About International Banking.


Professor Rondo Cameron in his book "International Banking" which is aid to be one of the first

serious books on the real history of international banking reminds us that there were multinational

banks as early as the 13lh century. History proves that by the time of the Medici bank 200 years later,

financiers living in the time of our forbears had discovered the advantages of holding companies for controlling sprawling networks of international branches.

Yet we remain largely ignorant of the way in which banks responded to a demand for capital that really became even more international and intense after 1870.

As Professor Cameron points out in his book, in the period to the outbreak of World War One, international commerce grew at the unprecedented rate of more than 3 per cent per annum for the world as a whole; it growing much faster than that for the leading nations.

International investment forged ahead too. Great Britain was singly responsible for 40 per cent of total foreign investment, however, other western European nations also provided huge credits to borrowers such as the USA, the Russian Empire and Latin America. Consequently, the market for capital became more integrated and international than ever.

Such international activity of the past is crucial to an understanding of the mechanisms by which banking structures in individual countries were formed into shapes recognizable as the precursors of today's systems.

In 1870 Britain, for example, had the largest foreign investments and the best developed banking system. However, UK domestic banks were scarcely involved in international activity before 1890. Foreign investment was handled mainly by the private banks, which exploited their extensive overseas connections through the London Stock Exchange. Even when the domestic banks did become involved, they tended to do so indirectly, placing deposits at the disposal of bill brokers and discount houses for the short-term financing of trade.

The real discovery of this book is that contrary to the general belief and expectations of the authors (Cameron and Bovykin) they found that banks were notresponsible for the emergence of multinational industrial enterprises! Specialists in the field of international banking say that for this fact the book will long be remembered and that, by any standard, the book stands out as a key work in banking history and it will definitely form the basis of much future study.

Supporting their story by the real historical facts and figures the authors showed that the banks certainly facilitated their expansion, mainly by providing short-term working capital and by financing the international movement of commodities.

Their foreign investments, however, were mostly undertaken in direct transactions with governments or in the form of social overhead capital, especially railways.

With minor exceptions, banks did not take the initiative in organising trading concerns, nor did they control large volumes of equity capital. By and large, industrial companies grew by self-irrvestment.

Indeed, the final section of the book examines the rise of multinationals across a series of industries, from oil to electrotechnologies, and gives plenty of evidence for the bankers' reticence. One proposed chapter on the chemical industry was abandoned when the author showed that there was simply too little bank involvement to be of interest.

Cameron posits a straightforward explanation. In both its private and joint stock forms, international banking had already developed into a highly specialised business. Its leaders recognised their risk-taking as quite distinct from that of industrial entrepreneurs, and where they paid too little heed to (hat central observation, they usually regretted it.

There is another no less interesting book for students in Economics "International Banking Deregulation: the Great Banking Experiment" by Richard Dale.

It deals with the problem of the merging of banking and securities activities.

Richard Dale touches upon the problem in many countries of the world including Japan, the UK, the USA, Germany, Switzerland, etc.

Should banks be allowed to get into the securities business? To some the question may seem absurd. No one asks whether a tobacco company should be allowed to diversify into, say, food processing. The only relevant question is whether experience and analysis suggest that such a move would be in the long-term interest of the company and its shareholders.

Banks, however, are special. Failure, or the threat of failure of one bank, can weaken rather than strengthen its competitors. Because of their central position in the financial economy, what happens to banks can have serious knock-on effects. So banks are regulated in a way other industries are not.

On mixing banking and securities businesses, regulatory and institutional practice has varied widely. In Germany and Switzerland it has always been aIlowed. In the UK it has only prevailed since "Big Bang" in 1986. In the US since 1933 because it was thought to have contributed to the Great Depression. In Japan, a law analogous to Glass-Steagall has been in force since the war under a US legal code.

Richard Dale's study is a model of clarity in exposition and fair-mindedness in argument. The central chapters describe the position in half-a-dozen countries, analysing the underlying dynamics: how and why did matters come to be as they are and what are the pressures for change?

Framing these chapters is an excellent discussion of the arguments in principle for and against the merging of banking and securities activities. Banks have usually argued in favour, citing potential economic benefits for themselves and their customers in terms of greater competition, cost savings and the convenience of "one-stop" banking. Dale is prepared to accept the force of these arguments (though experience in London since Big Bang might argue for scepticism).

Regulators and legislators tend to have been cautious on two main grounds: potential conflicts of interest and the dangers of contagious risk. Conflicts of interest can arise when the roles of principal and agent or adviser are combined - the possibilities of "stuffing" clients with particular securities; of all kinds of insider information; and of distortion of securities markets by the lending power of banks. Again, however, Dale is not too worried by these problems believing, perhaps reasonably, that a regime of Chinese Walls, properly policed and legally enforced, will minimise the dangers.

 

Тематичне заняття № 42

Module test paper №4

 

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