Business never stops in the global economy. Companies need banking services 24 hours a day on different continents. In this lesson, you'll learn about international banking, including services provided and types of banks.
Why Use an International Bank?
Meet Evan. He's an entrepreneur that has started an import-export business. He has developed contacts with suppliers in Asia, Western and Eastern Europe, the South Pacific and Africa.
Consequently, Evan needs access to banking services in several continents and numerous countries. He could establish banking relationships with local banks from each country in which he does business, but he is not that familiar with each country and the quality of the various banks.
Additionally, it would be a real pain for him to keep track of so many different banks and accounts. Instead, he wants to use an international bank that engages in banking transactions in several different countries. Evan finds a large U.S. bank that operates internationally in all countries where he conducts business. Since the bank is headquartered in the U.S. and subject to federal banking regulations, he feels safe using the bank for overseas transactions. He's also able to have all his banking and credit transactions conducted through one bank.
International Banking Services
International banks can provide Evan the same banking services that he can get at any hometown bank. Evan can deposit money in checking, savings and money market accounts. Evan can also obtain loans and lines of credit for his business. Evan's international bank can also provide some specialized services that Evan's import-export business may need. An international bank can provide trade financing, such as lending, letters of credit and export credit.
A letter of credit is an instrument that a buyer, like Evan, can request from his bank that guarantees that the bank will make a payment for goods purchased once the conditions found in the letter are met. For example, in order for payment to be received, the seller may have to produce certain shipping documents as proof that the goods have been shipped to Evan. Export credit is a line of credit given to an importer by a bank in the exporter's country. For example, Evan's bank may give Evan a line of credit in China to facilitate his import of goods from a Chinese manufacturer. Evan's bank can also help with foreign exchange. Foreign exchange refers to the exchange of one country's currency for the currency of another. For example, Evan may be importing goods from a member of the European Union. The foreign manufacturer doesn't want to be paid in dollars, but instead, wants to be paid in Euros. Evan's bank can exchange the amount of dollars in Evan's bank account to the requisite number of Euros to complete the transaction.
Types of International Banks
There are different types of international banking structures and relationships
A correspondent bank is a bank that provides services for another bank. Neither bank has an ownership interest in the other or has any control over the other. They just engage in a mutually beneficial relationship. For example, Evan's bank may have a relationship with a foreign bank in Paris that will conduct banking services in France on Evan's bank's behalf.Representative offices are small satellite service offices established by a bank that has a relationship with an overseas correspondent bank. A representative office provides assistance to people, like Evan, in dealings with correspondent banks. A representative office may also be able to help Evan navigate local business customs and help him understand specific lending or regulatory requirements.
A foreign bank branch is simply a branch of the bank located in a foreign country. It is subject to regulations of its home country as well as the foreign country where it operates. Many large U.S. banks go this route. Instead of working with local banks, they just open up a branch. While foreign branch offices provide a degree of predictability and familiarity for business people, like Evan, these branch banks may not have the same local knowledge and advantages that a bank operating in its hometown has. Banks can also enter the international bank arena through subsidiary banks and affiliate banks. A subsidiary bank is a bank that is formed in a foreign country and is either completely or partially owned and controlled by a bank from a different company. For example, Evan's bank may decide it's easier to buy a local bank in Hong Kong rather than trying to open its own branch bank.
An affiliate bank, on the other hand, is a bank that is partially owned by a foreign bank, but the foreign bank does not control it. For example, Evan's bank may decide it's cheaper to buy a minority ownership interest in a local Hong Kong bank, but the majority owner of the Hong Kong bank will control it. Edge act banks are banks that operate pursuant to the Edge Act that amended the Federal Reserve Act. The act allows federally chartered bank subsidiaries to engage in international banking activities even when physically located in the United States.
Some banks operate in offshore banking centers. Banks operating in offshore banking centers do not actually provide services to customers in the local economy. Instead, the banks manage accounts that are external to the country. Offshore banking centers offer lower regulations and taxes. Examples of offshore banking centers include the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama and Singapore.
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