Chapter 24: Learning Objectives

2. Chapter 24:Learning Objectives • International & Offshore Banking Centres • Eurocurrencies & International Regulations • Int’l Debt Crisis • How is Country Risk defined?

3. International and Offshore Banking Centres • Fostered by the growth of international trade • Facilitated by the growing importance of international capital movements • London and New York are the main centres • Offshore banks are viewed as “havens” largely for tax reasons (e.g., Cayman Islands) • Canadian Chartered banks are participants in international banking and have been for a long time

4. The Eurocurrency Market • Originated during the Cold War • Served to ease international trade in world dominated financially by the US dollar • Further growth stimulated by domestic US policies during the 1960s • Most important market in London where the benchmark rate is called LIBOR (London Inter-bank offer rate) • Holding of Eurodeposits facilitated by tax and reserve requirement advantages See TABLE 24.2

5. The Creation of Eurocurrency Canadian Bank Eurobank Liabilities Assets Assets Liabilities -$100C Deposit $100 reserves In $CAN +$100 deposit from Canadian bank +$100 Eurodeposit Can be loaned out

6. International Banking Regulations • National Treatment concept is dominant creating difficulties for international regulators (BIS, IMF, etc…) • An additional difficulty is the differences in domestic banking structures, namely universal vs. dual banking models

7. International Debt Crisis • It is possible for countries to become technically insolvent. In some cases, countries default on their loans if they are unable or unwilling to obtain foreign exchange to pay off int’l debts. • Oil price shocks, wars, are prime causes for debt defaults which have existed for decades • The Mexican financial crisis of the 1980s and in 1994 are the latest in a string of such financial crises, often caused by bad lending and domestic economic policies

8. Implications of a Debt Crisis • For an individual bank loan default can meant insolvency. See Table 24.3 for an example • Solutions include government bail-outs, debt-equity swaps, increased loan-loss reserves • As a result, assessing country risk is important and several agencies release their assessments on a regular basis

9. How a Debt Crisis can Affect a Bank Before a Debt Crisis A L Deposits $800 Capital $200 Loans $1000 $200 Default: ½ written off A L Loans $900 Deposits $800 Capital $100 $200 Default: Whole amount written off L A Loans $800 Deposits $800 Capital $0

10. Interest Rate Spreads & Country Risk

11. Indicators of Country Risk • Debt-service ratio: interest and principal as a percent of exports • Political factors: democratic institutions, political stability

12. Summary • International banking is a growing field facilitated by the growth of international trade and increased international capital movements • The Eurocurrency market is one of the driving forces in the growth of international banking • The Balance of Payments is used to examine the pattern of trade and of capital flows for a country • Countries can benefit from trade via improved welfare • The International debt crisis and problems of international banking regulations are important issues