bài giảng môn tài chính quốc tế the eurocurrency market

The Eurocurrency markets  One of the truly significant innovations of international banking of the past 50 years.. What is an international currency ? Size and dynamism of the economy

Introduced by

Assoc Pr Dr Truong Quang Thong

The Faculty of Banking – UEH

1 Why do banks go abroad?

Factor price differentials and trade barriers

Eurobanks,…

of 100% foreign banks in Vietnam.

3

Arbitrage and the cost of capital

markets (See more on International Finance course).

this currency, causing more international banking…

Ownership advantages

different customer demand,…

expertise, technival know-how,…

5

Income diversification

Excess managerial capacity

not be required at present.

this capacity by entering a new geographical market.



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Location and the product life cycle

Other explanations

 Follow your customers.

 Managerial motives

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2 International banking services

 Money transmission and cash management.

 Credit facilities with range of currencies.

 Syndicated lending.

 FX transactions and trade finance.

 Bond issues.

 Equity.

3 The Eurocurrency markets

 One of the truly significant innovations of international banking of the past 50 years.

 Providing a foundation for a series of innovations in both structure and choices in the financing of the MNCs

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What is an international currency ?

 Size and dynamism of the economy

 Size of official reserve assets

 Importance of international trade

 Size, depth and liquidity and openness of

domestic financial market

 Convertibility

 Soundness of macroeconomic policies

 Eurocurrency are domestic currencies of one country on deposit in a second country

 Eurocurrency markets serve two valuable purposes:

 An efficient and convenient monay market device for holding excess corporate liquidity;

 Major source of short term bank loans to finance corporate working capital needs, including the financing of imports and exports.

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 Banks which Eurocurrency are deposited are called Eurobanks

 Eurobank is a financial intermediary that simultaneously bids for time deposits and makes loans in a currency other than that of the currency of the country in which it is located

 Eurocurrency operation that qualifies a bank for the name Eurobank is in fact a

department of a large commercial bank

History of the Eurodollar Market

 Born shortly after the WWII.

 1945-1971: growing role of US$ as international means of payment and reserve asset: “$ as good as gold…”.

 The dollars of the Soviet Union and the creations of the two Soviet banks: Moscow Narodny Bank

in London and the Banque Commerciale pour l’Europe du Nord in Paris

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History of the Eurodollar Market

 1957: restriction to UK bank lending in sterling to non-residents of the UK  the choice of dollar

 1960s: Expansion of US MNC in Western Europe Many US banks set up oversea branches in Europe

 International trading center in London:

 Expertise of international monetary matters.

 Proximity in time and distance to major customers.

History of the Eurodollar Market

 Britain’s policy of GBP replacement by USD in

trade financing operations

 Balance of payment difficulties of the US during

1960s (hence increasing net US$ balance outside

the US)

 1973 oil crisis and the petro-dollar

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History of the Eurodollar Market

 Roots from the US banking regulations:

 Regulation Q: interest rate ceilings on time deposits in the US

(1965-1966).

 1963: Interest Equalization Tax imposed by the Fed to discourage US

investors from investing in foreign securities Thus, non-US

borrowers had to sell securities outside the US market.

 ….

 American banks have been able to make higher profits lending in

the Eurocurrency markets than in the domestic, highly regulated

market.

Participants of the Eurocurrency Markets

 Large international financial institutions: the WB,…

Advantages of the Eurodollar Market

 Low lending rates.

 High borrowing rate.

 Reasons of advantages:

 Economy of scale

 Admin cost savings

 Highly qualified customers

 Independence from supervisory and regulatory policies

Advantages of the Eurodollar Market

 Competition among banks produces low lending margins.

 Base rate: 6 month LIBOR + Spread

 Spread: usually expressed in “basis point”.

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Different Opinions on the Eurodollar Markets