International Business Law - Chapter 6

8/16/2019 International Business Law - Chapter 6

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Money and Banking


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Money

• Money: anything customarily used as a medium ofexchange and a measure of value

– 3 characteristics• As a means of exchange

• As a unit of measure or value and

• As a medium for storing value over time

– Can be both private and ocial• Private money: usually a basket of currencies can also be rare metal

or other commodity easily transferable and reasonably nonspoilable – !nly for making payments bet"een private parties "ho agree in advance to its

use

• !cial money: unit of exchange issued by a government agency #Mo$

%o&' or government(controlled )nancial institution #central bank' – Can be used to pay debts of any kind public or private*

– +ome special types #+%,s' only used by governments- to governments


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Money . cont/d

• &he value of money – 0alue of property and services is measured by

money• &he value of ocial money is nominally constant

– Contract to purchase a widget for 10 units of X = 10X

– 10X does not change, even if purchasing power/valuechanges

– Nominalism•

Some states have minimized the impact in severecases – ermany, !rgentina, "elgium #ruagay

» $f other party fails to pay in a timely fashion

– #S, $taly and #% & revaluation is N'( allowed


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Money . cont/d

• &he value of money #cont/d'

– Nominalism & )cont*d+• ossi-le to avoid in special case where

currency delivered as a commodity – .are coin

– .ichard v !#" & foreign currency case


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Money . cont/d

• &he choice of money – oney of account & denes amount of o-ligation

– oney of payment & money used to pay that

o-ligation• $*ll sell you it for 10#S )money of account+ so give

me 210,0003N )money of payment+

– $n contracts, parties should determine thea-ove, 4#S place of payment• ost countries allow foreign money o-ligation to -e

satised -y payment in local currency at place of payment


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Money . cont/d

• &he choice of money #cont/d' – Place of payment

• !-sent selection of the parties, courts will

determine place of payment & domestic laws vary – 567 #N Convention of Contracts for $nternational Sale of

oods

» lace of payment is place of delivery

• $f not named, then seller*s place of -usiness

– arties to a contract should name all three• !llows courts of those nations to resolve disputes

over interpretation or performance of contract – 56ample8 case 9:1 !rgentina


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Money . cont/d

• Maintaining monetary value – ;ow does seller ensure that he will receive a

fair price for the product<

– $nation )seller+ eation )-uyer+• aintenance of value clause

– rice ad>usted -y ination rate

• esignating money of account in sta-le currency – usually #S dollar, 5# euro, ? yen, #% pound

• #se of currency -as@et – Selected group of currencies whose weighted average is

used to dene amount of o-ligation

– Can -e ad hoc or AoBcial -as@et li@e $D*s S.


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1nternational Monetary $und

• !rigin of the 1M$

– 2stablished by 4 meeting in 5uly 6788• Bretton 9oods Conference

– Purpose to deal "ith• %iculties of currency exchange

• !ther %epression(era economic policies – Protectionist taris and other aggressive trade

policies


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1nternational Monetary $und .

cont/d

• !rigin of the 1M$ #cont/d'

– 1nternational monetary system . set ofrules and procedures "hich dierent

national currencies are exchanged foreach other in "orld trade

– 6st: gold standard: gold coins of

standard speci)cations – ;nd: gold bullion standard: re


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cont/d

• !rigin of the 1M$ #cont/d'

– &"o main problems• Currency inconvertibility

• =ack of standard for determining value of nationalcurrencies

– Collapse of the gold bullion standard

– 1M$ made overseer of member states/monetary and exchange rate policiesguardian of a >code of conduct/

– and no" surveillance

– and technical support


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cont/d

• 1M$


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cont/d

• 1M$


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cont/d

• !rganiation of the 1M$ – Board of overnors . highest authority

• overnor-alternate representing each member

• Meet once a year – 0oting by mail-other means throughout the year

– 2xecutive Board• ;8 directors managing director

• Meet at least 3x "eek

– Managing %irector-head of sta .appointed by 2xecutive Board


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cont/d

• 1M$ operations . obligates membersto observe >code of conduct/

– Eeep other members informed of its

currency exchange arrangements

– ,efrain from placing restrictions oncurrency exchange

– Pursue economic policies to increase itsnational "ealth #and other memberstates'


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cont/d

• 1M$ operations #cont/d' – Compliance "ith code essentially voluntary

• 1M$ can exert >moral pressure/

• Can declare not eligible to borro" money• Can be expelled

– 1M$ responsible for• +upervising currency exchange

• =ending money to support member/scurrency-economy

• Providing auxiliary services to assist members


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Currency 2xchange

• Currency exchange obligations of 1M$ memberstates – Fistory

• 1M$ par value system . declared value

– +econd Amendment• !ther than gold

• Pegged to other currencies +%, or other currencybasket

• !r Goat – +ome re


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Currency 2xchange . cont/d

• 2nforcement of exchange controlregulations of 1M$ member states – 2xchange contracts contrary to exchange

control regulations are unenforceable• Prevents one member from frustrating control of

another member

• %eters private persons from violating exchange

controls – Can be used:

• As a defense as a cause of action #by a memberby a person'


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• 2nforcement of exchange controlregulations of non(1M$ memberstates

– &raditionally states do not enforcerevenue la"s of other states

– As most are members of 1M$ relatively

moot point


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• 2nforcement of other exchangecontrol regulations

– $orbids restrictions on

payments-transfers involving currentinternational transaction• Anything other than >capital/ transaction


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• 2xemptions for ne" members

– 2xemptions available

– 4ot usually used


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Currency support

• +hort term source of funds

– $rom 1M$


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Currency support . cont/d

• 1M$ $acilities . ,egular

– ,eserve tranche Credit tranche2xtended fund facility +tandby

arrangements Concessional 1M$ facility

• 1M$ $acilities . +pecial #particularsituations'

– Compensatory )nancing facility+upplemental reserve facilityContingent credit lines


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Currency support . cont/d

• 1M$ Conditionality – Access to 1M$/s credit tranches and other facilities

is linked to member/s progress in implementingpolicies to restore balance of payments viability

and sustainable economic gro"th – eneral guidelines: encourage adoption of

corrective measures at an early stage respectdomestic social and political issues limit

performance criteria – 4B: 1M$ arrangements not contractual but

decisions of 1M$ that set out conditions fromcontinued )nancial assistance


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%evelopment Banks

• 9orld Bank #1nternational Bank for,econstruction and %evelopment . 1B,%'

– 1nternational %evelopment Agency #1%A'•

=oans to less developed countries – 1nternational $inance Corporation #1$C'

• =oans to private enterprises

– Manages trust fund of lobal 2nvironment$acility #2$'• $unds to developing countries to address

environmental problems: climate change biologicaldiversity international "aters oone layer depletion


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%evelopment Banks . cont/d

• 1nternational $und for Agricultural%evelopment #1$A%'

– $inancing for proDects that introduce

expand and improve food productionsystems in its developing memberstates

• ,egional development organiations• 4ational development agencies


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%evelopment Banks . cont/d

• Current controversies at 9orld Bank

– $raud

• ,eading H(; 1M$ comparison to9orld Bank


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Bank for 1nternational+ettlements

• Acts as a bank for "orld/s centralbanks

• Promotes international monetarycooperation

• Acts as an agent for internationalsettlements


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,egional Monetary +ystems

• Carry out similar functions as 1M$but on a regional scale

• +ee examples on p 366(36;

• +ee exhibit H(I 2uropean centralbank national central banks


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4ational Monetary +ystems

• &o implement national monetarypolices – Fighest level political . Ministry of

$inance &reasury %epartment – 4ext Central Bank #Bank of 2ngland &he $ederal ,eserve +tate Bank of

0ietnam' – Commercial Banks


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4ational Monetary +ystems . cont/d

• Bank %eposits

– ?history@ of banking

– 4ot as bailor

• 2urocurrency deposit example – 4o" euro . not applicable

– 4ote ((( foreign currency accounts #FE

0ietnam'

• 1nterbank %eposit Market – Most common . Certi)cate of %eposit

#C%'


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• $oreign 2xchange Market

– ood example on p* 36J

• $oreign 2xchange Contract – +pot

– $uture

– Fedging

– +peculators

– $or"ard contract

– !ption contract• Call

• Put

• +traddle-spread eagle


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• Arbitrage

– Arbitrageur

• &ransfer of money

– 1nstruction

– Bill of exchange-draft


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• Branch Banking

– 0arious national policies

– Fost state regulations

• 4orm v + . – +ee case H(I

– Branch v subsidiary #separate incorporatedbody'

– Fost and Fome +tate treatment of branch• +ee p 3;8 3;I

• $oreign bank liability for branch – +ee 04 case


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• ConGicts bet"een Fost and Fome+tate ,egulations

– +ee example p 3;J

– +uggested solution

– Case H(K

International Business Law - Chapter 6

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