International Banking Advantages And Disadvantages

Discuss the advantages and disadvantages of international expansion the banking industry may encounter.

In June 1852, American railroad bonds were issued in London and used to finance the 705-mile long Illinois Central. The issuance was so successfully executed that three-quarters of the Illinois Central assets were held British investors . This early example of investment banks tapping into international funds was the beginning of a global banking revolution in which banks would increasingly rely on foreign markets to raise funds, expand their business across continents and redefine financial innovation. In this report, we look at both the advantages and disadvantages an international banking system brings to individual institutions. We also

Cross-border transactions can take many forms, however a conceptually simple example is that of a German bank using deposits from German savers to extend a loan to a resident of Singapore. Lending may also occur via a third country using an international finance centre such as London. As shown in Graph 1, throughout the 1990’s, international claims on assets represented approximately 20% of global GDP. After experiencing a rapid expansion in the years prior to the 2008 crisis, international claims today represent approximately 45% of global GDP. BIS notes that this expansion is not correlated with global cross-border trade increases, therefore suggesting that banks have sought and discovered profitable opportunities outside the realms of economic expansion otherwise driven by the general trend of

Instead, this should be viewed as an advantageous by-product of expansion. For example, banks (in particular retail banks) often rebrand their foreign acquisitions. For example, Santander has been notable in rebranding its acquisitions, resulting in brand presence in Europe, Latin America, North America and Asia. As a result of rebranding their UK acquisitions and undertaking sporting sponsorship deals, Santander reported a rise in brand awareness from 20% to 80%, resulting in an increase in deposit inflows ft 5.

In the case where cost benefits are not achieved, establishing branch or affiliate in an international financial centre may enable banks to gain additional expertise in international banking and industry best practices. This in turn will bring benefit to their domestic operations.

2.Disadvantage: Increased costs

In many countries,foreign banks that are newcomers may not have other information sources and therefore may be disadvantaged compared to local or incumbent banks. This result reconfirms that the cost increase is one of the obstacles to the expansion of the banking industry.

Table2:Bank of China,2010,Monthly cost.

One domestic branch One overseas