What are the different forms of International lending? (7.1)
1) Trade financing ----|
A) Commercial Letters of Credit |
B) Standby Letters of Credit | ---- Most significant
C) Banker's Acceptances ----|
2) Domestic loans
3) Loans to Foreign Governments
What is the most important International Banking tool? (7.1)
What is purpose of international branching? (foreign exchange of funds, foreign lending, using bankers acceptances, standby LC, etc.)
The most important function is the financing of international trade. Most commonly used financing methods are letters of credit and bankers acceptances.
Currency translation adjustment - per international banking.
Process of restating balance sheet amounts denominated in one currency in terms of a second currency at current exchange rates. No actual exchange of funds takes place. FASB 52 requires multinational companies to restate assets and liabilities and earnings of foreign subsidiaries in terms of a national reference currency. The resulting foreign currency translation exposure is recorded as an equity account of the balance sheet. At large banks, adjusted foreign currency translation is included as part of equity capital.
Explain Foreign Currency Transaction Adjustment?
Associated with currency risk. A borrower may have enough adjusted currency to dollars, but the central bank may not have enough dollars.
International - Explain analysis & classifications based on transfer risk problems?
Transfer risk problems and classifications:
Other Transfer Risk Problem (OTRP) designation applies when:
1)a country is not complying with its external debt service obligations; however, the country is taking positive actions to restore debt service through economic adjustment measures, generally as part of an IMF program.
2)a country is meeting its debt obligations, but non-compliance appears imminent.
3) a country has been classified previously, but recent debt service performance indicates classification is no longer warranted (ex. country in compliance with IMF terms). However, sustained resumption of orderly debt service needs to be demonstrated.
1) Country not complying with its external service obligations,
2) Country is not in the process of adopting an International Monetary Fund (IMF) or other suitable economic program (or not adhering to such program), or
3) Country and its bank creditors have not negotiated a viable rescheduling and are unlikely to do so in the near future.
A country has protracted arrearage, as indicated by more than one of the following:
The loan is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. An example would be an outright statement by a country which repudiates obligations to banks, the IMF, or other lenders.
Which is the greatest risk in international lending (see 7.1-2)?
Country Risk is the greatest risk - and the primary factor which differentiates international lending from domestic lending. Country risk encompasses an entire spectrum of risks arising from economic, social, legal and political conditions of a foreign country that may result in favorable or unfavorable consequences for borrowers of that country.
Financial Risk - Refers to the potential economic inability of a borrower to comply with contractual credit terms and bears the closet resemblance to domestic lending. The added difference in international lending is that applicable information is less readily available and detailed.
Currency Risk - Pertains to the vulnerability of international lenders to variations in rates of currency exchange, and in every international extension of credit to someone has a currency conversion exposure.
Foreign banks must have a log of business transactions kept how often?
How often must foreign branches produce financials in English?
Special reserves established by a charge against current income and segregated from the bank's general ALLL and not included as part of the bank's capital.
Identify major components of Part 346.
Various restrictions & exceptions
Study Directly
Per Part 346, each insured branch shall keep a set of accounts and records in words and figures of English which accurately reflect the business transactions of the branch on a daily basis.
PART 347: FOREIGN ACTIVITIES OF INSURED STATE NONMEMBER BANKS
How much stock can be owned in a foreign bank per Part 347? (RR2847)
25% of capital