International Banking

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IBI PROJECT
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TYBBI 2012-2013
Pranav Makharia Roll NO. 30

Q - Explain the origins, features, functions and importance of international banking?

The origin of international banking dates back to the 2nd century BC when Babylonian temples safeguarded the idle funds and extended loans to merchants to finance the movements of goods. The loans extended by the Florentine banking houses were the first instance of international lending. During the nineteenth century many innovations were witnessed in the international lending, leading to trade financing and investment banking. Trade financing started as short term lending. Of the two investments banking accounted further great bulk of the international lending and financial companies acted as agents or underwriters for the placement of funds. By 1920, American banking institutions dominated international lending, and the European nations were the major borrowers. There was perfect international banking system existing till the time of First World War. The Bretton system had installed a secured financial framework and revolutionized the economic life by creating a global shopping center. International banking speeded up after the first oil crisis in 1973. Progress in the telecommunications sector across the world supplemented the growth of international banking.

Reasons for the Growth of International Banking
There are number of explanations or theories provided to support the growth in international banking operations. International banking theories explain the reasons behind the banks choice of a particular location for their banking facilities, maintaining a particular organizational structure, and the underlying causes of international banking. Certain theories are as such:- Follow the leader, explanations suggests that banks expand across national borders to continue to serve customers by establishing branches or subsidiaries abroad. Expansion abroad has a pervasive effect on competition.

Banks use management technology and marketing knowhow developed countries for domestic uses at very marginal cost abroad. Banks can take ownership-specific and location-specific advantages while operating abroad. Market imperfections due to domestic rules, regulations and taxations along with the drastic reduction in the cost of communications prompt the banks to set up operations abroad. Inter-country differences in the cost of capital attract banks to set up their operations in different countries. The multi-lateral system of payments came into existence after the creation of the IMF and the World Bank. Resources were new raised through financial markets for financing the development projects in member countries. Effectively it was the commercial banks which mobilized savings and channelized them to these institutions for development use. With the introduction of the flexible exchange rate system, exchange rates were determined by market demand- supply forces. Since all transactions went through the banking system involved with International Banking were ideally placed to establish the demand supply equilibrium. The role of establishing exchange rate was therefore transferred from central banks to commercial banks.

Characteristics and Dimensions
Though international banking concept is quite old, it has acquired certain new characteristics and dimensions. The maturities have risen considerably and now the average maturities are about ten years. Banks have started diversifying their sources of funds along with the assets. Apart from the above, two kinds of overseas bank operations characterized international bank expansion in the late 1960s and 1970s. A multinational consortium bank, was created by several established by parent banks, and; The shell branch, which is not really a bank but a device to get around the domestic government regulation, was created. Features of...
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