International Banking and Capital Market

International Banking and Capital Market

Mitchell Crafton International asset trades can be exchanged for many different types of assets. Many of these assets are traded in the international capital market as bonds and deposits denominated in different currencies, shares of stock and other financial instruments such as stock or currency options.

In asset trades, there are two distinctions between debt instruments and equity instruments. Bonds and banks deposits are debt instruments They

specify that the issuer of the instrument must repay a fixed value A share of stock is an equity instrument It is a claim to a firms profits, rather than a fixed payment By choosing how to divide their portfolios between debt and equity instruments: firms, individuals and nations can arrange to stay close to chosen consumption and investment

levels despite unknown eventualities that could occur The main contributors within the international capital market are: 1.Commercial banks 2.Corporations 3.Nonbank financial institutions

4.Central banks and other government agencies Transactions in the international capital market has increased very rapidly since the early 1970s. The major factor for this is countries removing barriers to private capital

flows across their borders. A important reason for this development is related to exchange rates We already have seen that a country that fixes its currencys exchange rate while allowing international capital movements gives up control over

domestic monetary policy. This sacrifice shows the impossibility of a countrys having more than two items from the following list: 1.Fixed exchange rate 2.Monetary policy oriented toward domestic goals

3.Freedom of international capital movements This is term is used to describe the business that banks foreign offices conduct outside of their home countries Banks may conduct foreign business through any of three types of institutions: 1. An agency office located abroad, which arranges loans and transfers funds but

does not accept deposits A subsidiary bank located abroad. A subsidiary of a foreign bank differs from a local bank only in that a foreign bank is the controlling owner A foreign branch, which is simply an office of the home bank in another country Branches carry out same business as local banks and are usually subject to

local and home banking regulations The growth of offshore currency trading coincides with that of offshore banking An offshore deposit is simply a bank deposit denominated in a currency other than that of the country in which the bank resides They are also referred to as Eurocurrencies Example: Yen deposits in a London bank

Eurodollars were born in the late 1950s from a response to the needs generated by a growing volume of international trade Most banks in the US could server these needs but Europeans found it cheaper and more convenient to deal with local banks familiar with their circumstances Many other currencies became readily available after 1950s, and offshore

markets sprang up for them also U.S. reserve requirements shows how regulatory asymmetries can operate to enhance the profitability of Eurocurrency trading Regulatory asymmetries explain why those financial centers whose government impose the fewest restrictions on foreign currency banking have become the main Eurocurrency

centers.

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