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CHAPTER 12 INTERNATIONAL BANKING ISSUES AND COUNTRY RISK ANALYSIS CHAPTER OUTLINE I. International Banking Operations a) World’s largest financial companies b) Types of foreign banking offices (1) Representative offices (2) Correspondent banks (3) Branch banks (4) Foreign subsidiary banks (5) Agencies (6) Consortium banks c) Interbank clearing house systems II. International Loans a) The international debt crisis of the 1980s (1) Major causes of the debt crisis (2) Solutions (3) Brady bonds b) The Asian financial crisis of 1997 c) A Thai crisis spread throughout the world d) Causes of the crisis e) The fundamentalist view f) The panic view g) Policy responses h) Syndicated loans i) Evaluation of international loans III. Country Risk Analysis a) Nature of country-risk assessment b) How to assess country risk (1) Debt ratios (2) Overall country creditworthiness (3) Sovereign-government bond ratings (4) Summary of country risk ratings IV. Summary 100
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CHAPTER OBJECTIVE Chapter 12 discusses several aspects of international banking activities along with country risk. These aspects include types of foreign banking offices, interbank clearing house systems, the international debt crisis of the 1980s, and the Asian financial crisis of 1997. This chapter looks at how banks assess unique risks of their foreign operations and how these risks can be incorporated into routine operations. KEY TERMS AND CONCEPTS Representative offices obtain information, give advice, and arrange local contacts for their parent bank's business customers. Correspondent banking system is an informal arrangement in which a bank in a country maintains deposit balances with banks in foreign countries and looks to them for services and assistance. Foreign branch banks do not have a corporate charter, board of directors, or shares of common stock outstanding. Thus, they are an operational part of the parent bank; their assets and liabilities are, in fact, those of the parent bank. Foreign subsidiary banks have their own charter, their own board of directors, their own stockholders, and their own managers. A foreign parent bank owns them completely or in major part. Consortium bank is a permanent group of banks that handle large international loans. Clearing House Interbank Payments System (CHIPS) is used to move dollars between New York offices of about 150 financial institutions that handle 95 percent of all foreign exchange trades and almost all Eurodollar transactions. Clearing House Payments Assistance System (CHPAS) began its operation in 1983 and provides services similar to those of the CHIPS. It is used to move funds between London offices of most financial institutions. Society for Worldwide Interbank Telecommunications (SWIFT) is an interbank communication network that carries messages for financial transactions. Debt-equity swaps
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