CHAPTER 17
INTERNATIONAL BANKING: RESERVES, DEBT, AND RISK
CHAPTER OVERVIEW
This chapter conducts a survey of the international banking system. The chapter begins by discussing how
international reserves allow nations to bridge the gap between monetary receipts and payments. Deficit nations can
use international reserves to buy time in order to postpone adjustment measures.
The chapter then discusses the major determinants of the demand for international reserves: (1) the monetary value
of international transactions and (2) the size and duration of balance–of-payments disequilibria. The need for
international reserves tends to become less pronounced with floating exchange rates than with fixed exchange rates.
The more efficient the international adjustment mechanism and the greater the extent of international policy
coordination, the smaller the need for international reserves.
A nation experiencing debt-servicing difficulties may cease repayments on its debt, service its debt at all costs, or
reschedule its debt. Debt rescheduling has been widely used by borrowing nations in recent years.
After completing the chapter, students should be able to:
BRIEF ANSWERS TO STUDY QUESTIONS
1. Similar to a householder’s desire for cash balances, nations require international reserves to bridge the gap
3. Owned reserves include monetary gold stocks, foreign currencies, and special drawing rights. Borrowed
4. Foreign currencies constitute the most important component of the world’s international reserves while special
drawing rights constitute the least important component.
6. Since 1975 gold has been demonetized. Today, gold is considered a commodity by the International
Monetary Fund.
7. One drawback of a pure gold standard is that gold stocks might not grow as rapidly as international trade. A
8. Special drawing rights are unconditional rights to draw currencies of other countries. They were created by
10. The international debt problem of the 1980s referred to the inability of some developing countries to pay back
11. A Eurocurrency is a deposit, denominated and payable in dollars and other foreign currencies, in banks
12. When making international loans, bankers face the following risks: (a) credit risk, (b) country risk, and (c)
currency risk.
13. A country’s debt-to-export ratio is the ratio of external debt to exports of goods and services. Changes in
15. Banks can reduce their exposure to developing country debt via several methods: (a) outright loan sales, (b)
debt buybacks, (c) debt-for-debt swaps, or (d) debt/equity swaps.
16. Debt equity swaps involve commercial banks selling their foreign loans to the foreign government for foreign