Chapter 16
Banking in the International
Economy
HSBC: Global Bank
• In November 2002, HSBC Holdings buys
large US finance company, Household
Finance.
• HSBC Holdings owns retail banks in UK,
USA, Canada, Argentina, etc.
Objectives
• To become familiar with trends and current
situations in important non-Hong Kong
banking markets.
• To understand the role of banks in
facilitating international trade and finance.
Largest International Banks
1
2
3
4
5
6
7
8
9
10
Bank
Deutsche Bank
UBS
Citigroup
Bank of America
Bank of Tokyo-Mistubishi
Bayerische Hypo
ABN Amro
HSBC Holdings
Fuji Bank
Credit Suisse
Source: Mishkin
Country Assests (US $ Billions)
Germany
742.5
Switzerland
685.9
USA
668.9
USA
617.7
Japan
579.8
Germany
538.6
Netherlands
504.1
UK
483.1
Japan
481.1
Switzerland
474
Assets By Country
International Loans - 2001
US$ Trillion
$7.80
By Location
%
German
18.2
French
7.8
UK
6.9
Other European
24.7
North American
7.3
Japan
11.9
Other
23.2
Frameworks of Banking System
•
In the post-war era, there were three basic
systems of banking regulation.
1. Universal Banking (prevalent in Continental
Europe: France, Germany, Switzerland).
2. Bank Holding Companies (prevalent in UK &
Commonwealth countries).
3. Strict Commercial Banking (once prevalent in
US & Japan)
Universal Banking
•
Universal banks do all sorts of financial
activities in one company.
1. Banks are free to engage in banking, securities, real
estate, insurance….
2. All businesses done under 1 legal entity. Banking
business fully shares risks.
3. Banks Own Securities and may have representatives
on board of major borrowers.
Advantages: Banks ownership of securities enables close
monitoring/ One stop shopping allows banks to build
strong relationships with borrowers.
Bank Holding Companies
•
Bank holding companies have a corporate structure in
which a parent company owns many subsidiaries in
different financial industries.
1.
2.
3.
4.
Subsidiaries engage in banking, securities, real estate and
insurance business.
Subsidiaries are separate legal entities so the bankruptcy of one
does not mean losses for the other.
Losses at one subsidiary do result in losses for shareholders of
the holding company.
Banks mostly protected from risk of sister companies.
Advantages: Protects depositors & bank capital from market
risk. One stop shopping can help build relationships.
Strict Commercial Banking
•
In this regime, banks are engage in only commercial
banking (taking deposits and making loans).
1. Banks are completely independent companies.
2. Banks may not be part of a corporation that also runs
investment banks, insurance etc.
3. In USA, banks could not own equities. In Japan, banks
did own equities.
Advantages: Banks protected from stock market risk.
•
In both Japan and USA, system has switched to bank
holding companies.
U.S. Banking System: Past
• Prior to 1980, U.S. banking system was heavily
regulated along a number of dimensions.
• Banks were strictly commercial banks and could
not participate in investment banking, insurance,
mutual funds, other financial industries.
• Banks were restricted to operation in 1 state
(California, New York, etc.)
• Regulation Q put an upper bound on deposit
interest rates. This led to development of
Eurodeposits and NOW accounts and competition
from MMMF.
Breaking Down the Wall
• Since 1980, US banking system and regulatory
environment has evolved to something closer to
UK universal banking system.
• Regulation Q phased out over 1980-1986 period.
• Banks have used holding companies to consolidate
across state lines
• Banks are now able to set up brokerages and sell
mutual funds.
• In 1999, banks were allowed to be a part of
holding companies that own insurance and
investment banks. In 1998, Citibank-Travelers
merger was first large merger of financial
companies.
Japanese Banking System: Past
•
Types of Japanese Banking System:
1. City Banks: Large, national banks
A. Keiretsu Banks – Associated with large industrial groups
(Fuji, Mitsubishi, Sumitomo etc.)
B. Secondary Banks - (Takugin, Sakura. Tokai..)
2. Regional Banks: Local Banks for small towns
3. Long Term Banks – (NCB, IBJ, LTCB) Issue 5 year
debentures and finance in industrial projects
4. Trust Banks – Take only large deposits (Mitsui,
Mitsubishi, Yasuda…
5. Credit Co-operatives: Small banks that specializes in
housing and agricultural lending.
6. Postal Savings Bank – Post office has a savings bank
which directly finances Japanese Government Banks.
Japanese Main Banking
• Japanese banking characterized by long term
relationship described as Main Banking.
• Companies in Keiretsu get financing from the
bank and the bank owns much of the stock of
member companies.
• Virtually all companies had a main bank which
closely monitored borrowers for long periods.
Japanese Banking System: Past
• Japan banks were restricted to commercial
banking, but could own equity securities.
• Japanese central bank had an official policy of not
allowing bank failures. Prior to 1990’s, not much
need for a lender of last resort.
• In 1990’s, Japanese banking system suffered large
losses due to collapse of equity prices and, most
importantly, default on many loans to property
speculators. Japanese bank loans constitute up to
7% of Japanese GDP.
• In 1997, Hokkaido Takushoku bank became the
first City Bank to be allowed to fail. Long Term
Credit Bank and Nippon Credit Bank nationalized.
The Big Bang
• As in the US, liberalization of financial markets has
produced new competition for banks and a declining
market share of external finance for banks.
• In 1998, announced a further financial liberalization
nicknamed the Big Bang. Part of this allowed for bank
holding companies and direct sales of mutual funds and
insurance by banks.
• Banking industry experiencing consolidation (Dai-Ichi,
Fuji, and IBJ will combine) and foreign competition
(Ripplewood has bought assets of LTCB).
Chinese Banks
•
•
•
Chinese savers restricted to bank deposits and
equity holdings.
Dominated by Four State Owned Deposit
Money Taking Banks (Industrial and Commercial,
Construction Bank, Agricultural Bank, Bank of China)
Other types of banks:
1. National Commercial Bank (CITIC,Bank of Communications,
Everbright, Huaxia, Minsheng)
2. Regional Commercial Bank (Guangdong
Development, Shenzen Development, Merchants,
Fujian Industrial, Shanghai Pudong Develompment,
etc.)
3. Credit Cooperatives (Collective Banks – Urban and
Rural)
1. Deposit Money Taking Banks are operated by the state and direct
funds to SOE’s often for policy purposes rather than commercial
2. Commercial banks lend to SOE’s on a commercial basis.
3. Cooperatives lend more to TVE’s and private enterprises.
Liabilities (Billion Yuan)
Deposit Money Taking Banks
Commercial Banks
Co-operative
2001
26312.84
21211.31
4583.66
Banks on the Eve of Reform
• SOE have had declining profitability and have often
been used as a way to provide social services.
• Government financed Asset Management Banks have
purchased Yuan 1.4 Trillion worth of bad loans from
banks.
• Many loans made by Chinese banks will not be repaid.
Bank of China uses a modern loan classification
system comparable with Hong Kong system. About
40% of BOC loans would fall under Classified status.
• Many loans made by largest WTO will allow greater
access to Chinese market to foreign financial services
companies presenting competition for deposits.
International Banking:
Facilitating International Trade
• Facilitating International Trade
– International Banks comprise much of the
foreign exchange market
– International Banks Issue Letters of Credit and
Bankers Acceptance for the International
Payments.
Facilitating International Trade
International Banking: Lending
• Cross-border lending has risen dramatically over the last
thirty years. Prior to 1960’s, international lending was
small and mostly sovereign borrowing.
• The UK and Switzerland were the main centers of
international banking.
• During 1970’s, oil exporting countries achieved large
dollar surplus due to high oil prices. U.S. banks recycled
loans to developing countries. By end of 1970’s,
international lending reached US$324 billion.
• In the 1980’s, Japanese trade surplus encouraged the entry
of Japanese banks into international markets.
• Over the next 20 years, international lending has risen 10
fold.
Syndicated Euroloans
• A Euroloan is a loan not made in the currency of
the borrower.
• International bank loans to developing economies
are Euroloans.
• The typical Euroloan is a floating-rate obligation
of relatively long maturity with LIBOR as the
benchmark rate.
• Euroloans usually are quite large.
• They are often handled by loan syndication, with
each participating bank holding a fraction of a
loan.
Why Syndicate?
• Loan syndication is a way to share risks and take
advantage of scale economies on information
costs.
• Some banks (called lead managers of loans)
specialize in evaluating and monitoring
international borrowers. These will typically be
large international banks.
• Smaller banks might be willing to absorb risks of
international lending but not have advantage in
evaluating loans.
• Lead managers find borrowers and share loans
with participating banks.
Bank Lending and the East Asian
Crisis
• During the early and mid 1990’s, there was
dramatic growth in international lending to Korea,
Malaysia, Thailand and Indonesia.
• These loans financed boom in investment in these
countries
• Much of these loans had very short-term
maturities.
• In late 1997-1998, many of these loans were
recalled very quickly.
• Capital outflows caused severe economic
dislocation in the affected countries.
Liabilities to International Banks
120000
100000
Billion US$
80000
60000
40000
20000
0
1990
1992
1994
INDONESIA
KOREA
1996
1998
2000
MALAYSIA
THAILAND
Financial Crisis
• Bank lending is a key element of financial
flows.
• East Asian crisis shows, however, that
banking and bank panics may be a source of
instability.
International Lending: Deposits
• A Eurocurrency deposit is a time deposit denominated
in a currency denominated deposit in a bank outside of
the U.S.
• Eurocurrency markets were pioneered by British
banks that were trying to avoid rules on the use of
pounds in international loans. London still the main
Euromarket center.
• Eurocurrency deposits catered to US depositors trying
to escape Regulation Q. First Eurocurrency is the
Eurodollar.
• Much of international banking is done in banking
centers called Euromarkets.
• Half of all Eurocurrency deposits are negotiable CD’s