeneral Agreement on Tariffs andTrade(GATT)[and now its successor theWorld Trade Organization(WTO)]

Eurocurrency and Eurobond MarketsLondon Interbank Offered Rate (LIBOR)Universal banking


18/27

Question 1

Who were the first people to develop modernbanking techniques?

Italian city-states


19/27

Question 2

What was the contribution of the Fuggers tointernational banking?


20/27

Question 2 - answerWho were the Fuggers and what important lesson in

diversification was learned from their experience?

One of the most prominent German banking families in the late Middle Ages (1487 1577)Gained control of the countrys silver production as collateral for loans. Developed letters of credit to provide liquidity to clients who facedmultiple currencies and inefficient markets for currency exchange.The Fuggers became too closely aligned with Charles V who decidedto borrow money to wage a series of wars against the Ottomans,French and German Protestants and they later found that evensovereign leaders are only as solvent as the underlying health of theireconomies.They learned an important lessondiversify both sides of the balancesheet. In their case, they developed too much exposure to onepolitical figure.


21/27

Question 3

What are the eurobond and eurodollarmarkets and how did they develop?


22/27

Question 3 - answer

What are the eurobond and eurodollar marketsand how did they develop?

Eurodollar market is an international money market focused on

short-term credit flowsEurobond market is an international capital market dealing withlong-term bonds (developed in the early 1960s)Significance of the eurodollar (eurocurrency) market:

Serves as a source of short-term funds for the trade financingactivities of international banksFacilitates foreign exchange transactions by banks

An outlet for placing surplus fundsGave birth to LIBOR London Interbank Offered RateOutlet for recycled petrodollars in the early 1970s


23/27

Question 4

What is Bretton Woods and what is itsimportance to international banking?


24/27

Question 4 - answer

What is Bretton Woods and what is its importance tointernational banking?

Created in 1944 (after math of WW II) At this conference the allied nations created organizations that weredesigned to provide coordination of monetary policy among the majorworld economiesCreated were:

IMF promote international monetary cooperation by establishing andmaintaining exchange rate stabilityWorld Bank long-term loans for reconstruction technical expertise to

developing economiesGATT promote free international trade through tariff reduction andnondiscrimination

The Bretton Woods system came to an end when Nixon took theUS dollar off the gold standard in 1971.Surviving institutions: [IMF (G7) and World Bank, and GATT is

now WTO]


25/27

Question 5

How did the system of internationalbanking evolve, starting with theItalians and eventually ending up with

the Americans as the dominant force?


26/27

Question 6

International banking has been throughthrough several crisis. What has beenthe cause of these crises, such as the

cases of Latin America in the 1980s orof Asia in the late 1990s?


27/27

Question 6

International banking has throughthrough several crisis. What has beenthe cause of these crises, such as the

cases of Latin America in the 1980s orof Asia in the late 1990s?

Too much debtand rapid decline in acountrys ability to service that debt areperhaps the too most common causes.(see table 2.2, page 21)

Brief History of International Banking

Documents

Transcript of Brief History of International Banking