Chapter 18
International Banking,
Debt, and Risk
International banking is often called Eurocurrency banking or offshore banking. Students will have had
basic coverage of money and banking in their principles course, but few will remember the details of
T-accounts, so a basic refresher on debits and credits and assets and liabilities is worth five minutes of
class time to ensure that everyone shares a common background.
This chapter allows the use of many anecdotes to add depth and excitement to the material. A rich source
of new material to put in lectures is Euromoney magazine. Data may be found in World Financial
Markets, a brief monthly publication of Morgan Guaranty Bank found in most libraries.
◼ Chapter Outline
Introduction
1. Why are Eurobanks able to offer narrower spreads than domestic banks?
2. Create an example of $10 million being deposited in the Eurodollar market by a U.S. firm, General
Electric. Your example should include at least one interbank transaction before the dollars are
borrowed by a French public utility firm, Paris Electric. How is the gross size of the Eurodollar
market affected by your example? What about the net size?
3. Imagine yourself in a job interview for a position with a large international bank. The interviewer
mentions that recently the bank has experienced some problem loans to foreign governments. The
interviewer asks you which factors you think they should consider when evaluating a loan proposal
involving a foreign governmental agency. How do you respond?
4. What are IBFs? Where did the initial growth of IBF business come from?
5. What kind of debt is rescheduled in a Paris Club arrangement? Why is an IMF standby loan
agreement required before a Paris Club meeting?
6. Researchers typically look at Eurocurrency interest rates rather than country-specific bank quotations
when they test for the validity of covered interest rate parity. What do you think is the rationale for
this choice?
Domestic banks are subject to a variety of government regulations, including reserve requirements,
Chapter 18 International Banking, Debt, and Risk 81
7. How might debt/equity swaps help solve the international debt problem? Point out the benefits and
drawbacks from the viewpoint of the debtor country. Why do you think the debt/equity swap market
has remained small over the years?
8. Pick one example from each of the three types of countries (in terms of risk) found in Table 18.5 and
create a country risk index for them. Rank them ordinally in terms of factors that you can observe –
GDP growth, exports, per capita GDP growth, and so on. Based on your results, do you basically
agree with how they were characterized in the table?