Professional Documents
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International Banking Law
International Banking Law
Definition:
Features:
i. Expansion: International Banking assists traders to expand their business and trade
activities beyond the boundaries of a nation. Economic growth and conducive climate
for carrying out the business activities in new nations are the factors because of which
many enterprises are looking beyond the borders of their own nations for their
business growth. Competitive advantages in respect of price, demand and supply
factors, future growth opportunities, cost of production and operating costs, etc., are
some of the other important factors for expansion of international trade and finance.
In view of this, the presence of banks across the nations have led to the growth of
international banking.
ii. Legal and Regulatory framework:- Flexible legal and regulatory framework
encourages traders and investors to enter into the international markets. Quick
approval to set up business, less complicated compliance requirements and stable
political situations help many new players to enter into a number of nations to expand
their activities. Also, due to lesser tax rates or no taxes to be payable, certain tax
havens play important roles as off shore banking centers which encourages many
international banking units to open their branches in such off shore centers.
iii. Cost of Capital: The operating efficiency of an enterprise depends upon the average
cost of capital. Many companies enter into new emerging markets to take advantage
of the lower cost of capital in such markets. Banks as a financial intermediary play an
important role as sources of funds.
iv. Current account and Capital account transactions: Banks play crucial role in
export and import trade. By providing different types of financial and non-financial
support, banks help enterprises, corporate customers and individuals doing business in
different countries, by extending trade finance and investment opportunities. Banks
also facilitate movement of funds (inward and outward remittances) through their
network and correspondent banking arrangements.
v. Risks: Different risks paved ways for diversification, thereby global investors look
for alternative destinations to invest their savings with twin objectives of safety of
funds and better returns. In view of their presence in different time zones,
international banks also face various risks,
Need of IBL
1. Ease of doing Business
2. Reduction of Cost of Capital post-LPG
3. Maintain Foreign Relations
4. Uniformity
5. Satisfies LPG Modal
6. Reduction of Risks
Benefits of IBL
An offshore bank offering international banking is a bank located in any country other than
the account holder’s home country. An account held in an offshore bank is therefore often
described as an offshore bank account. While international banking and offshore bank
accounts are often negatively perceived as a way to avoid paying tax (which in fact is illegal),
they boast legitimate financial advantages for expats over domestic banking arrangements.
1. Accessibility
2. Flexibility
3. Convenient
4. Accounts Management (Intermediaries provide access)
5. Tax efficiency - Some offshore locations have a reputation for low or zero tax rates,
which make them attractive banking options for globe-trotting expats. Be aware,
however, that as an offshore bank account holder, you are still required to pay tax on
interest earned from offshore savings. After all, tax avoidance is illegal. The benefit is
that interest on savings is paid before deducting tax. This is of course more favourable
than countries such as the UK, for example, where tax is deducted before adding
interest. Taxation can be a tricky area to navigate, not least because tax legislation
continually changes across both onshore and offshore jurisdictions. Also, the
specific tax advantages to which you are entitled depend on your personal
circumstances. Keep in mind there are many international tax intricacies to
understand, such as reporting and annual tax filing. To avoid falling foul of fines or
penalties when it comes to your offshore savings and tax obligations, always seek
professional advice before opening an offshore bank account.
6. Convenience and greater flexibility- As with any domestic bank account, you must
meet the due diligence requirements of opening an offshore account. However, you
won’t need to visit the bank in person. You can then access your offshore bank
account 24/7 from anywhere in the world either via a web browser or mobile app.
International bank accounts are often available in multiple currencies, which is
convenient if you need to make or receive payments in different currencies – often a
key benefit for expats living and working globally.
7. Investing- Investing from an international bank account is relatively straightforward
and can give you access to investment opportunities that may not be available in your
home country, or where you currently reside. This is an attractive feature for expats
leading international lifestyles. Depending on your situation, investing from an
offshore account may offer you many advantages including tax benefits, asset
protection and greater privacy. Keep in mind, however, that offshore investing attracts
greater regulatory scrutiny and higher costs. Most offshore banks offer tools to help
you build your investment portfolio. Your choice of offshore bank account,
however, needs to be structured around your risk profile and financial goals, so it’s
wise to seek professional advice before making a decision.
8. Easy transfers and lower exchange risk -International bank account holders can
make transactions in more than one currency including sterling, euros and US dollars.
Making transferring funds between countries plain sailing. Offshore accounts also
generally offer good exchange rates and allow you to move money between accounts
in different currencies without the fees.
9. Lending and Credit- International banking is effectively a private banking service,
so lending and credit facilities are often more flexible and tailored to your specific
needs. You may find you have access to much more competitive mortgage rates,
particularly if the property is in a mainstream market like the UK. International
banking has many advantages for expats and is worth considering; however, as with
any financial arrangement, it’s always best to talk to a financial adviser before taking
the plunge
Services offered by IBL
1. Arranges Foreign Exchange
2. Offers Investment Services (Underwriters who enable payment of services)
3. Acts as a foreign branch office
4. It is representative office of the parent bank
The functions of international banking play a crucial role in facilitating global financial
transactions and supporting economic growth. Here are some key functions:
1. Taking Deposits and Making Loans:
o International banks accept deposits and provide loans in both domestic and
foreign currencies.
o They lend to foreign governments, enterprises, and individuals, promoting
economic development and trade.
2. Managing Syndicated Loans:
o International banks act as agents for syndicated loans, coordinating financing
for large-scale projects and international trade.
o They design specialized financing solutions to meet the unique requirements
of global transactions.
3. Foreign Exchange Transactions:
o International banks facilitate foreign exchange transactions, ensuring efficient
currency conversion.
o They deal in gold, precious metals, and provide international money transfer
services.
4. Trade Finance Services:
o International banks issue documentary letters of credit, standby letters of
credit, and multiple currency credit lines.
o They also offer bank acceptance and Euro note insurance facilities.
Evolution:
International monetary system has seen many changes over centuries. Initially the barter
system was used as a medium of exchange to settle receipts and payments, on account of
economic activities.. Different items like precious stones, gold, paper, etc., have been used as
currency.
Two important events which took place in international financial markets during the last
century (20th century) are: evolution of the Gold Standard System, Fixed and Floating
exchange rate system.
Legal Tender Cases, two legal cases—Knox v. Lee and Parker v. Davis—decided by the U.S.
Supreme Court on May 1, 1871, regarding the power of Congress to authorize government
notes not backed by specie (coin) as money that creditors had to accept in payment of debts.
To finance the American Civil War, the federal government in 1862 passed the Legal Tender
Act, authorizing the creation of paper money not redeemable in gold or silver. About $430
million worth of “greenbacks” were put in circulation, and this money by law had to be
accepted for all taxes, debts, and other obligations—even those contracted prior to the
passage of the act.
In Hepburn v. Griswold (February 7, 1870), the Court ruled by a four-to-three majority that
Congress lacked the power to make the notes legal tender. Chief Justice Salmon P. Chase,
despite his involvement in passage of the Legal Tender Act as secretary of
the Treasury during the Civil War, wrote the majority opinion, declaring that the
congressional authorization of greenbacks as legal tender violated Fifth
Amendment guarantees against deprivation of property without due process of law.
On the day the decision was announced, a disapproving Pres. Ulysses S. Grant sent the
nominations of two new justices to the Senate for confirmation. Justices Joseph P.
Bradley and William Strong were confirmed, and at its next session the Court agreed to
reconsider the greenback issue.
In Knox v. Lee and Parker v. Davis, the Court reversed its Hepburn v. Griswold decision by a
five-to-four majority, asserting that the Legal Tender Act represented a justifiable use of
federal power at a time of national emergency.
The Bretton Woods Conference, created a new system popularly called as “Bretton Woods
System” Bretton Woods System paved the way for the formation of three important
multilateral International institutions viz., –
IMF Objectives
It was created in 1945 and presently has 188 members. Its Objectives are:
(c) to facilitate the balanced growth of international trade and creation of employment
opportunities
Eurocurrency
A Eurocurrency market is a market that provides banking services to a variety of customer by
using foreign currencies located outside of the domestic marketplace.
The concept does not have anything to do with the European Union or the bank associated
with the European member countries. although the Origins of the concept are heavily derived
from the reason instead it represent any deposit of foreign currencies into a domestic bank.
for example if Japanese Yen is deposited into a bank in a United State it is considered to be
operating under the auspices of the Euro currency market.
The modern evolution of the Eurocurrency market may be said to have begun in the early
1950 when the Soviet Union allegedly fearing that the United States might block its dollar
reserves, decided to deposit its dollars in a Soviet owned Paris Bank.
French were relatively neutral in the US-Russia Cold War. The French Open the dollar
account in a book and then transferred this balance to its dollar account maintained in New
York. The dollars so held with the French bank outside USA gave rise to the concept of Euro
dollar and consequently the Euro currency market. The market which thus originated in Paris
has now London as it nerve center, the important centers in Hong Kong and Singapore in
Asia.
In 1957 the British government had placed restrictions on the use of sterling for financing
third country trade following the suez crisis and the weakness of the pound sterling. This
encouraged the British bankers to turn to dollar lending to finance trade.
In the late 1950s many European countries relaxed their exchange control restoring thereby
dollar convertibility. The US domestic money market was reopened for the first time since the
Great Depression. This enabled the investor to move their money more freely as also
provided room for innovation to provide a new range of options for borrower and lenders. In
the year 1966, the net size of the Euro currency market was estimated at US dollar 21 billion
only, it has today grown tens of millions of USD recording many fold increase.
Types of IBL
The services and operations which an international bank undertakes is a function of the
regulatory environment in which the bank operates and the type of banking facility
established.
Modes of Existence of Foreign Banks in India: In India, Foreign Banks can exist in any one
of the following modes, after getting the requisite permission from Reserve Bank of India:
(i) Branch/es
(ii) A Wholly owned Subsidiary or
(iii) a subsidiary with an aggregate foreign investment up to a maximum of 74 per cent
in a private bank