Business never stops in the global economy. Companies need banking services 24 hours a day on different continents. A large business company, for example, ABC Ltd., may need access to banking services in several continents and countries. It could establish banking relationships with local banks from each country where it does business. Nevertheless, ABC Ltd. may not be familiar with each country and the quality of the various banks.
Additionally, it would be difficult for the company to keep track of many different banks and accounts. Instead, they would want to use an international bank that engages in banking transactions in several countries. As a result, ABC Ltd. may hire the services of a large bank that operates internationally in all countries where it conducts business.
International Banking Services
International banks can provide ABC Ltd. with the same banking services it can get at any hometown bank. The company can deposit money in checking and money market accounts. It can also obtain loans and lines of credit for its business. The international bank can also provide specialized services that the company’s import-export business may need. For example, a global bank can provide trade financings, such as lending, letters of credit, and export credit.
Let’s understand these international banking services:-
Letter of Credit
A letter of credit is an instrument that a buyer, like ABC Ltd., can request from the bank to guarantee that the bank will make a payment for goods purchased once the conditions in the letter are met. For payment to be received, the seller may have to produce certain shipping documents as proof that the goods have been shipped to ABC Ltd.
Export credit is a line of credit given to an importer by a bank in the exporter’s country. For example, the bank of ABC Ltd. may provide the company with a line of credit in Japan to facilitate the import of goods from a Japanese manufacturer.
ABC Ltd’s bank can also help with foreign exchange. Foreign exchange refers to exchanging one country’s currency for the currency of another. For example, ABC Ltd. may be importing goods from a member of the European Union. The foreign manufacturer doesn’t want to be paid in dollars but instead wants to be paid in Euros. ABC Ltd’s bank can exchange the number of dollars in the company’s bank account for the requisite number of Euros to complete the transaction.
There are different types of international banking structures and relationships. A correspondent bank is a bank that provides services for another bank. Neither bank has an ownership interest in the other or controls the other. Instead, they engage in a mutually beneficial relationship. For example, ABC Ltd’s bank may have a relationship with a foreign bank in Paris that will conduct banking services in France on behalf of ABC Ltd.
Representative offices are small satellite service offices established by a bank that has a relationship with an overseas correspondent bank. A representative office assists companies like ABC Ltd. in dealings with correspondent banks. A representative office may also be able to help ABC Ltd. navigate local business customs and help them understand specific lending or regulatory requirements.
Foreign Bank Branch
A foreign bank branch is simply a branch of a bank located in a foreign country. It is subject to the regulations of its home country and the foreign country where it operates. Many large global banks go this route. Instead of working with local banks, they open up a branch. While foreign branch offices provide a degree of predictability and familiarity for business firms like ABC Ltd., these branch banks may not have the same local knowledge and advantages that a bank operating in its hometown has.
Banks can also enter the international bank arena through subsidiary banks and affiliate banks. A subsidiary bank is a bank formed in a foreign country and is either entirely or partially owned and controlled by a bank from a different company. So, for example, the bank of ABC Ltd. may decide that it’s easier to buy a local bank in the UK rather than trying to open its branch bank.
An affiliate bank, on the other hand, is a bank that a foreign bank partially owns but the foreign bank does not control it. So, for example, the bank of ABC Ltd. may decide it’s cheaper to buy a minority ownership interest in a local UK bank, but the majority owner of the UK bank will control it.
Some banks operate in offshore banking centers. Banks operating in offshore banking centers do not provide services to customers in the local economy. Instead, the banks manage accounts that are external to the country. Offshore banking centers offer lower regulations and taxes. Examples of offshore banking centers include the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands, Antilles, Panama, and Singapore.
Bottomline: International Banking, an Important Network in the Globalized Economy
International banking can provide the same services as domestic banks and additional services to its customers. For example, global banks help finance trade through credit and export credit letters. They also provide exchange services so businesses can make payments in the local currency.
There are many different ways that banks can engage in international banking. For example, a bank may collaborate with a correspondent bank and help its clients with representative offices. In addition, a bank may decide to open a foreign branch or acquire a subsidiary or affiliate bank. Finally, some banks take advantage of offshore banking centers’ minimum regulations and taxes.