Chap023 - Chapter Twenty Three Geographic Diversification...

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Chapter Twenty Three Geographic Diversification: International Chapter Outline Introduction Global and International Expansions U.S. Banks Abroad Foreign Banks in the United States The International Banking Act of 1978 Advantages and Disadvantages of International Expansion Advantages Disadvantages Summary 16
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Solutions for End-of-Chapter Questions and Problems: Chapter Twenty Three 1. What are three ways in which FI can establish a global or international presence? The three most common methods are (1) selling financial services from domestic offices to foreign customers, (2) selling financial services through a branch or representative office established in the foreign customer’s country, and (3) selling financial services to a foreign customer through subsidiary companies in a foreign customer’s country. 2. How did the Overseas Direct Investment Control Act of 1964 assist in the growth of global banking activities? How much growth in foreign assets occurred from 1980 to 2003? Which types of foreign assets saw the largest amount of growth? The Overseas Direct Investment Control Act of 1964 restricted the ability of U.S. banks to lend to U.S. corporations that wanted to make investments overseas. Although later repealed, the law created incentives for U.S. banks to establish offices offshore to serve the financial needs of their U.S. corporate clients. From 1980 to 2003, foreign assets of U.S. banks grew from $354 billion to $804 billion, growth in foreign assets of 127% in 23 years. The largest dollar increase and the largest percentage increase occurred in individual loans. These numbers are affected by the slow economic activity of the first 3 years of this decade. Table 23-2 clearly shows that C&I loans had shown the largest dollar increase through the end of 2000. 3. What is a Eurodollar transaction? What are Eurodollars? Eurodollars are dollar-denominated claims at foreign or U.S. banks outside the United States. The Eurodollar transaction may be a liability or an asset transaction that is booked external to the boundaries of the United States. 4. Identify and explain the impact of at least four factors that have encouraged global U.S. bank expansion. First, the growth of international trade with the dollar as the primary medium of exchange has encouraged the use of U.S. foreign bank subsidiaries to assist in these trade-related transactions. Second, the U.S. banks in strategic locations, such as the Cayman Islands and the Bahamas, became preferred depositories for funds that were flowing out of politically sensitive and risky countries. Third, the Federal Reserve Bank often allowed U.S. banks to participate in activities that were permitted in foreign countries, even though those same activities may not have been permitted in the U.S. Finally, the technological improvements in communications, and the
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