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Globalization has brought many revolutionary changes in every phase of human life and function. The businesses world has especially changed a lot witnessing substantial effects of globalization and the banking sector is an important part of the business operations is also going through the phase of rapid changes due to advancement in communication and information technology. At present many banks are operating at the international level and these banks offer different corporate and consumer banking services to millions of customers in different countries. This paper is intended to discuss the major international banks operating in the USA, Mexico, and Canada.
An international bank is one that owns and operates branches in more than one country and for this purpose, the bank makes the foreign direct investment in those countries. Thus the presence and operations of an international bank in the country can draw a significant impact on the banking scenario and the following discussion strives to trace these impacts of the international banks’ operations on the banking scene of the USA, Mexico, and Canada. In this regard, the paper describes the background of the banking sector of these countries to have an understanding of the international bank’s operation and their roles in the banking sectors of these countries.
Banking Sector of Mexico and International Banks
The banking sector of Mexico is the second-largest banking sector of Latin America. The banking sector has commercial assets of U.S. $186 billion (Heiner Schulz, p8). After the financial crisis of the 1990s, the government of Mexico allowed foreign direct investment in the banking sector of the country after the enforcement of the North American Free Trade Agreement (NAFTA) in January 1994. This step was taken to get support for the undercapitalized domestic banks. As a result of the liberalization of the banking industry, a huge amount of FDI entered the country.
From 1994 to 2004, there was almost U.S. $30 invested by the foreign banks in the financial sector of Mexico. The major international banks that started their operation in Mexico after the economic liberalization include two Spanish banking groups “BVB and BSCH”; the Canadian “Bank of Nova Scotia”, USA-based “Citigroup” and UK-based “HSBC”. An important move was taken by Citibank group in August 2001 when the bank took over Banamex for the U.S. $12.5 billion. This was the largest foreign acquisition in Mexico as well as the largest financial sector deal ever in entire Latin America. In this way, Citigroup became the biggest international banking group operating in the country. Citibank was the only international banking group that was operating in Mexico even before the liberalization of the Mexican economy (Heiner Schulz, p8).
By the year 2002, the FDI in the banking sector become so high that almost 80 percent of the financial assets of the country went under the control of foreign financial institutions. By 2004 there was a further increase in FDI and 82 percent of financial assets went into the hands of the international banking groups. This was a substantial and unprecedented change in the economic scenario of the country that was opposed as well as favored by the experts. The critics strongly argued that the foreign banks have no role to play in the development of the banking sector due to the non-expansion of their domestic credit facilities but still they earn a massive amount of profit from the banking sector of the country through high fees and commissions. On the other hand, the supports of foreign banks operations has a belief that the foreign banks not only bring capital to the country but also skills, technology, and managerial know-how that play a very supportive role in the stabilization of the economy after the financial crisis. As a result, the banking sector has become the engine of the economic growth of Mexico. At present four out of the five largest banks operating in Mexico are under the control of the international banking groups that show the major share of the international banks in the financial sector of Mexico (Heiner Schulz, p8).
Banking Sector of Canada and International Banks
The banking sector possesses great importance in the economic scene of Canada. The stable economy of Canada is very attractive for the international financial groups that’s why at present almost all the major international banks that are operating in Canada either through their subsidiaries or representative offices. International banks are attracted to the banking sector of Canada because it is regarded as highly efficient as well as the safest and soundest financial sector in the world. The history of Canada has witnessed very few bank failures that invited the international banking groups to invest in the financial sector of the country (Department of Finance, p2)
The economy of Canada is liberalized for many years. Since the year 1980, international banks were allowed to establish their subsidiaries in the country. There were some restrictions on the operations of the international banks in Canada and most of them were removed after the “Canada US Free trade agreement, the North American Free Trade Agreement (NAFTA) and the World Trade Organization agreement on financial services”. (Department of Finance, p2)
Later in June 1999, legislation was passed that allowed the international banks to open their full fledge branches in Canada and at the same time the international banks were also allowed by the government that they can draw capital from their home country to support their lending activities in Canada. International banks are operating in Canada mainly through two types of branches; lending braches and full-service branches. Both of these types of branches of international banks are permitted the power equivalent to the domestic banks. However, the lending branches of the international banks need to fulfill some regulatory requirements as they are not allowed to borrow or take a deposit from any other financial institution. 42 international banks are operating in Canada and these banks are having control over 10 percent of the financial assets of the country. (Department of Finance, p2)
International banks are involved in a different types of banking activities and financial services in Canada. Most of the international banks operate in wholesale banking and niche financing. The Hong Kong Bank of Canada is the major international bank operating in Canada that has an extensive network of branches across the country and also contributed near to one-third of the foreign bank’s assets in Canada. (Department of Finance, p3)
Banking Sector of the USA and International Banks
The banking sector of the United States of America is regarded as one of the deep and competitive financial sectors of the world. The banking sector in the USA is well supported by strong economic conditions as well as sensible supervision. The banks in the USA provide a wide range of wholesale and retail financial services to different types of customers including individuals, SMEs, and corporations.
Despite the favorable financial sector conditions, the major share of the US financial sector is owned by the US banks and these banks are generating high revenues and growth through consolidations (US Department of Commerce, p1)
In the financial sector of the country, the experts see great room for the international banks and the economic liberalization further provide the international banks different opportunities to expand their networks and generate revenue from the banking sector of the USA but still, the dominant players in the USA banking sector are the domestic and US banks. (US Department of Commerce, p1)
At present, the major share of the financial sector of the country is under the control of the US banks however the role of the international banks are also gaining room in the financial sectors of the country and there was a 77 percent rise in the assets of the international banks in the US financial sector. At present 19 percent of the US banking financial sector assets is under the control of the international banks. Experts consider the role of the international banks very significant for the US economy because it has increased the FDI and at the same time skills and banking techniques also entered the US economy through the braches of the international banks and at the same time the entrance of the international banks in US financial market provides now opportunities of expanding the cross border investments to the US investors (US Department of Commerce, p1). The major international banks operating in the USA include HSBC, Bank of China, Bank of India, Deutsche Bank AG, National bank Egypt, Atlantic bank of NY, Bank of East Asia USA NA (Hong Kong). These banks provide different financial services to corporate consumers as well as individuals.
Discussion and Conclusion
The above discussion provides information about the major international banks operating in Canada, the USA, and Mexico and also explains the background of the financial sector of these countries to clarify the position and contribution of the international banks in the financial sectors of these countries. It is revealed from the above discussion that some decades ago the international banks were not having that much access to the financial markets of the USA, Mexico, and Canada, that they use to enjoy in the present time. In this regard, the international measures taken for trade liberalization have played an important role and after the enforcement of NAFTA and other agreements, the role of the international banks becomes important in these countries.
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At present many major international banks are operating in the financial sectors of the USA, Mexico, and Canada including Citigroup, HCBC, etc. The involvement of the international banks in the financial operations of these countries has drawn mostly significant impact on the economies of these countries through a rise in FDI, transfer of skill, techniques, and management capabilities, etc, however, some of the experts also have reservations on the role of the international banks because they see the profit acquired by the international banks greater than their role in the development of the financial sector of these countries. However, the considerable share of the foreign banks in the financial assets of these companies shows the importance of the presence of international banks in these countries.
Department of Finance, the Canadian financial system (1999), “Canada’s Financial Services Sector, Canada’s Banks”, The Department of Finance, 140 O’Connor Street, Ottawa, Ontario K1A 0G5.
Heiner Schulz, (2006) “Foreign Banks in Mexico: New Conquistadors or Agents of Change, University of Pennsylvania. Web.
U.S. Department of Commerce (2007) the US Banking Sector 2007, the International Trade Administration. Web.