INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS · PDF fileINTERNATIONAL FINANCING...

INT

ER

NA

TIO

NA

L

FIN

AN

CIN

G A

ND

IN

TE

RN

AT

ION

AL

F

INA

NC

IAL

MA

RK

ET

S

PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com

http://www.docudesk.com

INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS

I. CORPORATE SOURCES AND USES OF FUNDSA. 3 General Sources of Funds:

1. Internally-generated cash2. Short-term external funds3. Long-term external funds

B. Forms of Securities1. Equity2. Debt: the most preferred form

PD

F C

reated with deskP

DF

PD

F W

riter - Trial :: http://w

ww

.docudesk.com


C. Debt Instruments Used1. Commercial Bank Loans

2. Bondsa. Publicly issuedb. Privately issued

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


D. Financial Markets v. Financial Intermediaries1. Securitization

a. Definition:replacing bank loans withsecurities issued in public markets.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


b. Reflects reduction in access costsdue to

1.) Technological improvements2.) Globalization

E. Globalization of Financial Markets-has led to

1. Global center competition2. Regulatory arbitrage

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


II.NATIONAL CAPITAL MARKET ASINTERNATIONAL CENTERS

A. Principal Functions of Financial Centers-between savers and borrowers1. To transfer purchasing power2. To allocate funds

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


B. International Financial Market1. Development of most important:

a. Londonb. New Yorkc. Tokyo

2. Other Centers for Intermediariesa. Singaporeb. Hong Kongc. the Bahamas

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


3. Prerequisites to be a financial centera. political stability

b. minimal government interventions

c. legal infrastructured. financial infrastructure

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


C. Foreign Access to Domestic Markets1. The Foreign Bond Market

a. Extension of domestic marketb. Issues floated by foreign cos. or

governmentsc. Examples:

yankee bonds, samurai bonds

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


c. Three Major Types of Foreign Bonds

1.) Fixed rate2.) Floating rate3.) Equity related

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


2. The Foreign Bank Marketa. Extension of domestic marketsb. Important funding source:

Japanese banks for U.S. firms3. The Foreign Equity Market

a. Cross listing internationally can1.) diversify risk2.) increase potential demand3.) build base of global owners.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


D. Downside of Global Financial Markets-abrupt shifts in capital flows

II.THE EUROMARKETS

-the most important international financial markets today.

A. The Eurocurrency Market1. Composed of eurobanks who accept/

maintain deposits of foreign currency2. Dominant currency: US$

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


B. Growth of Eurodollar Market

caused by restrictive US governmentpolicies, especially

1. Reserve requirements on deposits2. Special charges and taxes

3. Required concessionary loan rates4. Interest rate ceilings5. Rules which restrict bank competition.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


C. Eurodollar Creation involves1. A chain of deposits2. Changing contol/usage of deposit3. Eurocurrency loans

a. Use London Interbank Offer Rate: LIBOR as basic rate

b. Six month rolloversc. Risk indicator: size of

margin between cost and rate charged.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


4. Multicurrency Clauses

a. Clause gives borroweers opton to switch currency of loan at rollover.

b. Reduces exchange rate risk5. Domestic vs. Eurocurrency Markets

a. Closely linked rates by arbitrageb. Euro rates: tend to lower lending,

higher deposit

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


D. Eurobonds

bonds sold outside the country of currency denomination.1. Recent Substantial Market Growth

-due to use of swaps.a financial instrument whichgives 2 parties the right toexchange streams of incomeover time.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


2. Links to Domestic Bond Marketsarbitrage has eliminated interest

rate differential.3. Placement

underwritten by syndicates of banks

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


4. Currency Denominationa. Most often US$b. “Cocktails” allow a basket of

currencies5. Eurobond Secondary Market

-result of rising investor demand6. Retirement

a. sinking fund usuallyb. some carry call provisions.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


7. Ratings

a. According to relative riskb. Rating Agencies

Moody’s, Standard & Poor8. Rationale For Market Existence

a. Eurobonds avoid governmentregulation

b. May fade as market deregulate

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


E. Eurobond vs. Eurocurrency Loans1. Five Differences

a. Eurocurrency loans use variable ratesb. Loans have shorter maturitiesc. Bonds have greater volumed. Loans have greater flexibilitye. Loans obtained faster

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


F. Note Issuance Facility (NIF)1. Low-cost substitute for loan2. Allows borrowers to issue own notes

3. Placed/distributed by banksG. NIFs vs. Eurobonds

1. Differences:a. Notes draw down credit as neededb. Notes let owners determine timingc. Notes must be held to maturity

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


IV. INTEREST RATE AND CURRENCY

SWAPSA. INTEREST RATE SWAPS

1. Definitionan agreement between 2 parties

to

exchange US$ interest paymentsfor a specific maturity on an agreed notional amount.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


a. Notional principal: a reference amount used only to calculate interest expense but never repaid.

b. Maturities: less than 1 to over 15 years

2. Typesa. Coupon swapb. Basis swap

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


3. Usage:to reduce risk potential and costs.

B. Currency Swaps1. Definition

two parties exchange foreign-currency-denominated debt at periodic intervals.

2. Purpose: similar to parallel loan

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


3. Differences of a Currency Swap:a. Currency swap is not a loan

b. No interest expense; no balance sheetentry

c. The right to offset any non-paymentis more firmly establish

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


4. Similarities between Interest Rate andCurrency Swapsa. Avoid exchange rate risk

b. Exchange rate is only a reference todetermine amounts exchanged

5. Economic Benefits of Swapswhen arbitrage prohibited, they provide

long-term financing.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


V. DEVELOPMENT BANKSA. General Purpose

founded by governments to help financevery large infrastructure projects.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


B. Types of Development Banks1. World Bank Group includes

a. International Bank for Reconstruction and Development

b. International Development Association

c. International Finance Corporation

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


B. Types of Development Banks (con’t)2. Regional Development Banks

finance industry, agricultural, andinfrastructure projects

3. National Development Banksconcentrate on a particular industry or region.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com

INT

ER

NA

TIO

NA

L

BA

NK

ING

TR

EN

DS

AN

D

ST

RA

TE

GIE

S

PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com

INTERNATIONAL BANKING TRENDS AND STRATEGIES

I. RECENT PATTERNSrapid growth in risk and complexity over

the last 2 decadesA. The Era of Growth (Causes)

1. Growth in international business2. Energy Crisis of 19733. Loans to developing economies

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


2. International Banking Crisis(1982)a. Energy Crisis (1973)

OPEC nations accumulatedhuge (petro) dollar balances

b. Loans went to developingnations.

c. OPEC funds dried up (1982)

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


d. Interest rates began to risee. Mexico: August, 1982

announced its inability to make loan payments

f. By spring, 198325 developing nations alsodefaulted - banking crisis!

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


3. Baker Plan (1985)Goal: to support 15 developing

nations through economic growthFailed.

4. Brady Plan (1989)Goal: debt relief through

forgiveness

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


4. Brady Plan options:a. Banks given two

1.) Make new loans2.) Write off portions of

existing loans in exchange for “Brady”bonds.3.) “Brady” bonds IMF backed

b. Bank crisis ends by July 1992.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


B. International Bank Regulations1. Needed:

well-defined supervisory structure2. Basle Agreement (1992)

set risk-based banking standardsa. Banks must have minimum

8% ratio capital to assets

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


b. Capital adequacy standards revised to incorporate

market risk

c. Banks must focus more onprofit growth

C. Japanese International Bank Expansion

1. Recent expansion overseas

2. Lately, retrenchment due to newBasle standards.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


II.ORGANIZATIONAL FORMS AND STRATEGIES IN BANK EXPANSION

OVERSEAS

A. Bank’s Foreign Market Approachdepends on1. Overall financial resources2. Level of market experience

3. Int’l business volume4. Bank’s strategic plans

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


B. Correspondent Banking1. Definition:

a bank located elsewhere thatprovides a service for another bank.

2. Main function:to provide financing for affiliatesof MNCs.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


3. Advantages of Correspondent Bankinga. Low cost market entry

b. Minimal staffing expensec. Multiple business sourcesd. Local banking opportunitiese. Network of local contacts

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


4. Disadvantages of Correspondentsa. U.S. customers may be given

lower priorityb. Some credit forms prohibitedc. Irregular, not extensive

credit results

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


C. Representative Offices1. Functions:

a. to provide advisor servicesb. to speed up servicesc. to help loan generation

*d. not authorized to directlyaccept deposits/make loans

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


2. Advantages of Representative Offices

a. Low-cost market entry

b. Efficient deliveryc. Attracts additional businessd. Maintains existing business

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


3. Disadvantages of RepresentativeOffices

a. Inability to more effectivelypenetrate markets

b. Expensivec. Qualified personnel difficult

to attract

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


D. Foreign Branches-true international presence

1. Functions:a. Same as rep. office

*b. Authorized to accept deposits/make loans

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


2. Advantages of Foreign Branchesa. Greater control over foreign

operationsb. Greater ability to offer direct,

integrated customer servicesc. Better customer relations

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


3. Disadvantages of Foreign Brancha. High-cost

b. Difficult and expensive to train managers.

E. Edge Act and Agreement Corporations:U.S. bank subsidiaries that may carryon international banking activities

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


1. Edge Act Banksa. Physically located in U.S.

b. Authorized to handle onlyinternational business

c. Customers: foreign or U.S.d. Authorized to accept foreign

currency deposits/make loans.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


G. International Banking Facilities (IBFs)can conduct international banking dueto U.S. government exemption.IBFs:a. Bookkeeping entriesb. Major Activities:

accept deposits/make loansc. Exempt from Fed’s Regulation Qd. Closely linked to eurocurrency

markets.

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


III. VALUE CREATION IN INT’L BANKINGA. Capital Adequacy

1. If well-capitalized, competitive advantage in

a. underwriting securitiesb. reducing cost of funding

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


B. Human Resources and Banking Organization1. Competitive advantage:

have an organization to exploitinformation to learn and to innovate quickly

2. Prepare/enable employees torecognize/respond to problems

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


C. Information Systems

1. To create competitive advantagea. requires large investment

in information technologyD. Transaction-Processing Services

1. Demand for seamless services ina. funds movementb. foreign exchangec. cash management

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com


IV. COUNTRY RISK ANALYSIS-country-risk assessment predicts

potential debt-repayment problemsA. Country Risk analysis

1. Involves an examination ofa. Economic factorsb. Political factors

PD

F C

reated with deskP

DF

PD

F W


ww

.docudesk.com

INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS · PDF fileINTERNATIONAL FINANCING...

Documents

Transcript of INTERNATIONAL FINANCING AND INTERNATIONAL FINANCIAL MARKETS · PDF fileINTERNATIONAL FINANCING...