International Banking for a New Century

Irene Finel-Honigman, Fernando Sotelino

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317527169
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This new textbook provides an up-to-date overview of international banking as the second decade of the twenty-first century unfolds. Integrating geo-economic, operational, institutional and regulatory changes in the financial sector, the volume's methodology incorporates specific case studies and research, combining theory with practical examples to illustrate the impact and consequences of past and present financial crises.

The volume considers the core aspects of international banking, including its structural and technical features, historical context, institutional evolution in core markets, and wholesale, retail, investment and private banking. It uses specific examples from past and present literature, post-2008 case studies and histories, and research materials, offering a fully updated overview of how international banks respond to global crises, the origin, efficacy and evolution of financial markets, and the regulatory framework within which they function.

One chapter is devoted to the evolution and potential of new markets, including the financial sectors of the BRICS and other emerging economies. Each chapter examines background, causes, impact and resolution, focusing on specific cases and their broader implications for the sector.

This textbook is a guide to the new, and at times unchartered, landscape to be navigated by large domestic, cross-regional and global banks, and will be invaluable reading for students of finance, business and economics, as well as for those in the financial sector.

1
History of international banking

International banks (almost) never die

Introduction

This chapter presents a historical overview of the origins of international banking through the first decades of the twenty-first century. It examines the evolution from domestic to global institutions; from separate deposit, savings, investment, and custodial functions to the universal banking model (or financial supermarket); from institutions bound and limited by national jurisdiction to globally interconnected institutions, subject to cross-border regulation.

Equally important to note is what this chapter does not cover. A history of banking and money would encompass a broader geographic and geo-economic spectrum, including the development of merchant societies in the Levant from the Byzantine to the Ottoman Empire; the rise of commercial banks in eighteenth and nineteenth century India and China; and the beginning of transactional trade and deposit activities in Africa and Latin America.

However, the concept of international banks defined as financial institutions, which offer retail, wholesale (corporate and investment banking), and insurance services, establish branches, subsidiaries, and conduct business across borders, is much more limited in geo-historic scope. Our focus, therefore, will be on its origins in Europe and the United States, moving from Italy northward through Amsterdam to London and, from 1905, to New York.

International banking was contingent on a strong central bank, a stable currency, and the growth of a retail client base, which entrusted financial institutions with deposits and savings, and a corporate client base, which needed credit lines to further expand domestic and, in time, its international operations.

Nineteenth century economic expansion and wealth generation was fueled by industrial innovation, a new economically active middle class, and the rise of colonial empires. The surge in global trade required British and French banks to extend their reach across Africa, the Indian subcontinent and South-East Asia.

London was the epicenter of banking and the markets in stock, bonds, and currency, with the pound sterling the sole globally convertible currency from the late seventeenth-century to the twentieth century, followed by the French franc after 1865 and the US dollar after 1905.

The historic resilience of European banks (including those of Britain and Switzerland) and American banks is illustrated by the 2014 list of global systemically important banks (G-SIBs) in Table 1.1.

Table 1.1 Global systemically important banks (G-SIBs) as of November 2013 allocated to buckets corresponding to required level of additional loss absorbency

Bucket^1	G-SIBs in alphabetical order within each bucket
5	(Empty)
(3.5%)
4	HSBC
(2.5%)	JP Morgan Chase
3	Barclays
(2.0%)	BNP Paribas
	Citigroup
	Deutsche Bank
2	Bank of America
(1.5%)	Credit Suisse
	Goldman Sachs
	Group Crédit Agricole
	Mitsubishi UFJ FG
	Morgan Stanley
	Royal Bank of Scotland
	UBS
1	Bank of China
(1.0%)	Bank of New York Mellon
	BBVA
	Groupe BPCE
	Industrial and Commercial Bank of China
	ING Bank
	Mizuho FG
	Nordea
	Santander
	Société Générale
	Standard Chartered
	State Street
	Sumitomo Mitsui FG
	Unicredit Group
	Wells Fargo

Source: Financial Stability Board, 2013 (available at http://www.financialstabilityboard.org/wp-content/uploads/r_131111.pdf).

1 “The bucket approach is defined in Table 2 of the Basel Committee document Global Systemically Important Banks: Updated Assessment Methodology and the Higher Loss Absorbency Requirement, July 2013. The numbers in parentheses are the required level of additional common equity loss absorbency as a percentage of risk-weighted assets that will apply to G-SIBs identified in November 2014, with phase-in starting in January 2016” (Financial Stability Board, 2013: 3).

International banks in Europe, Japan, the United States, and Canada have a long history of survival despite internal and external shocks, including acquisitions and mergers, restructurings, wars, and economic crises. The financial crisis of 2008 first spelled the near death of Royal Bank of Scotland (United Kingdom), ING (Netherlands), Commerzbank (Germany), UBS (Switzerland), and Citibank (United States), but government assistance, and partial takeovers or restructuring enabled these institutions to remain in business, and most returned to profitability.

On the French CAC 40, German DAX 30, and London FTSE 100 stock indexes, over one third of the listed companies were created before World War I. The financial institutions listed on these exchanges include Société Générale, BNP Paribas, Crédit Agricole, Commerzbank, Deutsche Bank, Postbank, Standard Chartered, HSBC, Barclays, Lloyds, and Royal Bank of Scotland. On the Japanese Nikkei 225, the eleven banks listed include Sumitomo Mitsui, Mizuho Trust, Resona Holdings, and Mitsubishi Financial, which originated in the period of bank–industry conglomerates of the 1880s to 1900.

In the last decades of the twentieth century, banks such as Deutsche Bank (Germany), UBS (Switzerland), HSBC (United Kingdom), UniCredit (Italy), and Citibank (United States) evolved from powerful domestic brands with global presence to multinational and multiregional, universal institutions, their profitability often dependent more on host country investment and corporate arms than on home country retail operations. International bank interconnectivity has increased as transactions have come to depend increasingly on political and economic conditions of more than one nation, and on the stability and effectiveness of more than one system of laws and financial mores.

This chapter is organized into four sections as follows:

1. The evolution of cross-border and cross-regional banking from the Middle Ages to the 1600s.
2. The history of central banking from the 1600s to the 1800s.
3. The maturation and expansion of international banking from the 1800s to World War II.
4. Financial institutions, multilaterals, and international banks post-World War II.

The evolution of cross-border and cross-regional banking from the Middle Ages to the 1600s

The concept of international banking developed in Europe in concert with almost a thousand years of cross-border wars, cross-regional trade, and currency transactions, as money lenders, money changers, and merchants were needed to provide funds, lend, and create instruments for expansionary wars.¹

Great natural resources did not automatically generate domestic or regional economic development. Empires rich in commodities, mineral wealth and human capital such as the Mamluks in Egypt or the Ottoman Empire, remained entrenched in autocratic and theological structures, which often hindered the development of independent financial systems and institutions. Although these dynasties fostered merchant classes, urban commercial centers, and monetary transactions, banking remained extremely limited as rulers maintained absolute control over state and private wealth, constricting capital mobility and the development of financial instruments and services.

Across Europe, development of a merchant and financial class was far from even. From the Renaissance period onwards, key players in international banking were small geographic entities in need of trade and international monetary transactions to increase productivity and exert power. These included the Italian city states of Genoa, Florence and Venice, as well as the Netherlands and England. These latter thrived due to parliamentary and republican regimes, few Church-led constrictions and relatively tolerant open societies, which fostered wealth generation and industrial activity. Hampered by church interdictions, repression of minorities and lack of economic control, the Holy Roman Empire, encompassing Spain, Portugal, and parts of Germany, never became a banking or financial center, despite vast maritime power and movement of currencies.²

Origins of cross-border banking

From the fall of the Roman Empire (456) until the Crusades (1095–1270), banking was limited within domestic borders. Under the Carolingian Empire (800–888), silver coinage circulated over an area almost the size of the present day European Union (EU), but trade did not extend beyond limited perimeters. By the eleventh century, seasonal markets, fairs, and the greater concentration of urban centers helped propagate acceptance of coins and specie. Yet barter economies remained the norm in isolated rural communities. From 1095 to 1270 the expeditions of the Crusades, instigated by the Vatican, led thousands toward the Holy Land. All routes from Europe passed to and from Italy, requiring complex financial dealings and activating commodity and currency markets. Italian merchants took on international banking functions, serving as intermediaries between monarchies, lending and extending credit to finance wars and trade. In 1338, there were more than eighty banking houses in Florence. The Bardi, Peruzzi, and Datini families, with branches in England, lent to the British Crown until Edward III’s massive debts at the start of the Hundred Years’ War provoked the first city state bankruptcy in 1345 to 1347. By 1470, the House of Medici had branches in Avignon and Lyon (France), Bruges (Belgium), and London (England), where accounts were kept in florins, the official gold coin minted in Florence and convertible throughout Europe. In fourteenth century Florence there were clear distinctions between moneychangers and bankers who dealt in international trade and coordinated government and papal loans.

Cross-border trade and exchanges

Cross-border trade transacted by dynastic merchant families generated immense profits and wealth. As merchants required the freedom to conduct trade year round and travel without restrictions new instruments were created, which did not require carrying large amounts of specie, including bills of acceptance, endorsed checks, bank notes, and promissory notes. A merchant in Florence could purchase goods from a merchant in Bruges, and pay for them by buying a bill of exchange drawn by a third party in Seville. The concept of one-month, three-month, and six-month or year-long maturities stems from the period assigned to payment based on geographic distance. The 1596 records of the Besançon fair describe the proceedings of wealthy merchants, government emissaries, brokers and important moneychangers who came from Genoa, Seville, and Florence to establish a syndicate to regulate rates of exchange by decree. From 60 to 200 men paid a membership fee of 3,000 gold ecus for the privilege of deciding rates and closing deals worth 30–40 million ecus: “Four times a year it was the scene of decisive but discreet meetings, something like the International Bank of Basel in our day” (Braudel Vol. 1, 1979: 91). During the reign of Francois I of France (1517–47), and under the Spanish-led Holy Roman Empire (1519–1608), large merchant houses no longer limited or beholden to their community, thrived wherever money could be generated and reinvested in different regions or countries.

The Age of Discovery, from the sixteenth to the mid seventeenth century, transformed trade and currency transactions as new markets in Asia and the Americas fueled a surge in trade in gold and silver from the Americas to Seville, Lisbon, and on to Amsterdam and London.³ Unregulated, exploitative, and extremely profitable, trading houses functioned as centers of exchange, finance, and multinational transactions. The Dutch East India Company, chartered in Amsterdam in 1601, dominated trade between Europe and Asia through the seventeenth and eighteenth centuries as the world’s largest import–export company. Declaring annual dividends for its stockholders, it offered “longer terms of credit, low prices, forswearing of freight and related charges, offers of full insurance, substantial advances, new arrangements for pay involving half bill and half bond: such became the stock in trade for merchants eager to acquire a piece of the growing India traffic” (Hancock 2002: 164).

The history of central banking from the 1600s to the 1800s

Public finance and independent central banks first developed in the Netherlands, Sweden, and England. These parliamentary monarchies or republics relinquished total control over state finances and promoted interdependency between fledgling markets, merchants, and financiers. By the end of the seventeenth century, bankers in Amsterdam and London no longer served the monarch solely, but rather invested in the interests of a community or nation.⁴ At the end of the Wars of Religion (1524–1598), Protestantism helped further promote economic development in Northern Europe, freeing commercial activity from theological restrictions and enabling the rise of an empowered merchant class.

After almost two generations of wars and the Revolution of 1688, England achieved fiscal harmonization, putting into practice the use of bank notes and deposits, a century before Continental Europe. The creation of the Bank of England in 1694, the monetary reforms of 1699, and increased Parliamentary control of state finances allowed British merchant and trading houses, including the Royal Bank of Scotland and Barclays, to evolve organically into joint stock companies.

Central banking: political and economic evolution

The evolution of government guaranteed financial institutions⁵ established to foster international trade, finance the government, and function as national commercial and deposit banks represented a major shift from autocratic to oligarchic control of a nation’s finances. The creation of the Bank of England under the aegis of Parliament in 1694 marked a major evolution away from Crown control of money issuance, to a separate institution granted the power to set monetary policy through its monopoly right to print fiat money with legal tender. “Independence of central banks is its...