International banking firms—multinational banking companies that reach across national boundaries—offer financial services around the globe today. Their growth has proceeded at a pace mirroring the growth of international trade and global capital flows as international banks typically follow their largest customers overseas.

• International banks operate many different kinds of service facilities to provide financial services across national boundaries today. Among the best known of these facilities are (a) international banking departments, usually located within the headquarters of a single bank: (b) shell branches in offshore island locations, designed to minimize the burden of regulation in raising funds; (c) representative offices, which funnel service requests to the banks’ central facilties; (d) Edge Act and Agreement corporations, which avoid or minimize some domestic regulatory restrictions; (e) international banking facilities (IBFs) that keep computerized records of offshore transactions; (f) full-service branches that offer most of the services available from the main bank office; and (g) agency offices, which assist customers with special transactions, including record keeping and cash-management services.



• Among the leading financial services provided by international banks are (a) letters of credit to help finance international trade; (b) buying and selling of foreign currencies for the bank and its customers; (c) issuing bankers’ acceptances to facilitate trade financing or the purchase of currencies; (d) accepting Eurocurrency deposits and making Eurocurrency loans; (e) marketing and underwriting security sales to help customers raise new funds; (f) securitizing loans to help the bank and its customers generate new working capital and reduce balance-sheet risk; (g) cash management services to provide liquidity for customers as spending power is needed; (h) advisory services regarding potential foreign investments and foreign markets that bank customers might be interested in; and (i) miscellaneous other financially oriented services.



• Foreign banks have come to represent a substantial share of all banking assets in the United States and account for a relatively large share of business loans made within the American banking system. Foreign bank growth inside the United States has occurred, in part, due to foreign-bank customers entering the United States, the needs of foreign businesses to carry out security sales and other transactions within the U.S. in order to obtain capital and liquidity, and the continuing search of many bank customers for safety in the face of international risks. A bank that can cross national borders offers its customers the chance to enter new markets and diversify their business operations, thereby expanding potential revenues and possibly reducing risk exposure.



• Government regulation of foreign bank activities has expanded considerably in recent years, subjecting foreign banks to most of the same rules and regulations that domestic banks face. In the United States, recently passed federal laws have led to close supervision and regulation of foreign banks. One prime example is the Foreign Bank Supervision Enhancement Act passed in 1991, which appointed the Federal Reserve Board as the principal supervisor of foreign bank activities in the United States and requires the Board’s approval of the expansion of foreign banking facilities inside U.S. borders. Moreover, the Federal Reserve can close a foreign-owned bank office if, in the Fed’s opinion, it is not adequately supervised by its home country. The Federal Reserve is also the chief supervisor of U.S. banks’ operations in overseas markets.



• The future of international banking presents significant risks today due to recent political and economic changes abroad and unanticipated movements in interest rates and currency prices. International banks also face greater lending risk because overseas loans, on average, are more risky than domestic loans due, in part, to the relative lack of information on the condition of foreign borrowers. In recent years, however, international banks have developed country risk profiles and other advanced tools to help lower the risks inherent in international lending.



• If international banks are to survive and prosper in the future, they must retain the public’s confidence and control risk taking. One of the most important methods used to accomplish these goal in recent years has been to impose common capital rules on major banks in leading industrialized countries (through the Basel Agreement on Bank Capital Standards, signed by all participating industrialized nations in 1988 and recently modified to deal more effectively with changes in risk exposure among the world’s leading banks).



• Today there is less emphasis in international bank regulation upon rigid standards and, instead, greater use of risk control models created by each bank to deal with its own unique risk exposures. Moreover, international banking rules are focusing today more and more on the private marketplace to impose discipline on bank behavior and risk taking. For example, international banks choosing to take on greater risk often find that the free market forces them to pay more for the capital they must raise in order to carry on their daily operations.



• International banking is likely to benefit in future years from greater deregulation as governments move to liberalize the rules limiting future bank expansion into new markets and allow private markets, rather than government dictum, to play a far greater role in shaping the service offerings and the performance of international banking corporations.