Types of foreign banking offices

There are six major types of foreign banking offices: representative offices, correspondent banks, branch banks, subsidiaries, agencies, and banking consortia. The list of alternatives also should include Edge Act corporations, international banking facilities, and export trading companies, which are discussed in other chapters.

Representative offices National banks may establish offices in foreign countries when their parent bank is doing business in these countries or in neighboring countries. These offices do not have traditional banking functions such as deposits, loans, letters of credit, drafts, and Eurodollar markets.

Representative offices obtain information, give advice, and arrange local contacts for their parent bank's business customers. They help local business executives initiate inquiries about the parent bank's services and introduce visiting executives to local banks. They put clients of parent banks in contact with government officials or local business firms. They also provide their parent bank with credit analyses of local firms and political information about the country.

Correspondent banks Most major national banks maintain correspondent banking relationships with local banks in many major foreign cities of the world. The 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.

Local correspondent banks accept drafts and honor letters of credit. They also provide credit information. Finally, they collect or pay foreign funds from import or export transactions.

Branch banks Foreign branch banks do not have a corporate charter, a 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 branch banks provide a full range of banking services under the name and guarantee of the parent bank. They attract big local borrowers because legal loan limits depend on the size of the parent bank.

Foreign subsidiary banks In spite of the fact that foreign subsidiary banks have their own charter, their own board of directors, their own stockholders, and their own managers, they are owned completely or in major part by a foreign parent bank. They must comply with the laws of the host country.

Because foreign subsidiary banks maintain their status as local institutions with local ownership and management, they are able to attract additional local deposits and have greater access to the local business community. In addition, they are more likely to appeal to the foreign business community than a local bank because they have permanent relations with their foreign part owner.

Agencies Agencies of foreign banks can offer only a limited range of banking services. They cannot accept transaction deposits from residents of their own country, and they must deal exclusively with commercial customers. Their primary function is to finance both exports and imports that originate from companies in their own country. Agencies also actively participate in interbank credit markets and some other loans to companies in their own country.

Consortium banks A consortium bank is a permanent group of banks that handles large international loans. It has its own charter, but it is a joint venture owned by two or more shareholder—parent banks, usually with different nationalities.

Consortium banks develop their business and take customers that the parent bank suggests. They arrange global syndicates for large international loans. Syndicates in large international loans spread risk and overcome the inability of a single bank to handle a large loan alone. Consortium banks also underwrite corporate securities and arrange mergers and acquisitions.

Table 12.2 Characteristics of US foreign banking offices

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