Lecture 2

International Banking
Structure and Organisation

Introduced by Assoc. Prof. TRUONG Quang Thong

School of Banking - UEH

2021
.
 Intro
• International commercial banking must
evolve to meet the needs of international
companies in terms of securing financing for
their global activities,

• It also must respond to and reflect the state

of competition, technology and trends in
globalization.
 Overseas Operations
Overseas operations can be structured in a number of ways. The
following are in order of commitment:

1. Correspondent Banking – lowest possible level of exposure to the foreign

market involving using a native bank in the foreign market to provide services
for the foreign bank.
2. Representative Office – the foreign bank establishes a physical presence in
the foreign market offering a limited range of services. Officers troll for
business opportunities but cannot accept deposits or lend funds on its own
books.
3. Agency – an integral part of the parent bank but cannot perform all of the
functions of a branch.
4. Branch Office – is an integral part of the parent bank and acts as a legal and
functional arm of the head office. Branches may perform all banking functions
that are permitted by the host country.
5. Subsidiary – separate legal entity from the parent, thereby isolating liability
within the subsidiary itself. It must be separately capitalized, and if it is not
deposit-taking, the cost of capital in the foreign market can be considerable.
6. Consortium Banks – a group of banks that form an alliance to enter a new
market.
Structure - Correspondent Banking

• Lowest level of foreign exposure

• Domestic bank provides services for the foreign

bank: foreign exchange and trade-
Related services for multinational customers

• Foreign bank does not incur costs of a

physical presence
 Structure - Representative Office

• Physical presence but limited functions

• Can accept deposits and lend funds
• Low budget to open and easily to close down
• Act as marketing tools for foreign parent
banks
• Useful when domestic regulations forbid
foreign bank entry
 Structure - Branch Office
• A higher level of commitment - a legal part of
the parent bank
• Fairly independent with respect to decision
making
• Can take deposits and make loans
• Mainly conduct wholesale businesses
but, not separately capitalized from parent
• Limited responsibility vs Unlimited?
 Structure - Agency

• An integral part of the parent bank

• Fall between branch and rep office in terms
of functions
• In the US, an agency is not allowed to take domestic
demand deposits but may offer lending services
like a branch
• Used primarily for wholesale international
commercial lending
Structure – Subsidiary (ngân hàng con)

• Separate legal entity from parent bank

• Organised under laws of host country
• Can engage in full array of services of host country
• Can be used to circumvent restrictive regulations
• Separately capitalised - costly than a branch and
could compete with parent
 Key Determinants of the
Structure
• The host country’s banking laws
• The bank’s resource constraints
• The degree of commitment to a new market
• Tax issues
• …
 CORRESPONDENT BANKING
The origin of Correspondent Banking

•Correspondent banking is not necessarily cross-

border.

•In fact it is originated from a domestic context. The

story goes that small, local banks in operation at that
time needed a money centre or a clearing bank
located in the country’s principal financial centre to
clear their funds through the nation’s banking system.

.
 CORRESPONDENT BANKING

• At the very beginning, correspondent banking

was merely the networking among banks or the
network of interbank relationships in which one
bank sells services to other banks or to nonbank
financial institutions. The bank that provides the
services is called the “correspondent” bank.

• This kind of correspondent banking became

more significant with the growing need of
banking clients for their international business,
for example settlement of international trade
finance at places where the home bank does
not / cannot have branches to realize their
request.
 CORRESPONDENT BANKING

• The original need for (international) correspondent banking

thus started for the settlement of clearing items and effecting
foreign currency payments.

• For this kind of settlement, a bank will have to have an

account maintained in the foreign country (a “nostro” account,
or “vostro” account in the eyes of the foreign correspondent
bank). Whether or not two banks can be considered as
“correspondents” is, in most cases, the existence of a test-key
arrangement plus an account relationship.

• With the development of international trade, any bank issuing

a letter of credit on behalf of its client (applicant) which
imports goods from abroad will need a relationship bank
located in the exporter’s country to “advise” that letter of credit
to the exporter. This makes correspondent relationships a
must.
 CORRESPONDENT BANKING
• In the field of trade finance, a correspondent bank in fact
can contribute more. By “confirming” the letter of credit,
the “advising” bank will become a “confirming bank” ,
thus will provide help to the exporter by taking over the
payment risk from the issuing bank, usually located in a
foreign country. If the “confirming” bank further
“discounts” the letter of credit, the advising bank can
function as a paying bank thus providing liquidity to the
exporter. This will be discussed later in more detail
under “trade finance”.

• Now a correspondent bank is not only a (foreign) bank

that may help your settlement of international trade, it is
also a business partner from whom you may either buy
product from or sell your product to. A correspondent
bank is therefore an institutional client and
correspondent banking is therefore called institutional
banking.
 BRANCH AND REP OFFICE

•Without doubt, the banking industry today is facing

consolidation. Merger and acquisition is becoming a
trend. With merger and acquisition, the birth of super
global banks becomes a reality.

•It seems that the need for correspondent

relationships with other banks was expected to
decrease. The argument goes that banks, at least
the global ones, can have branches and
representative offices for their business expansion
and supervision abroad, instead of having too many
correspondents.
 BRANCH AND REP OFFICE

•The branch and representative network can be the “ambassador”

of the head office to the countries in which banks are active. On
behalf of head office, they are dealing with government, central
bank and other government agencies.

•They facilitate (arrange) visits from head office. They are the
home bank “eyes” and “ears”, watching the development of the
market, visiting local clients and banks for follow-up (head office
visits once or twice a year) and providing the latest market
development to head office.

•They are also risk analysts and risk checkers for the head office
and help solve commercial problems.
 BRANCH AND REP OFFICE

• However, the branches and representative offices cannot

totally replace the business of correspondent banking.
Correspondent banking is still an important business with
potential to develop. In fact, many banks are paying more
attention to their correspondents instead of developing their
own branches and representative offices. This can be
explained by several factors.

• First, by using branches and representative offices, banks

intend to be close to their clients. But a physical presence
near their customers’ offices will be rendered less
necessary by the IT improvements taking place in
communications. Banks are becoming more cost and
efficiency conscious so as to maintain their
competitiveness.
 BRANCH AND REP OFFICE

• Second, under the consolidation of the banking industry, we shall

see that cross-border services develop, globally, around a
framework of interdependent partnerships based on division
of labour, service integration and joint product development.
Banks can choose either to be”big” or to be “specialized”.

• They also have remote clearing access from centralized

processing sites and strongly defined bilateral and multilateral
corporate alliances. Banks without the critical mass of technical
expertise may choose to outsource at least some part of their
activities to those banks better positioned in the field.

• Outsourcing is also due to the fact that some services can either
be too expensive to provide independently, or cannot be
provided because of regulatory constraints.
 BRANCH AND REP OFFICE

• Third, over the years, the concept of correspondent banking

has developed further from its initial trade finance and
settlement services. A much broader range of correspondent
banking services has been offered. Nowadays many banks
are marketing their products towards other financial
institutions, which are regarded as the same as individual
and corporate customers.

• To large banks, which are perhaps in a position to offer all-

round services, correspondent banking has potential in the
sense that interbank transactions can generate extra
earnings. If banks want to fully utilize their existing
resources, physical and human, they should be interested in
offering corresponding services to other banks.

• They need correspondent banks to buy their products to

reach economies of scale. They may also buy products from
their correspondents as an outsourcing partner
 BRANCH AND REP OFFICE

• Smaller banks have to offer a full range of services to their

customers in order to survive. But the demand for special
transactions is unpredictable and infrequent. It would be too
costly to invest in the technology and human resources to
enable the bank to offer all-round services. A Russian’s bank
branch in Amsterdam may not have the expertise to evaluate
the country and bank risk for Taiwan, with which the trade flow is
exactly “sporadic”.

• To take advantage of economies of scale, services must be

provided in large volume. Even when priced at a mark-up over
correspondents’ costs, these services are cheaper than if
provided independently. Thus small banks with a limited
customer base can hardly justify large investment to provide
infrequently used services.

• However, they must be able to provide these services to remain

a full service bank, and it is cheaper to buy them on demand.
They need correspondents to help them.
Please Stop Here and Wait.
 CORRESPONDENT BANKING TODAY :
TOWARDS AN INSTITUTIONAL
RELATIONSHIP

•As a result, banks themselves today are becoming

more and more institutional customers to each other.

•This implies that correspondent banks are not only

offering to each other services that cannot be offered
by themselves, but are also providing the opportunity
for banks to consider if the available service in the
bank should be outsourced.
 CORRESPONDENT BANKING TODAY :
TOWARDS AN INSTITUTIONAL
RELATIONSHIP

• Trade business, for example, is under a great deal of pressure

globally. Bank clients look less at where the supplier of goods
or services is located, and more at the quality and price of the
goods or services. Banks are thus constantly under pressure
to improve the quality and to get costs under control.

• Many banks are thus looking globally for outsourcing

partnerships. Banks nowadays call their “correspondent
department” a department for “financial institutions”.

• Such correspondent banking relationships will be of a

commercial nature, as they may offer substantial earnings for
banks on commercial activities such as custody, account
handling, international trade settlement, foreign exchange and
treasury products, syndication loans, etc.
 CORRESPONDENT BANKING TODAY :
TOWARDS AN INSTITUTIONAL
RELATIONSHIP
• The role played by correspondent banking does not stop at
that. As we will see later, this correspondent network will
change the risk portfolio of the bank by trading assets –
taking in extra risk, or selling out existing portfolio via risk
participation, syndication and forfaiting. It may also change
the liquidity position by taking deposits from, or giving
deposits to, other banks.

• What, then, remains unchanged today for institutional

banking ?
• What remains unchanged is the fact that “institutional
banking”, or “correspondent banking” as we used to call it,
is still a kind of relationship banking. It succeeds in serving
clients by reaching the places that branch networks cannot,
or where branches do exist, but cannot offer the same
service.
 CORRESPONDENT BANKING TODAY :
TOWARDS AN INSTITUTIONAL
RELATIONSHIP

• Any bank with the ambition to provide a

comprehensive service to its clients will definitely need
a sizeable network of correspondents around the
world.

• The institutional banking department plays a crucial

role in efficient utilization of bank limits, trade services,
assets trading and in supporting the acquisition of new
counterparties for foreign exchange and money market
operations.

• It also supports the bank’s funding by attracting

financing from other correspondent banks in the form
of bilateral borrowings, pre-export financing, post-
financing and syndicated loan facilities.
 CORRESPONDENT BANKING TODAY :
TOWARDS AN INSTITUTIONAL
RELATIONSHIP

• Such an institutional relationship can be realized either on a

reciprocity basis or on a one-way basis, with the
correspondent bank simply serving as the agent for the
originating bank in handling some specific transactions.

• Naturally, towards a particular bank there is inevitably a

delicate balance between “cooperation” elements and
“competition” elements in this correspondent relationship,
that is a correspondent bank can sometimes be a “partner”
and sometimes a “competitor”. This will be the crucial
ingredient of the relationship.

• Such a balance between the two will change over the

years, and varies considerably from one relationship bank
to another.
 SUMMARY
• Correspondent banking originated from a domestic context. It
started with the need to settle clearing items such as a cheque.
With the development of international trade, correspondent
banking became a must. Nowadays, correspondent banking is
becoming relationship banking, with correspondents as
institutional clients of the bank. More often, correspondent
banking is called “institutional banking.

• Consolidation among banks does not reduce the need for

institutional banking. This is because globally banks are
working around a framework of interdependent partnerships
based on division of labour, service integration, joint product
development and risk distribution. Banks are more and more
becoming each other’s customers. Institutional banking is thus
a sales department to institutional,
•
• For such partnership banking, there is inevitably a delicate
balance between the cooperation elements and the competition
elements.