Online Custom «International Banking» Essay Sample
Table of Contents
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- Activities of International Banks
- Deposits Taking and Lending Activities
- Forex Activities
- Representational Activities
- Interbank Activities
- Funding Trade Activities
- Risks Mitigation by International Banks
- Interest Rates and Currency Risk Mitigation
- Liquidity Risks
- Credit Risk
- Systematic or Market Risks
- Political Risk
- Part B: Euromarkets Analysis and the World’s Economy
- Related Economics essays
As the globalization continues, a variety of ideas and capital continue moving from one country to another. The increasing interconnectedness of global activities has also led to the integration of financial services. As the financial services continue to be interrelated and integrated, the result is a significant demand for financial services. Various types of financial services are mostly provided by banks. Banks play a vital role in facilitating a range of international activities, as well as international trade. Generally, banks are categorized as domestic or transnational. The current paper will focus on international banks. International banks have a presence in more than one country and engage in a range of activities, as it will later be outlined in this paper. International banks provide individuals and companies with financial services, like local banks do. However, the services of international banks are a bit differentiated and more complex. International banks do not carry out business in a void; they operate in a dynamic environment, involving the interplay of some factors that subject them to numerous risks. Some of these factors are political instability, economic volatility, competition from other banks and players in the same industry, as well as rules and regulations that govern their operations. Although international banks have their self-governing rules and regulations that control their operations, they are also subjected to laws of different countries in which they operate, and by so doing they are subject to international laws. International banks are the key contributors to the development of international financial markets, which shape and control the world’s economy. International banks play a critical role in financial markets, as they are engaged in activities, such as forex trade, funding trade, and interbank transactions and face numerous risks, such as liquidity and market risks, which they can successfully mitigate, as they take part in the development of international financial markets, such as Euromarkets; international financial markets act as a balance in the development of the world’s economy.
Activities of International Banks
International banks, just like local banks and other financial services providers, are essential in the work of financial markets. They engage in a range of activities, which are discussed below.
Deposits Taking and Lending Activities
Like other local banks and financial institutions, international banks accept deposits from its members and other business partners and advance loans to those who need them. International corporations and governments of different countries, as well as wealthy individuals, have accounts in some of the international banks that operate in their countries (Niepmann & Schmidt-Eisenlohr 2017, p.6). According to Niepmann & Schmidt-Eisenlohr (2017, p.6), international banks accept deposits from account holders who have an excess of cash in supply and give it to those in need of the cash in for loans. International banks also offer loans to governments of different countries, especially the home country in which they operate in the form of syndicated loan (Claessens 2016, p. 7). The loans are repaid later with some charges that are called the interest on loan. Such an activity involves a large transaction with large amounts of money, and mostly they are across the border.
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International banks deal with customers from various parts of the world. Such customers are involved in payments and transfers of funds from one country to another (Claessens 2016, p. 3). The transactions involve dealing with different currencies. According to (Duff 2017, par.4), international banks come to act as a foreign exchange dealers by providing the currency that the other party needs. However, the banks provide such valuable services for certain fees that they use to finance their operating expenses.
International banks have their operations in more than one country and are in a position to handle various international transactions. International banks serve as representatives of other banks (Duff 2017, par. 5). By representing other banks in their branches, business partners can still handle international transactions on behalf of other banks in the industry. According to Duff (2017), international banks are the affiliates of other banks. Some of the activities that the international banks handle as representatives include project loans, processing of the payroll, and currency transactions, as well as cash management (Duff 2017, par. 5). The banks, therefore, represent other banks in the international market, where they operate.
International banks also engage in interbank activities. It is a tactic that is employed by banks, especially when it involves a significant transaction. According to Wolf (2017), in this market, international banks are involved in borrowing activities, when they experience a shortage or lending money to other foreign banks, especially when they have an excess funds at their disposal, and some banks do not have. When banks borrow funds through such markets, they are not exposed to a lot of interest rate risks (Wolf 2017). Therefore, international banks are involved in this activity due to its worldwide reach and exposure to operations that involve multiple currencies.
Funding Trade Activities
International banks ease transnational trade. International banks are involved in financing international trade between international companies. Such organizations are in different countries. According to Duff (2017, par. 3), international banks finance trade by accepting and issuing letters of credit that are used to acknowledge deposit of funds from a company that is in another country. International banks, in this case, act as guarantors to the company abroad and the company can now send some goods to its customers in another country (Niepmann & Schmidt-Eisenlohr 2017, p. 6). The letter of credit that is issued is also used to serve as a guarantee for a loan between international companies, which are located in different countries (Niepmann & Schmidt-Eisenlohr 2017, p. 6). Through international banks, the credibility and legitimacy of such companies are guaranteed, and international banks ensure that such companies are complying with the international rules and regulations, involving international trade (Niepmann & Schmidt-Eisenlohr 2017, p. 6). Therefore, international banks help to maintain the soundness of international trade activities.
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Risks Mitigation by International Banks
International banks operate in dynamic environment, which has different volatility. As a result, they are faced with numerous risks (Siskos 2014, p. 5). To maintain stability and soundness of international business, banks have to manage and mitigate such risks by engaging in some activities.
Interest Rates and Currency Risk Mitigation
International banks act as financial intermediaries by providing finances in different forms of currency. According to (Siskos 2014. p. 7), some of these transactions may involve long-term financing, while others involve short-term financing. As a result, international banks are faced with numerous uncertainties in the rate of interest. Such transactions also involve dealing with different forms of currencies and, hence, forex interest rates volatility that results to currency risks (Bey 2017). International banks mitigate these risks by engaging in a range of activities; among them is through the interbank transfers. When international banks transfer funds internally, they can lower the probability of interest volatilities, resulting in reduced consequential losses.
International banks engage in taking deposits and funds lending, both at local and international levels. During its business operations, it may run out of funds at disposal, hence resulting in liquidity risk (Bey 2017). The bank relies on deposits, which it does not own and, therefore, it has to look for the means of reducing chances of running out of funds at any time during its operations. International banks maintain a certain proportion of their deposit to manage and overcome such risks and remain within the safety margin. According to Siskos (2014, p. 6), international banks also regulate the ratios of debt to equity and keep it low in order to be certain about meeting its obligation, when needed. Therefore, they do not lend more than what they have in availability.
When international banks lend out funds, it is not guaranteed that the money loaned will be refunded, putting the banks at uncertainties. When international banks issue credit in the form of loans and other lending, they are exposed to credit risks. It is, therefore, the failure of debtors to discharge their repayment obligations (Buch & Goldberg 2015, par.3). International banks manage such a risk by issuing out the secured loans, such that recovery of their money is guaranteed (Bruno & Shin 2015). They also offer risk-free investments to the government in the form of syndicate loans; such loans are free from credit risks and repayment is guaranteed (Buch & Goldberg 2015, par.3). International banks also vary in the rate of interest that they charge, depending on the credibility of a party that is seeking for loans (Bey 2017). Therefore, by so doing, the international banks ensure their funds are secured.
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Systematic or Market Risks
International banks operate in a volatile market that has numerous players. Financial markets involve the interplay of market forces, which are independent of the banks’ control. According to Siskos (2014, p. 9), such risks expose banks to short-term losses, hence affecting international banks’ earnings and also affecting the stock prices. Since the international banks have no control over such market risks, this is a hazardous area that needs to be well analysed and a decision needs to be made to maintain sanity, when such risks occur. As a result, banks manage these risks by engaging in short-term policies that are aimed at lowering the portfolio losses (Siskos 2014, p. 9). Most of them have to be reviewed on a daily basis because the markets are volatile.
International banks have their operations in different countries across the world. Different countries have a diverse political environment. Instability in the political environment brings about uncertainty, not only in financial markets, but also in others sectors. As Siskos (2014, p.8) alludes, volatility in political system undermines the stability of international banks. Though the risks are beyond control of the banks, there is a need to develop measures that will be put in place to mitigate the effects of such risks (Bruno & Shin 2015). International banks manage these risks by engaging with the Multilateral Investment Guarantee Agency. The agency issues with an insurance policy against the risks related to such volatile political environment (Bruno & Shin 2015). However, the risk is customized to meet individual demands of the clients in a specific area.
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Part B: Euromarkets Analysis and the World’s Economy
The origin of Euromarkets started to develop as early as during the cold war, when some countries, like USSR, were in a dire need of international funds regarding dollars (Palan 2015, p. 8). Over the years, the demand for dollars has risen significantly, hence triggering international banks and other financial institutions to hold cash reserves in the form of dollars (Correa & Girón 2016, p. 5). Some banks have even gone extra mile and were requesting those depositing funds to deposit in dollars (Johns 2013, p. 9). The demand for dollars in most of the countries did not affect the money supply in respective countries, and so they felt there is no need for regulations and control.
The demand for international liquidity in the form of external currency continued to increase, triggering financial markets and countries to think about the alternative. This demand has led to the creation of euro market, and London was among other key players in the market’s founding. London accounted for about 80% of such markets (Correa and Girón 2016, p.3). The main aim of the euro market was to give solutions to countries in need of such liquidity and to provide them with incentives for taking part in the euro market development (Seiber 2013, p. 7). In euro market, countries and other financial institutions can get funds in a foreign currency, other than the currency of that country in which they operate (Seiber 2013, p. 7). Euro market has led to liberalized capital movements from one country to another or from one economy to another.
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Euro market was introduced to bridge the gap in international trade, as well as facilitate financing and continuity of international trade (Germain & Schwartz 2014). Euro market has, therefore, balanced and contributed to shaping the world’s economies. Countries can get money to finance their development projects by placing Eurobond to get finances for meeting the demand (McClam 2013). The euro market has had sweeping changes across the globe. The euro market has facilitated the flow of international capital and financial markets (Knox, Agnew & McCarthy 2014). Euro market is now among the prominent capital markets and is leading in terms of bank deposits (Germain & Schwartz 2014). Therefore, euro market has positively accelerated the growth of other economies around the world by providing funds for developments.
The euro market has provided stability in international trade by providing an assurance of stability in the exchange rate (McClam 2013). Through the euro markets, foreign exporters, investors, and importers are free from risks and losses that are associated with fluctuations of exchange rate exposures (Bussière, Delle Chiaie & Peltonen 2014). Due to this advantage, the world’s economy continues to develop and stabilize, as international trade and investment continue with fewer fears about the occurrence of losses. The market continues to attract investors, who have been afraid to go global in other countries. Therefore, euro market plays a key role in improving investment climate around the world.
Additionally, the euro markets provide with international reserves for other financial institutions and governments in different countries. By so doing, the market is provided with the global currency reserves, which ensure continuity of economy and, hence, maintains balance and soundness of the world’s economy. The international foreign reserves facilitate the transfer of funds from one country to another in the form of foreign currency. The reserves also aid in bridging the gap in demand for foreign currency. Euro markets, therefore, are like catalysts in the growth of international financial markets and enabling trade.
The international banking system is significant in accelerating the growth and development of world’s economies. International banks do most of the functions that are done by local banks. They play a significant role in expanding businesses and reaching out to developing economies, which are in need of such international financial services. International banks face similar risks that exist in financial markets. However, through the available mechanisms that are within their reach, they can manage and maneuver through and continue conducting business. International banks have played a primary role in the development of other financial services, like the euro markets, which are vital in the development of the world’s economies. Therefore, the existence of such international financial service providers should not be undermined but should be embraced.