8.1 Structure and functions of international banking

International banks play crucial roles in global finance, facilitating trade, managing currency risks, and supporting cross-border transactions. They offer services like trade finance, foreign exchange, and project financing, enabling businesses to operate seamlessly across borders.

These banks face unique challenges in navigating multiple regulatory environments, managing currency risks, and dealing with political uncertainties. Their complex structures, including branches, subsidiaries, and correspondent relationships, allow them to serve diverse markets while balancing global and local demands.

International Banking Overview

Roles of international banks

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• Trade finance services facilitate global commerce through letters of credit, export credit, and trade guarantees
• Foreign exchange services enable currency conversion, forward contracts, and hedging instruments for risk management
• Cross-border payments and transfers streamline international transactions via wire transfers and SWIFT network
• Project financing supports large-scale developments through syndicated loans and infrastructure funding (dams, airports)
• Global cash management optimizes multinational corporate accounts and liquidity across borders
• Investment banking services guide cross-border mergers and acquisitions and underwrite international securities

Structure of international banks

• Headquarters direct central management, oversee risk, and coordinate regulatory compliance globally
• Branches operate as legal extensions of parent bank, balancing home and host country regulations (Citibank branches)
• Subsidiaries function as separate legal entities with greater autonomy, primarily following host country rules
• Representative offices conduct market research and liaison activities without providing direct banking services
• Correspondent banking relationships form partnerships with local banks to extend reach (JPMorgan Chase & Santander)
• Global business lines organize by product or service type, often utilizing matrix management structures

Types of international banking

• Retail banking caters to individuals and small businesses, offering personal accounts, mortgages, and credit cards
• Wholesale banking serves large corporations and institutions with commercial lending and treasury management
• Investment banking focuses on capital markets operations, corporate advisory, and securities underwriting
• Regulatory distinctions vary, from historical separations (Glass-Steagall Act) to modern reforms (Volcker Rule, UK ring-fencing)

Challenges in international banking

• Currency risk arises from exchange rate volatility, affecting financial statements and cross-border transactions
• Regulatory compliance spans multiple jurisdictions, requiring adherence to diverse AML and KYC procedures
• Political risk threatens bank assets and operations through policy changes or expropriation (Venezuela nationalizations)
• Operational risk encompasses global cybersecurity threats and fraud prevention across diverse markets
• Reputational risk impacts global brands, heightened by social and environmental responsibility expectations
• Systemic risk reflects the interconnectedness of global finance, amplifying contagion effects during crises (2008 financial crisis)
• Interest rate risk stems from divergent monetary policies, affecting international loan portfolios
• Liquidity risk requires managing cash flows across time zones and ensuring access to diverse global funding sources