International Financing Strategy

The strategy if international financing is when banks increase their participation in the operation of the Euro system, i.e. Eurobond and Euro loan issues.  This type of activity has become increasing common.  Although all these operations can be organized fro a bank’s head office, most banks use as their intermediary their subsidiaries in international financial centres and/or tax havens.  These operations fall, of course, within the province of wholesale banks.  Transactions are for the most part denominated in Eurodollars, but the Deutsche mark, the Swiss franc and the yen have been taking an increasing share over the last ten years.  The strategy of international financing has been gathering momentum at the same pace as the Euromarket-in other words, extremely rapidly (15-20 per cent a year).  This acceleration started in 1963 when the U.S. authorities introduced the exchange equalization tax.  The type of borrower has been changing since the late 1960s but particularly since 1974.

When U.S. banks were once again able to finance the foreign subsidiaries of U.S. MNEs from the United States, there was less need for them to resort to the Eurodollar market.  In addition, MNEs are relatively independent of banks for their financing and it would seem that this situation is becoming increasingly common.  For one thing, MNEs have a substantial self-financing capability.  Secondly, they often have their won in-house bank and, lastly, MNEs have created a commercial paper market where they lend to one another.  It is true that this market is very exclusive and the more humble MNEs continue to rely on international banks, which make use of their subsidiaries in the euro system centres particularly when the LIBOR rate is lower than the base rate in their home country.  In all likelihood therefore, the strategy of international financing, which has been the front-runner for several years, may prove to lack the stamina of either the supportive strategy above or the strategy of a genuine decentralization of banking activities to which we are about to turn our attention.