What is an international bank? How do international banks compete?

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What is an international bank? How do international banks compete?

The banking system became internationalised in the 1960s and since then it has been one of the most dramatic trends in the economy.  The other two major trends in international and domestic banking are globalisation and securitisation.  There are three definitions of an international bank according to Prof. Aliber.  A bank may be said to be international if it uses branches or subsidiaries in foreign countries to conduct business.  Secondly, a bank may be said to be international if it relates to the currency denomination of the loan or deposit independent of the location of the bank.  And the last way of defining international banking is by the nationality of the customer and the bank.   The definition for international banking includes location of parent banks and their banking facilities, residency of customers and currency denomination.  

The existence of international bank service activity is explained by the international trade theory.  Banks engage in international banking activities because of the theory of comparative advantage.  When a country produces a good or a service at its highest efficiency in that particular country it is said to have comparative advantage.  The economic welfare of a country will therefore increases if that country will export its good or service in which it has comparative advantage and imports other goods or services where they are relatively more efficient compared to its goods or services.  At firm level, firms engage in international trade because of competitive advantages in order to make the most out of the arbitrage opportunities.  

In order to deliver international banking services to its customers, banks use one or more of the following different organizational forms:

  • Participation / Loan Syndication
  • Correspondent-Bank Relationships
  • International Department
  • Representative Offices
  • Overseas Branches
  • Edge Act and Agreement Corporations
  • Foreign Affiliates
  • International Banking Facilities
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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 ...

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**** This has been a fair description of the international banking market but the analysis is limited. More should have been made of the benefits and drawbacks of the international banking market. At this level, more evaluation is required.