Briefly discuss the several types of international banking offices.
The services & operations which an international bank undertakes is a function of the regulatory environment wherein the bank operates and the sort of banking facility established.
A correspondent bank relationship is established while two banks maintain correspondent bank account along with one another. The correspondent banking system provides means for bank’s MNC client to conduct business worldwide from his local bank or its contacts.
A representative office is small service facility staffed through parent bank personnel that is designed to assist MNC clients of the parent bank in its dealings along with the bank’s correspondents. This is a way for the parent bank to provide its MNC clients along with a level of service greater than that provided through simply a correspondent relationship.
A foreign branch bank operates such as a local bank, however legally it is a part of the parent bank. As such, a branch bank is subject into the banking regulations of its home country & the country in which it operates. The primary cause a parent bank would establish a foreign branch is that this can provide a much fuller range of services for its MNC customers through branch office than it can through a representative office.
A subsidiary bank is locally incorporated bank i.e. either completely owned or owned in major part by a foreign subsidiary. An affiliate bank is one which is only partially owned, however not controlled by its foreign parent. Subsidiary and affiliate both banks operate under the banking laws of the country wherein they are incorporated. U.S. parent banks discover subsidiary and affiliate banking structures desirable since they are allowed to engage in security underwriting.
Edge Act banks are chartered federally subsidiaries of U.S. banks that are physically located in the United States which are allowed to engage in full range of international banking activities. A 1919 amendment to Section 25 of the Federal Reserve Act developed Edge Act banks.The reason of the amendment was to let U.S. banks to be competitive along with the services foreign banks could supply their customers. Federal Reserve Regulation K let Edge Act banks to accept foreign deposits, extend trade credit, trade foreign currencies, finance foreign projects abroad and engage in investment banking activities along with U.S. citizens involving foreign securities. As such, Edge Act banks do not directly compete with the services provided through U.S. commercial banks. Edge Act banks are not banned from owning equity in business corporations as are domestic commercial banks. Therefore, it is through the Edge Act that U.S. parent banks own foreign banking subsidiaries and contain ownership positions in foreign banking affiliates.
An offshore banking center is a country whose banking system is organized to allow external accounts beyond the normal economic activity of the country. Offshore banks operate like branches or subsidiaries of the parent bank. The prime activities of offshore banks are to seek out deposits and grant loans in currencies other than the currency of the host government.
In the year of 1981, the Federal Reserve authorized the establishment of International Banking Facilities (IBF). An IBF is a separate set of asset & liability accounts which are segregated on the parent bank’s books; this is not a unique physical or legal entity. IBFs operate like foreign banks in the U.S. IBFs were largely established as a result of the success of offshore banking. The Federal Reserve desired to return a large share of the deposit & loan business of U.S. branches and subsidiaries to the U.S.