Question

6. International banking and money market: Understand reasons for international banking, types of international banking offices and what they are. Especially, Correspondent, representative, & subsidiary banks.

Answer 1

Now a days the world has become a global village where business are carried out across the globe. We need banks to carry out transactions for businesses and for the economy to grow. There are various reasons for international banking:

a) Use of foreign currency: When a firm does business in international markets they need foreign currency to carry out operations or business transactions in that country. For example if an American firm carries out business operations in UK they need pounds to carry out business there or if they import from Singapore they would need Singapore Dollars to pay to the exporter who is situated in Singapore.

b) International Money transfers: To carry out continuous business in foreign land we need money transfers to be done at regular intervals, for this we need an international bank or a local bank having account/relation with international bank to carry out the transaction.

c) Access to foreign markets: If we need to expand our business to international markets we need banks to help us raise money in those markets, attract foreign investors, forex trading and International share trading.

d) Flexibility: If we have banking arrangements with international banks we have the flexibility to do the business for example we may deposit money in mumbai and the person in new-york can withdraw it. This can reduce the time-lag in doing transactions and the business can work at a much faster speed.

e) Tax regulations: Businesses sometimes are so engrossed in day to day activities that taxes and banking regulations are not on their mind. With international banks they regularly update the customer of the regulations that the must follow and help them with tax regulations also which could save a lot of money for the business.

These are the various reasons for which international banking is very essential in today's world.

But to carry out those transactions there are various types of banking branches/offices for the same. those are: Correspondent banks, representative banks, subsidiary banks, offshore banks etc

a) Correspondent banks: Its a relationship between two banks, where the local bank provides international banking relationship with the help of the correspondent bank which is an international bank. The local banks which are small in size can use these banks to serve their customers and don't need to invest heavily in international branches.

b) representative office: its a branch office of the parent bank where the office can open accounts of the customers for the parent bank and can invest and transfer the money of the customer to the parent banks's country. for example if bank of Singapore has a representative office in Dubai, they can open accounts for customers who want to invest in savings and deposits in Singapore.

c) subsidiary banks: Its a bank which is incorporated in the foreign country by the parent bank and the subsidiary bank has to carry out normal banking and business transactions as per the law of the land. Its partially or completed owned by the parent bank. For example Citibank Corp services India Ltd is a subsidiary of Citigroup INC

d) offshore banks: These are banks situated in the country where they work independently of the banking regulations of the country. They allow foreign accounts. Swiss bank is an example of off-shore banking.