Part A.: International banks tend to operate differently in different economies to maximise shareholders’ value. Critically analyse international banks risk management procedures.
1. Introduction
2. Main body
2.1. Shareholders’ value and maximizing shareholders’ value:
• What is shareholder wealth?
The increased return to a shareholder in the form of dividends and/or capital appreciation.
• Why do banks move abroad?
Seek growth & profits v domestic markets (mature, competitive, overly regulated). Diversification, improve economies of scale & scope, improve brand awareness.
Conditions – entry barriers have to be lowered, growing economy.
Competitive advantage – superior management team, advantages in technology, access to financial markets, sizeable capital, superior products and services (wealth management – good P/E ratio) follow clients abroad
• How do banks increase shareholder wealth?
– Invest in Net Present Value positive projects – banks have a raft of products, services and expertise which could be marketable in emerging markets. Find profitable markets. Diversification
– Reduce cost of capital – wide access to funding, domestic and wholesale markets. Eurocurrency markets (what are the advantages & disadvantages – chapter 2 covers the eurocurrency market). To minimise cost of capital got to minimise risks.
2.2. International banks risk management procedures:
• Types of risk?
– Credit risk
– Interest rate risk
– Currency risks – devaluations, balance of payments, prone to capital flight, does the country have a strong balance sheet, fixed/floating FX rate
– Political risks – corruption, cronyism, violence, social contract
– Country risks – protect foreign interests, legal structure,
– Operating risks – international banks more complex, sufficient monitoring, enough skilled personnel, principal-agent problem, Nick Leeson, Jerome Kervie
– Economic risks – do they know the market, credit risks, concentration risk.
• How can a bank mitigate these risks?
– Know the market & customers and increase presence at a steady pace (representative office-low presence, foreign branch-high presence) start with low cost, low risk products & services (revolver loans & overdrafts)
– Counterparty & country limits reduce risk, check management team, accounting info, monitoring loans.
– Share risks – syndicated loans.
– Use derivatives to hedge FX risk, credit risk and interest rate risk.
3. Conclusion/Concluding remarks
Part B: Discuss the income opportunities available to international banks and critically evaluate the potential impact of regulatory reforms (with reference to Basel III) since the financial crisis on such income.
1. Introduction
2. Main part
2.1. Income opportunities
• Banks have four main types of revenue (income).
– Net interest income (interest income – interest expense): comes from basic products such as loans, overdrafts, credit cards, payment services.
+ International banks have a lot of experienced staff and well established products which can be tailored to new markets where there is a demand for financial services.
+ Chapter 2 in the module guide has a very good section on syndicated loans which is a popular international banking product for risk reduction
– Net fees and commission income: include insurance, intermediary service, leasing, factoring, foreign exchange currency services, cash management, trade finance (issuing financial papers for companies.
– Net trading income: includes international banks role as market maker (dealer), broker, trading derivatives (principally interest/currency) commitments and guarantees (such as letters of credit and bills of exchange).
– Investment income: includes underwriting, mergers and acquisition activities, and asset and wealth management.
2.2. Regulatory reforms (with reference to Basel III) since the financial crisis and its impacts on such income.
The Basel Accords refer to the banking supervision Accords – recommendations on banking regulations)—issued by the Basel Committee on Banking Supervision (BCBS)
The Basel Committee consisted of representatives from central banks and regulatory authorities of the G10 countries plus Luxembourg and Spain
The committee does not have the authority to enforce recommendations, although most member countries as well as some other countries tend to implement the Committee’s policies
Basel III: list all differences between Basel I and II vs Basel III
– Capital Definition and Requirements
– Capital Conservation Buffer
– Countercyclical Buffer
– Leverage Ratio
– Liquidity Ratios
– Capital for CVA Risk
Impacts of regulatory reform on income opportunities:
– Impact on cost of capital
– Impact on lending activities
– Impact on other activities
– Impact on bank’s profit…
3. Conclusion
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