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International Banking System Essay

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Updated: May 28th, 2021

In general, the banking system is divided into two principal categories, which are domestic and foreign banks. The arrangement of international banking is highly complex as it consists of numerous structural subdivisions, each of them carrying out its specific function. This paper will primarily dwell upon the peculiarities of the foreign banks and the variety of their tasks. First of all, the international banking system will be compared to the domestic one in order to reveal the principal differences between them. Further, the structure of the global financial markets will be considered alongside with the range of instruments traded therein. Additionally, different types of foreign exchange exposure faced by the multinational corporations will be analyzed in order to identify and measure the risks involved.

It is essential to determine the fundamental differences between foreign and domestic banks. They differentiate in the services provided to the customers. Firstly, “international banks arrange trade finance to enable imports and exports for their customers” while domestic banks serve only for the trading across the country (Editorial Board, 2015, p. 48). Secondly, foreign banks arrange for foreign exchange which is essential for the cross-border transactions and the investments, and domestic banks do not provide such opportunity.

Another distinguishing point is the kinds of deposits assumed by the banks and the loans and investments they make (Editorial Board, 2015). While domestic banks perform the financial operations in the national currency, the majority of international banks borrow and lend in the Eurocurrency market, which consists of deposits situated in banks that are foreign to the country, issuing the currency in which the deposit is denominated (Claessens & Horen, 2014). Additionally, internal banks are regulated by the laws of the state in which they are situated, while international banks are governed both by the laws of the domestic country and the country in which the branches of those banks are located.

Based on the mentioned differences, it is easy to define the reasons why the United States use international banks. First of all, foreign banks provide transactions and investments across the world, which is essential for the majority of people in the business. Secondly, the branches of international banks are vastly used by people who travel to different countries. Another principal point is that the international banking system provides the U.S. government with the opportunity to invest in the global market and to develop as a country. Also, foreign banks satisfy the needs of the multinational corporations as they lend large sums of money with fewer risks for those companies.

As it was mentioned before, the structure of the international banking system is highly complex, which is entirely shown on the example of the varieties of the international markets. They include the aforementioned Eurocurrency market (primarily including Eurodollars), the international bond market, which consists of foreign bonds, Eurobonds, global bonds, equity-related and dual currency international bonds; the international stock markets are also included. The Eurocurrency market functions on the interbank level, and it operates in parallel with the banking systems of the countries which created the particular currency (Editorial Board, 2015). The international bond market provides bonds to the foreign investors, and primarily those bonds differ from each other by the currency in which they are denominated. The instruments are usually presented in the forms of debt or equity, representing a share of liability or ownership (Berger & Turk-Ariss, 2015).

As it was previously mentioned, multinational corporations (MNCs) are provided with large sums of money by international banks and international loan syndicates. They use those finances for own economic development, project financing and investing. However, the process of foreign exchange is often exposed to the variety of adverse effects which could cause numerous adverse outcomes including default. In other words, international exchange exposure appears when a business company’s value of future cash flows depends on the value of foreign currencies (Bertay, Demirguc-Kunt, & Huizinga, 2017).

Due to the nature of the multinational corporations, their performance vastly involves the transactions and investments which are made outside of the domestic banking system (Lane & McQuade, 2014). Since the exchange rates tend to fluctuate, the multinational corporations are exposed to the numerous risks (Glasserman & Loudis, 2015). There are different methods of estimating those chances, most notably the Moody’s model of creditworthiness ratings (Editorial Board, 2015). This model allows to predict the possible adverse outcomes and to minimize the losses of both multinational corporations and international loan syndicates.

In this paper, the brief overlook of the international banking system was given. First of all, the differences between foreign and domestic banks were analyzed, and, based on the observed distinctions, the use of international banks by the United States was described. Furthermore, the structure of the global financial market was considered in order to depict diversity and complexity of its constituents briefly. Also, it is possible to notice that the international banking system is influenced by numerous factors. Those factors were described as well, representing the issues related to the foreign exchange exposure. In conclusion, it is essential to observe that the use of international banks is one of the most in-demand economical instruments.

References

Berger, A. N., & Turk-Ariss, R. (2015). Do depositors discipline banks and did government actions during the recent crisis reduce this discipline? An international perspective. Journal of Financial Services Research, 48(2), 103-126.

Bertay, A. C., Demirguc-Kunt, A., & Huizinga, H. (2017). Web.

Claessens, S., & Horen, N. (2014). Foreign banks: Trends and impact. Journal of Money, Credit and Banking, 46(1), 295-326.

Editorial Board. (2015) Structure of international financial markets, institutions, and instruments. In Global Financial Management (Chapter 4). Web.

Glasserman, P., & Loudis, B. (2015). A comparison of US and international global systemically important banks. Office of Financial Research Brief Series, 15(7), 1-10.

Lane, P. R., & McQuade, P. (2014). Domestic credit growth and international capital flows. The Scandinavian Journal of Economics, 116(1), 218-252.

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IvyPanda. 2021. "International Banking System." May 28, 2021. https://ivypanda.com/essays/international-banking-system/.

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