Money, Banking, and International Financechanges in the ruble-dollar exchange rate because the bank pushes the exchange rate risk upon
the Russian business. However, Euroloans and Eurobonds are not completely free from the
exchange rate risk. If the Russian business earns profits from sales denominated in rubles, then a
severe ruble depreciation can cause the Russian business to default and/or bankrupt.
Subsequently, the business cannot afford to convert a depreciating currency into an appreciating
one, and it defaults on the Euroloan.
Banks can grant Euroloans in billions of dollars. Therefore, several international banks
cooperate to grant a sizable loan. We call this cooperation a loan syndication. Syndicate spreads
a large loan among several banks, and one bank manages the loan and earns a management fee.
Most international banking business is conducted through the Euromarkets. These markets
remain unregulated and include all financial markets that are denominated in U.S. dollars and
are located outside of the United States.
Last financial instrument, a banker’s acceptance, facilitates international trade. If a U.S.
store wants to import coffee from Costa Rica, the exporter in Costa Rica has little information
about the U.S. store’s credit worthiness. Furthermore, if the exchange of coffee for money
occurs in the future, the U.S. store does not know what the future exchange rate will be. Thus,
this becomes an information problem, and an international bank can use a banker’s acceptance.
The U.S. store deposits money at its international bank. Bank guarantees payment by issuing a
banker’s acceptance and sends a letter of credit to the exporter in Costa Rica. If the U.S. store
bankrupts, the exporter in Costa Rica still gets his money. If the firm does not deposit money at
the bank and the bank guarantees payment, then the bank must pay the exporter in Costa Rica.
When the exporter in Costa Rica exports the coffee to the U.S., the exporter deposits his letter of
credit at his bank. Exporter’s bank would contact the U.S. store’s bank and arrange payment.
Consequently, banker’s acceptances lower transaction costs and are liquid assets because banks
and holders can sell or buy them on secondary markets.
Regulatory Oversight
After World War II, the U.S. dollar became the international transaction currency. An
international transaction currency is the preferred currency used in negotiating transactions in
the international financial markets. For example, traders negotiate all transactions in the
petroleum market in U.S. dollars.
During the 1980s, several developing countries threaten to default on their Euroloans. Loan
default would trigger a global banking crisis in the industrialized countries. Consequently,
twelve countries, including the United States met in Switzerland to discuss capital requirements.
They named the meeting after the city, Basel. Basel committee wanted to ensure banks had
enough capital to survive a financial crisis and avoid massive profit losses. Unfortunately,
countries have difficulty in implementing the Basel agreement because every country has
distinctive regulations and different accounting standards. Nevertheless, the Basal agreement set
common capital standards for banks engaged in currency swaps, financial futures, and options.
The 1980s debt crisis forced central banks to meet and discuss their roles of being the
lenders of last resort during a banking crisis. Central banks concluded they should concentrate
on the financial stability of their own domestic banks. However, many banks are linked