Tutorial 7

Q1) Briefly discuss the various types of international banking offices.

Correspondent bank
A correspondent bank relationship is established when two banks maintain a
correspondent bank account with one another. The correspondent banking
system provides a means for a banks MNC clients to conduct business
worldwide through their local bank or its contacts. It will provides income for
large banks. For example: Smaller foreign banks that want to do business, say
in the US, will enter into a correspondent relationship with a large U.S. bank for
a fee.
Representative office
A small service facility overseas staffed by parent bank personnel that is
designed to assist MNC clients of the parent bank in dealings with the banks
correspondents. It is no traditional credit services provided and looks for
foreign market opportunities and serves as a liaison between parent and
clients. It is also useful in newly emerging markets. Representative offices also
assist with information about local business customs, and credit evaluation of
the MNCs local customers. It is useful when the bank has many MNC clients in
a country but does not wish or cannot open a foreign branch or subsidiary in
that country.
Foreign branch
A foreign branch bank operates like a local bank, but is legally part of the
parent bank, not a separate entity. A branch bank is subject to both the
banking regulations of home country and foreign country. The primary reason a
parent bank would establish a foreign branch is that it can provide more
extensive range of services (faster check clearing, granting loans) than the first
2 methods. Foreign branches are not subject to host country reserve
requirements or deposit insurance and compete with host country banks at the
local level. Most popular means of internationalizing bank operations.
Subsidiary bank
A subsidiary bank is a locally incorporated bank that is either wholly owned or
owned in major part by a foreign parents.
 Affiliate bank
An affiliate bank is a local bank that is only partially owned, but not controlled
by its foreign parent. Most suitable method to gain overseas experience at
minimum risk.
Offshore Banking Center
A country whose banking system is organized to permit external accounts
beyond the normal scope of local economic activity. The host country
usually grants complete freedom from host-country government banking
regulations. Banks operate as branches or subsidiaries of the parent bank.
The primary activities of offshore banks are to seek deposits and grant loans
in currencies other than the currency of the host government. Reason for
offshore banks are low or no taxes, services provided for non-resident
clients, few or no FX controls, legal regime that upholds bank secrecy. The
IMF recognizes the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the
Netherlands Antilles, Panama, and Singapore as major offshore banking
centers.