- •Государственное образовательное учреждение высшего профессионального образования
- •«Хабаровская государственная академия экономики и права»
- •European Central Bank (1999) The Effects of Technology on the EU Banking Systems, Report, http://www.ecb.int./pub/pdf/other/techbnken.pdf.
- •The Economist (2003) “Banking in China: strings attached”, 6 March
- •European Central Bank (2002) Mergers and Acquisitions Involving the EU Banking Industry, Press release, December, http://www.ecb.int/press/pr/date/2000/html.
- •CHAPTER 1
- •The Role of Banks and Their Main Functions
- •1.1 Introduction
- •1.2 The nature of financial intermediation
- •Figure 1.1 The intermediation function
- •Lenders' requirements:
- •Borrowers' requirements:
- •Figure 1.3 Direct and indirect finance
- •Financial
- •Indirect financing
- •Financial
- •Intermediaries
- •Figure 1.4 Modern financial intermediation
- •Financial
- •Indirect financing
- •Financial
- •Intermediaries
- •1.3 The role of banks
- •a) Size transformation
- •b) Maturity transformation
- •c) Risk transformation
- •REVISION QUESTIONS
- •CHAPTER 2
- •Banking Services
- •2. Find out if there are credit card holders in your group and what for they use their cards.
- •3. What credit card systems do you know?
- •5. Discuss recent changes and trends in the banking system of your country.
- •2.1. Introduction
- •2.2 What do banks do?
- •2.3 Banks and other financial institutions
- •Figure 2.1 Classification of financial intermediaries in the UK
- •2.4 Banking services
- •2.4.1 Payment services
- •2.4.2 Deposit and lending services
- •2.4.4 E-banking
- •Box 2.2. New online banking and financial services delivery channels for large companies
- •Table 2.6 Bankinlsg services offered via branches and remote channels
- •Table 2.7 Foreign exchange online trading sites
- •Box 2.3. Is internet banking profitable?
- •2.5 Current issues in banking
- •2.5.1 Structural and conduct deregulation
- •2.5.2 Supervisory re-regulation
- •2.5.3 Competition
- •2.5.4 Financial innovation and the adoption of new technologies
- •2.6 Responses to the forces of change
- •2.6.1 Mergers and Acquisitions
- •2.6.2 Conglomeration
- •2.6.3 Globalisation
- •2.6.4 Other responses to the forces of change
- •Box 2.4 Focus on globalisation
- •CHAPTER 3
- •Types of Banking
- •3.1. Introduction
- •3.2 Traditional versus modern banking
- •Table 3.1 Traditional versus modern banking
- •3.2.1 Universal banking and the bancassurance trend
- •Figure 3.1 Bancassurance models
- •3.3 Retail or personal banking
- •3.3.2 Savings banks
- •3.3.3 Co-operative banks
- •3.3.4. Building societies
- •3.3.5 Credit unions
- •3.3.6 Finance houses
- •3.4. Private banking
- •Table 3.2 Best global private banks
- •3.5 Corporate banking
- •3.5.1 Banking services used by small firms
- •3.5.1.1 Payment services
- •3.5.1.2 Debt finance for small firms
- •3.5.1.3 Equity finance for small firms
- •3.5.1.4 Special financing
- •3.5.2 Banking services for mid-market and large (multinational) corporate clients
- •3.5.2.1 Cash management and transaction services
- •3.5.2.2 Credit and other debt financing
- •Short-term financing
- •Commercial paper
- •Euronotes
- •Repurchase agreements (repos)
- •Long-term financing
- •Syndicated lending
- •Eurobonds
- •3.5.2.3 Commitments and guarantees
- •3.5.2.4 Foreign exchange and interest rate services offered to large firms
- •3.5.2.5 Securities underwriting and fund management services
- •3.6 Investment banking
- •3.7 Universal versus specialist banking
- •CHAPTER 4
- •International Banking
- •GETTING STARTED
- •4.1 Introduction
- •4.2 What is international banking?
- •4.5 Types of bank entry into foreign markets
- •4.5.1 Correspondent banking
- •4.5.3 Branch office
- •Box 4.2 Canadian Imperial Bank of Commerce (CIBC) correspondent banking services
- •Source: Adapted from http://www.cibc.com/ca/correspondent-banking.
- •4.5.4 Agency
- •4.5.5 Subsidiary
- •4.6 International banking services
- •4.6.1.1 Money transmission and cash management
- •4.6.1.2 Credit facilities - loans, overdrafts, standby lines of credit and other facilities
- •4.6.1.3 Syndicated loans
- •4.6.1.4 Debt finance via bond issuance
- •Figure 4.2 Bond features
- •Bond characteristics
- •4.6.1.5 Other debt finance including asset-backed financing
- •4.6.1.6 Domestic and international equity
- •4.6.1.7 Securities underwriting, fund management services, risk management and information management services
- •4.6.1.8 Foreign exchange transactions and trade finance
- •Letters of credit
- •Forfaiting
- •Countertrade
- •4.7 Increasing role of foreign banks in domestic banking systems
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4.6.1.6 Domestic and international equity
Once they get to a certain size, companies have the choice of diversifying their sources of external finance by accessing the capital market. We have already noted that the largest firms can issue bonds and raise funds in the syndicated loans market, but before they can access these markets it is more than likely that they have become publicly listed on their domestic stock exchanges and raised equity finance through the issue of shares (or stock as it is known in the United States). The next step maybe to consider a listing in a foreign market - known as a Euroequity issue. However, most firms are not known well enough overseas to attract foreign investors so they may first try a Eurobond issue where the market is for professional investors and if this is a success they may progress to a cross-listing of their shares on another stock exchange.
There has been a substantial growth in the cross-listing of shares during the 1990s and the US market has been a popular destination for such listings. In particular, European and Asian companies are keen to seek out US investors by listing not only in their home market but also in the United States. The main rationale is that a foreign listing provides the company with access to a more liquid capital market and a cheaper source of funding. There is also substantial prestige associated with obtaining a foreign listing on a major international stock market like the London and New York exchanges. Firms also seek to cross-list to diversify their source of funding and to tap new investor segments - such as various institutional investors that may not be prevalent in home markets. A cross-listing of equity in another market may also establish a secondary market for shares used to acquire other firms in the host market and such shares can also be used to compensate local management and employees in foreign subsidiaries.
4.6.1.7 Securities underwriting, fund management services, risk management and information management services
In addition to the financial services already mentioned, international banks also provide a variety of sophisticated services that complement traditional credit and debt finance facilities. These services are numerous but they can be broadly grouped into three main categories: guarantees; foreign exchangeand interest raterelated transactions; securities underwriting and fund management services (the main features of such services have been illustrated in Section 3.5.2).
4.6.1.8 Foreign exchange transactions and trade finance
Firms involved in international trading activity can rely on the banking system to
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provide various forms of trade finance that help facilitate the import and export of goods. The three main types of trade finance relate to the provision of letters of credit, forfeiting and countertrade.
Letters of credit
A letter of credit is a legal banking agreement that allows importers to offer secure terms to exporters. Letters of credit have been used for centuries in international trading transactions. The letter of credit from a bank guarantees to the seller that if various documents are presented, the bank will pay the seller the amount due. It is simply an undertaking given by the issuing bank on behalf of the buyer to pay a seller a specific amount of money on presentation of specified documents representing the supply of goods within certain time limits. These documents must conform to terms and conditions set out in the letter of credit and documents must be presented at a specified place.
Such an agreement offers security to the seller as an assurance of payment from an international bank, on the condition that the terms of the letter of credit are complied with. In addition, a seller can also raise extra finance using the letter of credit as collateral if necessary.
The attraction from the buyer's perspective is that they do not have to pay cash up front to a foreign country before receiving the documents of title to the goods purchased. This is obviously helpful when the buyer is unfamiliar with suppliers j overseas. In addition, a letter of credit protects the buyer's interests as the bank will only pay the supplier if specific documents are presented. Payment will be given if these documents comply with the terms and conditions set out in the letter of credit. The buyer can also include safeguards into the letter of credit such as inspection of the goods, quality control and set production and delivery times. Table 4.2 sets out the main features of a standard letter of credit agreement.
An irrevocable letter of credit provides a guarantee by the issuing bank in the event that all terms and conditions are met by the buyer. A revocable letter of credit, in contrast, can be cancelled or altered by the buyer after it has been issued by the buyer's bank.
Forfaiting
In a forfaiting transaction, the exporter agrees to surrender the rights to claim for payment of goods or services delivered to an importer under a contract of sale, in return for a cash payment from a forfaiting bank. The forfaiting bank takes over the exporter's debt and assumes the full risk of payment by the importer. The
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exporter is thereby freed from any financial risk in the transaction and is liable only for the quality and reliability of the goods and services provided. The buyer's obligation is usually supported by a local bank guarantee and can in certain cases be guaranteed by the government. As in the case of letters of credit, the documentation requirements are relatively straightforward. This requires evidence of the underlying transaction, copies of shipping documents and confirmations from the bank guaranteeing the transaction. Forfaiting transactions can be on a fixed or floating interest rate basis. The exporter will receive the funds upon presentation of all the relevant documents, shortly after shipment of goods, and payment will usually be made in the form of a letter of credit.
Countertrade
Countertrade is a general term used to cover a variety of commercial mechanisms for reciprocal trade. Simple barter is probably the oldest and best-known example, however, other techniques such as switch-trading, buy-back, counter-purchase and offset have developed to meet the requirements of a more integrated global world economy. The main types of countertrade include:
•simple barter - direct exchange of physical goods between two parties;
•switch-trading - involves transferring use of bilateral balances from one country to another. For instance, an export from the United States to Libya will be paid for with a dollar amount paid into an account at a bank in Libya. This in turn can only be used to buy goods from Libya. The original US exporter may buy unrelated goods from Libya or may sell the dollars at a discount to a 'switchtrader' who buys Libyan goods for sale elsewhere;
•buy-back - this is an agreement where the exporter of plant or equipment agrees to take payment in the form of future production from the plant;
•counter-purchase - involves an initial export whereby the exporter receives 'payment' in goods unrelated to what the exporter manufactures;
•offset - refers to the requirement of importing countries that their purchase price be offset in some way by the seller, this can include
requirements to source production locally, to transfer technology or to increase imports from the importing country.
There is a wide range of countertrade mechanisms that aim to facilitate trade in
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goods. This type of activity is usually more prevalent in countries that limit FDI and are subject to greater political risk.
4.6.2 New' credit products and securitisation
The growing corporate emphasis on capital market financing is also driving the development of a wider range of 'new' credit products . For instance, corporate debt is widely traded in the United States, either as bonds, syndicated loans or securitised assets - loans that are bundled together and sold as a security in the market. In the United States a broad array of loans are being securitised, including corporate loans, mortgages, credit card receivables, computer leases, and so on. The growth in credit derivatives business has also helped boost the market for tradable corporate credit products. Credit derivatives are tradable instruments that can be used to manage credit risk - the likelihood of default. The growth of such business means that nowadays around 50 per cent of all credits to US firms are tradable. This contrasts with the situation in Europe, where less than 20 per cent of credits are tradable.
While the European corporate bond market is under-developed compared with that in the United States, analysts predict that it will grow rapidly over the next five years. As companies seek to use a range of debt products it is most likely that many will choose tradable debt financing from the onset with high - yield corporate debt being the fastest growing segment.
As developments in these segments of the credit product market enhance liquidity this should facilitate the securitisation trend. While Europe has witnessed some high-profile bank loan securitisations (mainly in the form of Collateralised Debt Obligations, CDOs3) it is expected that the restructuring of banks' and large companies' balance sheets will continue at a faster pace, thus boosting the securitisation trend. Traditionally the bulk of loan securitisations in Europe were related to bank mortgage loans or top-end AAA corporate loans. Triple AAA loans are those of the highest credit quality assigned by the credit rating agencies; loans rated below BBB are regarded as high-yield or 'junk' issues. The growth of a deeper and more liquid market for corporate credit will therefore help the securitisation of lower-grade credits. Securitisation in Europe has traditionally been limited by the lack of quoted companies, poor disclosure standards and various other factors. Nevertheless, it seems likely that these obstacles will be overcome by the development of viable vehicles for securitising smaller credit issues and the growing investor demand for such products.
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The securitisation trend in both the United States and Europe is also likely to be reinforced further by e-issuance and e-trading platforms that will extend beyond the primary equity markets and fixed income trading already undertaken by many global as well as investment banks. At present, a handful of firms are attempting to develop online standards for a wide range of government and corporate bond secondary markets. In the United States firms such as TradeWeb and Deal Composer are developing such services, as are their European counterparts - such as EuroMTS.
In addition to a wider range of tradable credit products, many companies will also seek to use more tax efficient means of asset financing to fund their business including leasing and factoring/forfaiting. Traditionally, this type of business in the United States has been provided by specialist firms - such as GE Capital, whereas in Europe the main asset finance firms are owned by large banks. As more companies aggressively manage their balance sheets and identify the tax and other accounting advantages associated with alternative asset financing structures they are likely to increasingly require specialist services in this area. While businesses such as aircraft and computer leasing have been around for some time it is envisaged that a wider array of superspecialist asset finance firms may emerge, or may be developed by global banks, to deal with the financing needs of specific industries or market segments. Various European global banks have suggested that they may re-direct their asset finance business towards the medium-sized corporate sector to complement their traditional lending business.
Overall, global credit markets are expected to witness major changes over the next few years. Following the US model, Europe is likely to experience rapid growth in the corporate bond, syndicated lending, credit derivatives and loan securitisation business. Much more of this activity will relate to non-investment-grade or 'middlemarket' company businesses, many of which have modest international activities. In addition, traditional bank credit will also be substituted with asset finance that better matches corporate client needs and risk profiles.
3 CDOs are securitisations of packages of corporate bonds, loans and credit default swaps. They typically comprise of between 50 and 150 underlying securities, so the spread of risk or 'granularity' is less than, for example, mortgage securitisations. Balance sheet CDOs are created by banks from assets already on their books, although banks increasingly acquire assets in the market to create a CDO, sometimes to meet the requirements of a particular investor. The risk of default is