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International Finance-lecture4.docx

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Ryerson University
FIN 621
Sergiy Rakhmayil

• International Finance-lecture4 IBS 621 • Lecture 4 • International Finance • Course topics – Foundations of International Financial Management – World Financial Markets and Institutions – Foreign Exchange Exposure – Financial Management for a Multinational Firm • World Financial Markets and Institutions • International Banking and Money Market • International Bond Market • International Equity Markets • Futures and Options on Foreign Exchange • Currency and Interest Rate Swaps • International Portfolio Investment • International Banking • International banks – Take deposits, issue loans denominated in ____________currencies, facilitate international trade, and trade currencies • In Canada - More details at Canadian BankersAssociation webpage • Rapid growth in international banking – Rapid growth of international trade – Banks abroad can pursue activities not allowed in home country – Tap into Eurodollar market • Types of International Banking Offices • Correspondent bank • Representative office • Foreign branch • Subsidiary and affiliate bank • EdgeAct Banks (in the USA) • Offshore banking center • Banking crises • Economic equilibrium - A condition or state in which economic forces are ____________. Economic variables will remain constant indefinitely in the absence of external shocks. • Economic disequilibrium - an ____________situation in which some forces outweigh others • Any significant economic change  imbalance  potential for a crisis • The question is not whether we will have another crisis, the real question is how we are going to live through the next crisis • International Debt Crisis • In 1970s major world banks were accepting deposits from the OPEC countries and Russia (oil dollars that gave rise to the whole Eurodollar market) • Large sums of money were invested in bonds or other debt obligations issued by governments of less developed countries LDCs • Global recession led to ___________of LDC’s governments to service debt  – major banks invested too much and could go ___________if no repayment of principal and interest  • global banking ____________ • Debt-for-Equity Swaps • As part of debt rescheduling agreements among the bank lending syndicates and the debtor nations, creditor banks would sell their loans for U.S. dollars at discounts from face value to MNCs desiring to make equity investment in subsidiaries or local firms in the LDCs. • ALDC central bank would ______the bank debt from a MNC at a smaller discount than the MNC paid, but in ________currency. • The MNC would use the local currency to make _________________________investment in the LDC that was economically or socially beneficial to the LDC. • Debt-for-Equity Swap Illustration • Asian Crisis • View statistics for Malaysia, the Philippines, and the United States. In 1997, Malaysia and the Philippines suffered a severe currency crisis. Provide a partial explanation based on the data. • International Banking Regulation International bank crises, along with the regulation (bad) experience in Canada, suggests that regulation often __________________ In many banking crises, the existence of government safety net increases ___________________incentives and regulatory __________________makes things worse. Check at Bloomberg current bond yields for government bonds issued by Brazil, Mexico, Venezuela, Peru, Chile, and compare with 10-year US government bond yield. Problems in regulating international banking (1) Lack of knowledge or ability to closely monitor bank operations in other countries, (2) Hard to identify which agency is responsible • CapitalAdequacy Standards • Recent trend in banking regulation: ___________ and __________________of regulatory requirements (i.e. BaselAccord) • Bank capital adequacy refers to the amount of equity capital and other securities a bank holds as reserves. • The Bank for International Settlements (BIS) and the 1988 and 2003 Basel Accords are a key part of the international institutions and standards that govern how much bank capital is “enough” to ensure the safety and soundness of the banking system. • Calculating capital requirements • Calculating capital requirements • We will introduce two forms of Bank Capital requirements • The first type is based on the so-called leverage ratio: Leverage Ratio = Equity Capital/Assets Well capitalized: a bank’s leverage ratio must exceed 5%. Is First Bank well capitalized? • Risk-based capital requirements (from the Basel 1988Accord): assets are allocated into four categories, each with a different weight to reflect the degree of credit risk • Calculating capital requirements 1 category: zero weight, reserves and government securities in OECD countries 2 category: 20% weight, claims on banks in OECD countries rd 3thategory: 50% weight, municipal bonds and residential mortgages 4 category: 100% weight, debts of consumers and corporations Off-balance-sheet activities are treated in a similar manner Banks must hold as capital at least 8% of their risk-weighted assets. • Calculating capital requirements • Is First Bank well-capitalized according to Risk-bas
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