Article on Indian Banking Sector: “Gobalization of International Banking”

Over the last several years’ internationally active banks have shifted from international banking to global banking. Some banks, rather than taking deposits in one jurisdiction and lending in other, have pursued the strategy of taking deposits and offering consumer loans, mortgages and corporate loans within a variety of national markets through a local presence. Other banks have pursued a capital market strategy, seeking to fund their portfolios of local securities locally as well. Whether adopting a globe consumer earlobe wholesale model, banks are increasingly looking to serve customers through a local presence funded locally. The ambition to build a ‘global’ (or multinational) bank so defined defers from that to build and international’ bank, define as a bank that takes deposits in one country and makes loans in another. Even after shifting to global banking, Country risk remains same.

Although the most compressive time series evidence for the long term shift in business from cross border to serve local markets happens to cover US in corporate banks, what follows demonstrates that the global strategy is by no means confined to banks based in the united states. Indeed, Canadian, Irish, Spanish, swiz and UK banks are more globalised than US banks. Looking at the data by local banking market, the shift is vary uneven, with European a major exception and Asian markets more globalize then they are generally considered to be.

From International To Global Banking: 20 Years View:

While different banks have shifted from international banking strategy towards global banking strategies at different paces, the overall trend was already evident by at least the mid-1980s. Cross borders business, in a particular lending to developing countries funded with euro currency deposits, had propelled the expansion of banks foreign assets during the 1960s and 1970s. By contrast, during the 1980s and 1990s, locally funded business tended to expand more rapidly than cross borders positions. Data covering banks incorporated in United States illustrate the growth of foreign banks locally funded business. Whereas US banks cross borders claims increased by 55%(percent) to $548 bn between 1982 and 2001, there local claims rose yearly 400% to $385 bn, reaching a ratio of 0.7.Although it spears that cross borders claim significantly outgrew local claims in 1997,this reflects a series brake that year from the inclusion of derivative position. Since this brake, the ratio has narrowed the more broadly measured local claims have continued to grow faster then the cross border claims.

Globalisation By Nationality Of Banks:

The growth of locally funded business has by no means been confined to US banks. Banks incorporated in other countries have expanded their local presence in foreign banking markets as quickly as US banks, if not faster. The expansion of non-US banks is less well documented, however.

The newly complied data show that the US banking system has not become extraordinarily global when juxtaposed with its international peers indeed a handful of banking system are more global than that of the united states. The most recent consolidated banking statistics indicate that Canadian banks have a ratio of local claims in local currencies to international claims of 1.2. To a large extent, this reflects the large funding base of there branch and subsidiary operations in the unite states. So it might be said that Canadian banks are as much regionalized as globalize. Spanish banks are also very global, funding much of there foreign claims locally, particularly in Latin America. The UK, Swiz, and Irish banks local claims are nearly equivalent to there international claims. The UK-headquarter banks are well represented in local markets not only in the western hemisphere but also in East Asia.

Global And International Banking By Market:

Turning from the banks behind the expansion of locally funded claims to the markets into which they have expanded, the balance between international and global banking varies across different regions. Bank of international settlement (BIS) reporting banks local claims on Latin American countries rose sharply in the late 1990s and are now as large as international claims. In the Asia-Pacific region local claims are quickly approaching the level of international claims, and in North America the gap is not very wide. Local claims are half as large as international claims on countries in Eastern Europe, the Middle East and America, but are rising rapidly. Only reporting banks claims on Western Europe still predominantly take the form of cross border claims.

Explaining The Shift:

The shift from international from global banking reflect changes both in banks strategies and in the constraints they face. An interesting question is why international banking seem to have yielded so little to global banking in the European market.

Bank Strategies:

Over the last generation, many banks altered their business strategies. The new strategies have trended to lead to a balanced increase in local asset and liabilities. While international department major banks spend much on renegotiating the loan made in 1980s’ bankers who have made their name-developing consumer and securities business rose to leadership positions. And emphasis on consumer banking means trying to turn depositor into credit cards users and mortgage customer and vice-versa. This naturally tends to lead to balanced growth of asset and liabilities in foreign market. Similarly, the development of securities business within the country ten to lead a balance of asset and liabilities, for instant government bonds financed with repurchase transaction.

Similarly, banks strategic shift from holding to originating and selling international claims has standard to reduce their cross border footing the renegotiation of the 1980s’ ended up creating new asset class for institution investors.. Originally Brady bonds and than more gernally emerging market bonds issued by government and companies. While international banks as holders as well as underwriter such obligations, the widening of the investors base to includes institutional investor has substituted for cross border banks loans to some extend.

Specific lesson drawn from the experiences of the debt cases of the 1980s’ also led banks to favor global over international banking, particular in riskier markets. In the early 1980s’ foreign exchange crises lead governments to impose payment moratoriums on cross border loans locally funded assets, while subject to credit risk at such time, did not involve of foreign exchange drain and so were not necessaries affect by payment moratoriums.

Bank have pursued their altered strategies by de novo entry into new market by organic expansion of existing operations and through cross border acquisition. In acquiring banks a cross borders, they have being part of larger wave of cross border mergers and acquisitions. Cross border mergers and acquisition reached a record level of eight percent of world GDP in the let 1990s’.

While in the part, have elected to follow their customers explores in order to have a balance sheet of sufficient size to serve their peak needs, bank expansions has also drawn on the same conviction that relatively large global players will dominate each business.

Altered Constraints:

Circumstances as well as strategies lay behind the shift to global banking. Among the most important factor determining the pace of foreign banks expansion into local financial system is financial sector liberalization. Over the past two decades, many countries have moved from relatively closed and administrated financial system to more open ones. This has typically included the relaxation of restrictions on foreign ownership of local banks. For e.g.: – In Canada restrictions on foreign branch banking on the market share of foreign subsidiaries effectively led foreign banks to serves customers from outside the country rather then through local affiliates.

Liberalization has at times been precipitated by financial crisis. Bank with global ambitions have found it attractive to buy local banks put up for sale following crisis related nationalizations owing to loan losses. In addition after, the weakness of local banks after a crisis offer competitive opportunities of multinational banks to expand their extent operations. In countries with state dominated financial system, liberalization and the aftermath of crisis were often accompanied by privatization, in which foreign banks could participate.

Another factor working to domesticate foreign banks operation is the decline of unremunerated reserve requirements as a part of monitory control. For.e.g: – A foreign bank landing to a US corporation and funding the loan offshore could previously avoid the federal reserves requirement. In 1990, however the fed lowered this reserve requirement to 0% (zero percent), removing much of the incentive to book loans offshore

  • vijay

    awesome work dude good for reference & learning. keep it up