Chapter 17
Global Banking Activities
Chapter Objectives
1. Describe the different types of organizational units that engage in global banking activities.
2. Demonstrate the impact that foreign banking organizations have in U.S. markets. Explain the
universal banking model, which is common outside the U.S.
3. Identify the foreign banking activity of the largest U.S. banks.
4. Analyze the basic features of the Eurocurrency, Eurobond, and Eurocredit markets.
5. Explain the status of the European Community and its potential impact on world markets.
6. Describe the organizational structure of U.S. banks’ that engage in global banking activities.
7. Describe the mechanics of bankers acceptance financing and extending loans globally.
8. Examine the role of bank foreign exchange activities, and explain the relationship between
foreign exchange rates and interest rates.
Key Concepts
1. U.S. banks have generally reported signiticant earnings from banking activities conducted
outside the U.S. Foreign banks have similarly reported strong earnings on U.S. banking
activities. International banks are those that have operations in many geographic markets.
2. U.S. commercial banks conduct global business primarily through their home o0ces, foreign
branches, foreign non-bank subsidiaries, Edge Act Corporations, and international banking
facilities. Foreign banks conduct business in the U.S. via agencies and branches, bank
subsidiaries, Edge Act banks, New York State Investment companies, and thri4s. Banks
headquartered in Japan, Canada, France, the Netherlands, Switzerland, United Kingdom, and
Germany have a major presence in various U.S. banking markets.
3. Many of the largest U.S. banks have extensive exposure in loans to foreign governments,
private businesses, and individuals located outside the United States. Citigroup has perhaps
the greatest exposure and is involved in the widest range of activities as any U.S. based
commercial bank. At year-end 2000, the U.S. had just 3 of the top 25 banks ranked in terms
of total assets. By 2004, these three U.S. banks were ranked second, 14th and 16th.
4. Global financial markets enable participants to borrow and invest in different currencies
quite easily. The Eurocurrency, Eurobond and Eurocredit markets are extremely
well-developed to serve participants that want to issue securities denominated in many
different currencies.
5. Short-term trade financing is handled via bankers acceptances. These instruments allow
banks to guarantee exchanges initiated by exporters and importers.
6. It is difficult to evaluate the creditworthiness of many international loans via traditional
methods, especially when the borrower is a foreign government entity. These loans may be
subject to exchange rate risk as well as default risk and country risk.
7. Many banks operate foreign exchange trading desks that enable customers to convert
currencies. Banks assist customers in this and also trade currencies for their own accounts.
8. Foreign exchange risk is the current and potential risk to earnings and stockholders’ equity
arising from changes in foreign exchange rates. It is found in assets and liabilities
denominated in different currencies that are held on a bank’s balance sheet and in certain
off-balance sheet activities. The magnitude of foreign exchange risk on balance sheet is
indicated by a bank’s net exposure in a currency and the potential volatility in the underlying
foreign exchange rate.
9. Spot and forward exchange rates are linked globally via global spot and forward markets in
currencies and interest rate instruments.
Teaching Suggestions
Global banking activities are becoming increasingly important to worldwide business activity and
financial markets. Students should examine current periodicals for examples of global
partnerships among domestic and foreign institutions, and non-financial businesses. The
Economist and the Financial Times are excellent resource in this regard. In recent years, there
have been numerous global mergers and acquisitions involving both financial and non-financial
firm that characterize the increasingly global activity of many firm.
This chapter emphasizes the role that U.S. banks play outside the U.S. and the role that foreign
banks play in the U.S. It introduces foreign exchange risk, which is important to global market
participants and U.S. firm that have foreign-based customers. Many community banks along the
U.S. border must offer services related to foreign trade finance and foreign currency exchanges.
Have students collect recent evidence of global merger activity by investigating financial and
nonfinancial combinations. Focus on the performance of HSBC, ABN Amro, the Royal Bank of
Scotland, and RBC Centura for examples of foreign banks with a signiticant U.S. presence. Have
students read Citigroup’s annual report and estimate the impact of foreign operations on boAom
line earnings.
Spend some time discussing foreign exchange risk as measured by a bank’s net exposure in a
currency. This reBects both on- and off-balance sheet exposures. Foreign banks have the same
types of exposures. Ask students to review the annual reports of the largest U.S. banks and
foreign banks to read the footnotes and assess what the banks say regarding their foreign
exchange risk and international activities. Review how much of these banks’ boAom line
earnings are generated outside their home country.