International banking markets perform a financial-intermediation function similar to that of domestic banking markets i.e. banks in these markets gather deposits from surplus-spending units and lend them to deficit-spending units. The only difference is that in international banking it happens across national boundaries. Therefore foreign exchange risk and foreign-country risk has to be taken into consideration. Eurocurrency market is made of banks which accept deposits and extend credits in currencies other than the currency of the country they are located in. This market is very important because it has integrated in the international financial markets. The Eurocurrency market is very efficient and offers very good interest rates and therefore the customers will be better off.
The international payment system is a system which refers to all the procedures that banks use in order to transfer funds and receive payments from abroad. Normally, major banks act as clearing agents not only for individual customers but also for smaller banks and financial institutions. SWIFT, FEDWIRE and CHIPS and CHAPS are the main electronic system payments used. From these systems, SWIFT has shown to be the most popular electronic fund transfer system because it offers real-time settlement 24 hours a day. Along with them, large banks uses their own systems in order to facilitate internal payments.
The main types of international bank lending are:
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Development loans. These loans are granted to less developed countries. Development loans are a special kind of loans because they are given to countries which do not have access to commercial credit markets. These countries are not charged commercial interest rate on these loans. Development loans are provided to finance infrastructure construction, such as highways, telecommunications facility, water and electricity systems, schools. The loan decreases as the country develops. The World Bank and regional developed banks grant these loans. These banks are not commercial ones and commercial banks are only involved on temporary basis.
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Project financing. This type of financing is provided to developed countries. This is done with sponsors which will be countries that have interest in seeing the project taking place. Project financing rest on three main items which are: that the income should be sufficient to service the debt, the asset value of the project should be sufficient to pay the capital amount the project should liquidate and that sponsors provide a long-term guarantee.
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Leverage buyout loans. They are used when acquiring a commercial company. Basically the assets of company being bought will serve as collateral. In such cases, a bank will be financing the total sum of money required. The commercial bank will make an agreement to be paid prior to the shareholders.
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Note issuing facilities. It could be the case when the bank is guaranteeing the payment of the capital on the assets. In addition, this contains the form of a commitment by the bank to purchase the remainder of the issue which were not bought by the public.
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Loan syndication. This is when a group of banks will join forces to lend a sum of money together on common terms and conditions to one borrower. This original bank will assess the credit awareness of the borrowing company and will look for other banks to divide the loan with. The borrower will only deal with the original bank as it will be the one managing the loan. This type of loan is attractive both for the lender and the borrower. For the lender it is attractive because risks are spread among all the banks in the group and for the borrower it is a means to raise a large sum of money.
The costs and benefits of the international banking systems are many. As multinational banking increases the number of banks in one particular country, competitive pressure increases and therefore international banks have to reduce the prices of international bank products in order not to loose customers. Domestic banking will also be in competition and therefore it has to reduce its prices. With this increase in competition, the customer will be better off because s/he could make use of the services or buy products at a lower price. International banking has enhanced the efficiency of capital flows and the flow of funds between countries. It has also made it easier for funds to flow to the most profitable opportunities. Another benefit is the impact on regulation. Banks in the US were very much regulated and therefore they started to make business move abroad. Different countries started to liberalize and de-regulate the financial systems and this resulted in an increase in competition and efficiency.
International banking can also be responsible for a number of costs. Because of the fact that international banking has the potential to flow funds from the banking domestic system of a particular country to the international system, the level of economic activity of that particular country will decrease. Another disadvantage of the international banking system is that certain categories are not accessible to all. An example of this is the Eurocurrency market which is only made accessible to large companies and not to small companies and individuals. This leads to a competitive disadvantage. In the international system, banks may be exposed more to risks due to lack of experience and asymmetric information. But despite the fact that there are costs, benefits in international banking still outweigh the costs.
The level of competition in international banking has increased in recent years. Banks in international banking compete in terms of three factors: price, user convenience and public confidence. An interest rate is the cost of borrowing or the price paid for the rental of funds and so customers will always go for the lowest rates on loans and the higher rates on deposits. In retail banking, convenience is very important. In every village or city there should be ATMs so that the customer will not have to waste a lot of time to go to a bank branch and wait in the queue in order to get served. Also bank branches should not be very far away from the centre of the city or village and should have opening hours convenient to the customers. In order to increases in the number of customers, the bank should be aware that the customers have a lot of confidence in it. If customers’ confidence begins to decrease, they can withdraw their deposits and there can be a bank failure. A method to increases confidence in the customers is by having adequate capital in order to buffer for any possible losses.
In banking, technology is also an important factor in competition. It has made it possible for banks to always offer new services that previously were not there and in additional, technology has impact on how banks operate. Financial innovations are another factor that banks have to compete with. These innovations include new organization set-ups, new systems and new products and services. Product innovation arises because of constraints like competition.
Internationalisation and globalisation of financial institutions and markets are two of the important areas in banking and finance. The more technology improves the existing systems in banking, the more there are financial innovations. And this helps more banks to go on international basis and improve their services and introduce new ones.
BIBLIOGRAPHY
T. KIM (1993) International Money & Banking, First edition, Routledge, New York
D. WRIGHT & W. VALENTINE (1988), Business of Banking, Second edition, Northcote House, Great Britain
F.S. MISHKIN (2000), The Economics of Money, Banking and Financial Markets, Sixth edition, Addision Wesley Longman, United States
