bài giảng môn tài chính quốc tế the eurocurrency market


Truong Quang Thong

August 2012
 ! " #  $
%$& '($)
Lecture 4 :
The Eurocurrency Market
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*+,

Factor price differentials and trade barriers.
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Arbitrage and the cost of capital.
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Ownership advantages.
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Income diversification.
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Excess managerial capacity.
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Location and the product life cycle.
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-.

Physical presence through FDI.

Price differentials: cases of US and UK banks with subsidiaries in India; fund raisings by
Eurobanks,…
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Trade barriers requiring banks to have a physical presence before they can start: case

of 100% foreign banks in Vietnam.
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-

Arbitrage: the practice of taking advantage of price differentials between two or more
markets (See more on International Finance course).

The cost of capital: when a currency appreciates, banks find it easier to obtain finance in
this currency, causing more international banking…
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Natural disadvantages when entering a new market: new regulatory environment,
different customer demand,…

Possession of ownership advantages: superior marketing techniques, managerial
expertise, technival know-how,…
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To diversify earnings, so to reduce risks.

Product diversification
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Geographic diversification
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31-

Banks face incentives to build up expertise in many areas even if this expertise would
not be required at present.


Given the present excess of managerial capacity, it is then efficient for banks to utilise
this capacity by entering a new geographical market.


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Unit Cost
Time
1
2 3
4
ACF
ACD
P=ARF
4 phase location cycle
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"3-

Follow your customers.
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Managerial motives
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40

Money transmission and cash management.
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Credit facilities with range of currencies.

Syndicated lending.


FX transactions and trade finance.
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Bond issues.
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Equity.
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51

One of the truly significant innovations of international banking of the past 50 years.

Providing a foundation for a series of innovations in both structure and choices in the
financing of the MNCs.
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+,
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Size and dynamism of the economy

Size of official reserve assets
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Importance of international trade
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Size, depth and liquidity and openness of
domestic financial market
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Convertibility
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Soundness of macroeconomic policies
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


Eurocurrency are domestic currencies of one country on deposit in a second country.

Eurocurrency markets serve two valuable purposes:

An efficient and convenient monay market device for holding excess corporate liquidity;

Major source of short term bank loans to finance corporate working capital needs, including the
financing of imports and exports.
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

Banks which Eurocurrency are deposited are called Eurobanks.

Eurobank is a financial intermediary that simultaneously bids for time deposits and makes
loans in a currency other than that of the currency of the country in which it is located.

Eurocurrency operation that qualifies a bank for the name Eurobank is in fact a
department of a large commercial bank.
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6
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Born shortly after the WWII.
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1945-1971: growing role of US$ as international means of payment and reserve asset: “$ as good as
gold…”.

The dollars of the Soviet Union and the creations of the two Soviet banks: Moscow Narodny Bank
in London and the Banque Commerciale pour l’Europe du Nord in Paris.
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6
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1957: restriction to UK bank lending in sterling to non-residents of the UK  the choice of
dollar.
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1960s: Expansion of US MNC in Western Europe. Many US banks set up oversea branches in
Europe.
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International trading center in London:
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Expertise of international monetary matters.
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Proximity in time and distance to major customers.
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6

Britain’s policy of GBP replacement by USD in
trade financing operations.

Balance of payment difficulties of the US during
1960s (hence increasing net US$ balance outside
the US).

1973 oil crisis and the petro-dollar.
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Roots from the US banking regulations:

Regulation Q: interest rate ceilings on time deposits in the US

(1965-1966).

1963: Interest Equalization Tax imposed by the Fed to discourage US
investors from investing in foreign securities. Thus, non-US
borrowers had to sell securities outside the US market.

….
 American banks have been able to make higher profits lending in
the Eurocurrency markets than in the domestic, highly regulated
market.
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-6
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Large international financial institutions: the WB,…

MNC
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Goverments
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Personal Investors

…
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
Low lending rates.

High borrowing rate.
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Reasons of advantages:



Economy of scale
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Admin cost savings

Highly qualified customers

Independence from supervisory and regulatory policies.
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06

Competition among banks produces low lending margins.

Base rate: 6 month LIBOR + Spread

Spread: usually expressed in “basis point”.
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."-6

Causing inflation?

FX risk?

Liquidity risk and the role of the lender of
last resort?

About a world supervisory and regulatory
framework?
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