Multinational Banking

Currencies have leaped beyond their traditional boundaries, so that today it is possible to write checks in US dollars against bank accounts in Tokyo, or to write checks in Japanese yen against bank accounts in New York.  Indeed, bank accounts in different currencies exist side by side in just about every financial center, so that in, for example, London, we find bank account in dollars, yen, euros, Swiss frans, and every other major currency.  Similarly, it has become possible to arrange loans in US dollars in Hong Kong or in euros in Sydney.  The growth rate of these so-called “offshore currency” deposits and loans has been nothing short of startling, and is part of the increased globalization of financial markets, in general, and of the banking industry, in particular.

Spearheading the growth of offshore currencies and loans was the appearance of Eurodollars in the 1950’s.  Despite several decades of study of the causes and consequences of the emergence of Eurodollars, there are few topics in international finance but have attracted as much controversy and disagreement.  The most important parts of this disagreement center on the extent banks can create Eurodollars and the danger Eurodollar creation involves.  We shall attempt to give a balanced view of these issues and shall also explain the many aspects of Eurodollars, and more generally of offshore currencies, on which there is consensus.  Then we shall describe the nature of the banks which deal; in the offshore currency market.  However, before we begin, we should define what we mean be “Eurodollars” and “offshore currencies”.   An expansion of offshore currency operations within the United States has been made possible by rules allowing the establishment of international banking facilities (IBFs).  The facilities can accept foreign currency deposits and are exempt from both US reserve requirements and insurance premiums on deposits as long as the deposits are used exclusively for making loans to foreigners.  Offshore banks generally remain well hedged.  They accept deposits in many different currencies, and also have assets in these same currencies.