Question

Explain the differences between various forms of international banks. Is there a link between the motivation behind a bank’s move into international banking and the form of international banking it chooses? Use an example in your answer.

Answer 1

ANSWER-

At the heart of international finance are international banks, which come in different structures and roles. "The Handbook of International Banking" notes that international banks have helped pave the way for the globalization of finance. Since people across the world hold diverse interests and pursuits in the financial world, it is natural that global banks conform to a diversity of roles to accommodate the nature of international banking.

Roles

International bank types can be categorized by the services they perform. For example, retail banks--also known as commercial banks--serve consumers with basic transaction services such as withdrawals and deposits. Retail banks have been internationalized by incorporating investment banking features, giving their clients access to global markets for investing.

Modes

The mode in which a bank exercises its role may qualify a bank as being international. The University of Michigan cites different types of banks, each possessing a distinct banking manner, namely: correspondent banks, representative offices, foreign branches, subsidiaries and affiliates, Edge Act banks and offshore banking centers.

Correspondent Banks

Correspondent banking implies a relationship between at least two banks, including those in differing countries. Multinational corporations (MNCs) may utilize these banks for conducting global business, according to the University of Michigan. Correspondent banks are usually small, and may have representative offices serving MNCs outside of the bank's home country.

Foreign Branch Bank

These banks operate in countries foreign to the parent bank to which they are legally tied. They must abide by banking regulations established in the home and host countries, according to Investopedia.com.

Subsidiaries and Affiliates

A subsidiary bank is incorporated in one country, but is either partially or completely owned by a parent bank in another country. An affiliate works in a similar manner except it is not wholly owned by a parent company and operates independently.

Edge Act Banks

This designation applies to certain U.S. banks, and is based on a 1919 constitutional amendment. While physically located in the United States, Edge Act banks conduct business internationally under a federal charter.

Offshore Banking Center

A "Swiss bank account," commonly referred to in Hollywood movies, is an example of an offshore banking center's services. According to the University of Michigan, these centers are actually countries with banking systems allowing foreign accounts that function independent from the country's banking regulations.

link between the motivation behind a bank’s move into international banking and the form of international banking it chooses

You've probably heard of offshore bank accounts and Swiss bank accounts. You may have­ heard there’s great wealth to be found in these foreign bank investments. But what's really so special about these esoteric banking opportunities?

An international bank is a financial entity that offers financial services, such as payment accounts and lending opportunities, to foreign clients. These foreign clients can be individuals and companies, though every international bank has its own policies outlining with whom they do business.

According to OCRA Worldwide -- an organization that matches people and companies to international banking -- international banks tend to offer their services to companies and to fairly wealthy individuals, i.e., people with $100,000 and counting [source: OCRA]. But plenty of international banks, particularly Swiss banks, open their doors to customers of any income bracket [source: Obringer].

Companies do business with international banks to help facilitate international business, the complexities of which can be quite costly.

Individuals work with international banks for a number of reasons, including tax avoidance, probably the term you've heard the most in relation to offshore banking. Tax avoidance isn't necessarily illegal, as you will learn on the pages that follow. But there are plenty of other hazards in international banking.

First we'll look at some reasons for banking internationally.

Reasons to Bank Internationally-

There’s a wealth of reasons for individuals and companies to bank internationally. Many people around the world use international banks to shelter their money from their home country's income and estate taxes. Hosts of banks are based in countries with low or no income and estate taxes, such as the Cayman Islands, Belize, Panama and the Isle of Man. But you can't just put your income in Belize and not pay taxes. Customers must report their income and work with their bank to make sure tax avoidance doesn't turn into tax evasion.

Some individuals use international banks to invest in the economies of booming countries and in developing countries, the same way they might invest in a domestic corporation or real estate venture.

A number of wealthy individuals keep their wealth in offshore banks and other entities to keep it safe from lawsuits. That doesn't mean these people are criminals; they simply want to avoid losing every penny to a sudden, unexpected or predatory lawsuit.

Since international banks lend and borrow on international markets, they’re less affected by domestic interest rate fluctuations. For example, when Mr. and Mrs. Platinum want to avoid sinking interest rates in their own country, one thing they might do is move their money into an international bank.

Also, some foreign banks might offer better interest rates than domestic banks, providing a money-making opportunity for customers.

International banks also make it easier for a company with an international presence to do business around the world.

For one, the company doesn't have to set up a million different bank accounts around the world, then wait to receive money while the banks deal with one another.

In addition, international banks offer many financial services to facilitate international trade. Besides offering payroll services for companies with employees and contractors in other countries, they offer letters of credit to ensure that companies in different countries pay one another for goods and services. They also offer financing services to support businesses facing the large costs of importing and exporting products.

The process of establishing an account at a reputable international bank will probably include the following:

• The bank will confirm your identity and the identities of anyone who has an ownership interest in your money.
• Like a good father, the bank will ask you about your intentions. Why do you need an international bank account? What does your business do?
• The bank will inquire about the origin of your deposits, especially very large ones. Where'd you get that $756 million, son? Hopefully not from that big heist in downtown Rome.
• The bank will ask for references. Are you a reputable individual or company?
• The bank will analyze how risky a customer you would be. Can you or your company pay back loans?