CU-MBA-SEM-IV-International Banking and Forex Second draft

MASTER OF BUSINESS ADMINISTRATION SEMESTER IV INTERNATIONAL BANKING AND FOREX

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Manisha Malhotra Dr. Nitin Pathak University Institute of Computing University School of Business © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit 1 – International Banking .............................................................................................. 5 Unit 2 - International Commercial Banking ......................................................................... 24 Unit 3 -International Commercial Banking .......................................................................... 42 Unit 4 – Risk Management For International Banks ............................................................ 67 Unit 5 – International Loans Syndication............................................................................. 89 Unit 6 – International Banking And Development ............................................................. 109 Unit 7 – International Banks And Financial Markets ......................................................... 138 Unit 8 – International Banks And Financial Markets ......................................................... 150 Unit 9 – Foreign Exchange Markets .................................................................................. 165 Unit 10 – International Money Market Instruments ........................................................... 181 Unit 11 – International Banking Law And Regulation ....................................................... 204 Unit 12 – International Banking Law And Regulation ....................................................... 215 Unit 13 – Forex Markets In India ...................................................................................... 239 Unit 14 – International Banking And Other Parts .............................................................. 252 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1 – INTERNATIONAL BANKING STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Meaning 1.3 Scope of International Banking 1.3.1 Banking, Securities and other Financial Subsidiaries 1.3.2 Significant Minority Investments in Banking, Securities and Other Financial Entities 1.3.3 Insurance Entities 1.3.4 Significant Investments in Commercial Entities 1.3.5 Deduction of Investments Pursuant to this Part 1.4 Importance of International Banking 1.5 Globalization of Banking 1.6 Summary 1.7 Keywords 1.8 Learning Activity 1.9 Unit End Questions 1.10 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the concept of International Banking  Illustrate the Scope of International Banking  Examine the Importance of International Banking 1.1 INTRODUCTION This section of the Manual of Examination Policies provides a broad perspective of international banking. It begins by addressing the concept of country risk, which is the primary risk associated with international banking activities. The section then discusses 5 CU IDOL SELF LEARNING MATERIAL (SLM)

common international banking products and services such as foreign loans, investments, placements,1 currency exchange, and funds management. Within the discussion on foreign loans, significant attention is given to trade finance, which is an important, yet declining, segment of U.S. banks’ international credit exposures. Due to increased globalization of international markets and competition from non-bank intermediaries, U.S. banks have become less involved in trade finance and more involved in direct loans to foreign banks, participations in syndicated credit facilities, and loans to individuals and foreign businesses. This section also discusses the international banking operations of foreign banks in the U.S., the operational structures established by U.S. banks in order to conduct banking activities in foreign jurisdictions, and parallel-owned banking organizations (PBOs). A PBO exists where there is common control or ownership of domestic and foreign banks outside of a traditional bank holding company structure. The PBO structure results in a global financial organization that may not be subject to comprehensive, consolidated supervision standards and could present unique supervisory concerns. Finally, this section discusses supervisory methods and examination guidance relating to the supervision of foreign banking organizations (FBOs) and provides references to applicable laws and regulations. The section concludes with a glossary of international banking terms. While the number of U.S. banks involved in international finance is relatively small in comparison to the overall number of U.S. banks, many large institutions have notable cross- border exposure and significant international activities. Moreover, in certain markets, a considerable number of smaller banks continue to allocate significant resources to international banking. Many international banking activities parallel those conducted in domestic banking operations. For example, in both international and domestic markets, a bank may extend credit, issue and confirm letters of credit, maintain cash and collection items, maintain correspondent bank accounts, accept and place deposits, and borrow funds. Other activities are more closely associated with international banking, such as creating acceptances and trading foreign currencies. The most important element of international banking not found in domestic banking is country risk, which involves the political, economic, and social conditions of countries where a bank has exposure. Examiners must consider country risk when evaluating a bank’s international operations. Despite similarities between domestic and international activities, banks often conduct international operations in a separate division or department. Large banks typically operate an independent international division, which may include a network of foreign branches, subsidiaries, and affiliates. Smaller banks, or banks with limited international activity, often use a separate section that works with a network of foreign correspondent banks or 6 CU IDOL SELF LEARNING MATERIAL (SLM)

representative offices. In either case, international activity is usually operated by separate management and staff using distinct accounting systems and internal controls. Given the risks introduced by doing business in a foreign country, particularly in emerging markets, examiners must review and understand international activities when assessing a bank’s overall condition. Furthermore, examiners should coordinate international reviews with Bank Secrecy Act (BSA), Anti-Money Laundering (AML), and Office of Foreign Assets Control (OFAC) reviews. Federal Financial Institutions Examination Council (FFIEC) 009 and 009a Country Exposure Reports or Treasury International Capital (TIC) Form B Reports, can also assist examiners determine a bank’s level of country exposure. Other resources include recent Reports of Condition and Income (Call Reports) and Uniform Bank Performance Reports. Examiners can usually examine international activities at a bank’s main domestic office or other centralized location. Part 347 of the FDIC Rules and Regulations governs minimum Recordkeeping standards at state non-member banks that operate foreign branches or meet certain investment or control levels. These standards require banks to maintain certain information concerning offshore activities at their head office. This requirement generally enables a centralized review of asset quality, funding operations, contingent liabilities, and internal controls. In some cases, on-site examinations of foreign branches may be necessary because of inadequate information at the main domestic office or the existence of unusual branch activities. Examiners should determine the availability and quality of information maintained at the main office during the pre-examination process to gain a general understanding of any unusual branch activities before considering a foreign branch examination. If the information at the centralized location appears inadequate or unusual branch activities are identified, it may be appropriate to conduct a pre-examination visitation or begin the domestic examination before commencing the foreign branch examination in order to obtain additional information. 1.2 MEANING International Banking is a cycle that includes banks managing cash and credit between various nations across the political cash and credit between various nations across the political limits. It is otherwise called Foreign/Offshore Banking. In another words, International Banking includes banking exercises that cross public wildernesses. It concerns the international development of cash and offering of monetary administrations through seaward expanding, reporters banking, agent workplaces, branches and offices, restricted branches, auxiliary banking, acquisitions and consolidations with other unfamiliar banks. Every one of the essential devices and ideas of homegrown bank the executives are pertinent 7 CU IDOL SELF LEARNING MATERIAL (SLM)

to global banking. In any case, uncommon issues or limitations emerge in worldwide banking not ordinarily experience while working at home. There are a lot of available methods for entry into international banking operations. This includes; Correspondent Banks, Representative Offices, operations. This includes; Correspondent Banks, Representative Offices, Branches and Agencies, Limited Branches, Subsidiary Banks, Bank Acquisitions and Bank Mergers. An international bank is a financial institution that is based in a foreign location and provides services to clients from around the world. In many ways, international banks provide services and support that is familiar to anyone who has maintained any type of bank account. What is different is the additional services that are often included. There’s more than one type of international bank. The one that most people and many business owners will use is known as an offshore private bank. There are also institutions that are classed as correspondent banks, offshore banking centres, and subsidiary banks. For now, let us focus on what private banks have to offer and how they compare and contrast with domestic banks. Choosing to open any type of banking or investment account with an international bank means considering the right location. It’s important to remember that banking laws can vary from one nation to the next. By understanding how those laws apply and what they mean in terms of building wealth, it’s important to look for a few qualities. You want to consider banking options in nations with a proven track record of political and economic stability. The regulations that govern international accounts must provide a reasonable amount of protection for depositors. 1.3 SCOPE OF INTERNATIONAL BANKING This report presents the outcome of the Basel Committee on Banking Supervision’s work over recent years to secure international convergence on revisions work over recent years to secure international convergence on revisions to supervisory regulations governing the capital adequacy of internationally active banks. Following the publication of the Committee’s first round of proposals for revising the capital adequacy framework in June 1999, an extensive consultative process was set in train in all member countries and the proposals were also circulated to supervisory authorities worldwide. The Committee subsequently released additional proposals for consultation in January 2001 and April 2003 and furthermore conducted three quantitative impact studies related to its proposals. As a result of these efforts, many valuable improvements have been made to the original proposals. The present paper is now a statement of the Committee agreed by all its members. It sets out the details of the agreed Framework for measuring capital adequacy and the minimum standard to be achieved which the national supervisory authorities represented on the Committee will propose for adoption in their respective countries. This Framework and the standard had been 8 CU IDOL SELF LEARNING MATERIAL (SLM)

endorsed by the Central Bank Governors and Heads of Banking Supervision of the Group of Ten countries. 2. The Committee expects its members to move forward with the appropriate adoption procedures in their respective countries. In a number of instances, these procedures will include additional impact assessments of the Committee’s Framework as well as further opportunities for comments by interested parties to be provided to national authorities. The Committee intends the Framework set out here to be available for implementation as of Year- end 2006. However, the Committee feels that one further year of impact studies or parallel calculations will be needed for the most advanced approaches, and these therefore will be available for implementation as of year-end 2007. More details on the transition to the revised Framework and its relevance to particular approaches are set out in paragraphs 45 to 49. 3. This document is being circulated to supervisory authorities worldwide with a view to encouraging them to consider adopting this revised Framework at such time as they believe is consistent with their broader supervisory priorities. While the revised Framework has been designed to provide options for banks and banking systems worldwide, the Committee acknowledges that moving toward its adoption in the near future may not be a first priority for all non-G10 supervisory authorities in terms of what is needed to strengthen their supervision. Where this is the case, each national supervisor should consider carefully the benefits of the revised Framework in the context of its domestic banking system when developing a timetable and approach to implementation. The fundamental objective of the Committee’s work to revise the 1988 Accord2 has been to develop a framework that would further strengthen the soundness and stability of the bean to develop a framework that would further strengthen the soundness and stability of the international banking system while maintaining sufficient consistency that capital adequacy regulation will not be a significant source of competitive inequality among internationally active banks. The Committee believes that the revised Framework will promote the adoption of stronger risk management practices by the banking industry, and views this as one of its major benefits. The Committee notes that, in their comments on the proposals, banks and other interested parties have welcomed the concept and rationale of the three pillars approach on which the revised Framework is based. More generally, they have expressed support for improving capital regulation to take into account changes in banking and risk management practices while at the same time preserving the benefits of a framework that can be applied as uniformly as possible at the national level. 5. In developing the revised Framework, the Committee has sought to arrive at significantly more risk-sensitive capital requirements that are conceptually sound and at the same time pay due regard to particular features of the present supervisory and accounting systems in individual member countries. It believes that this objective has been achieved. The Committee is also retaining key elements of the 1988 capital adequacy framework, including the general requirement for banks to hold total capital equivalent to at least 8% of their risk-weighted assets; the basic structure of the 1996 Market Risk Amendment regarding the treatment of market risk; and the definition of eligible capital. 6. A significant innovation of the revised Framework is the greater use of assessments of risk 9 CU IDOL SELF LEARNING MATERIAL (SLM)

provided by banks’ internal systems as inputs to capital calculations. In taking this step, the Committee is also putting forward a detailed set of minimum requirements designed to ensure the integrity of these internal risk assessments. It is not the Committee’s intention to dictate the form or operational detail of banks’ risk management policies and practices. Each supervisor will develop a set of review procedures for ensuring that banks’ systems and controls are adequate to serve as the basis for the capital calculations. Supervisors will need to exercise sound judgement when determining a bank’s state of readiness, particularly during the implementation process. The Committee expects national supervisors will focus on compliance with the minimum requirements as a means of ensuring the overall integrity of a bank’s ability to provide prudential inputs to the capital calculations and not as an end in itself. 7. The revised Framework provides a range of options for determining the capital requirements for credit risk and operational risk to allow banks and supervisors to select approaches that are most appropriate for their operations and their financial market infrastructure. In addition, the Framework also allows for a limited degree of national discretion in the way in which each of these options may be applied, to adapt the standards to different conditions of national markets. These features, however, will necessitate substantial efforts by national authorities to ensure sufficient consistency in application. The Committee intends to monitor and review the application of the Framework in the period ahead with a view to achieving even greater consistency. In particular, its Accord Implementation Group (AIG) was established to promote consistency in the Framework’s application by encouraging supervisors to exchange information on implementation approaches. 1.3.1 Banking, Securities and other Financial Subsidiaries To the greatest extent possible, all banking and other relevant financial activities conducted within a group containing an internationally conducted within a group containing an internationally active bank will be captured through consolidation. Thus, majority-owned or - controlled banking entities, securities entities and other financial entities7 should generally be fully consolidated. 25. Supervisors will assess the appropriateness of recognizing in consolidated capital the minority interests that arise from the consolidation of less than wholly owned banking, interests that may be included in capital in the event the capital from such minority interests is not readily available to other group entities. is not readily available to other group entities. 26. There may be instances where it is not feasible or desirable to consolidate certain securities or other regulated financial entities. This would be only in cases where such holdings are acquired through debt previously contracted and held on a temporary basis, are subject to different regulation, or where non-consolidation for regulatory capital purposes is otherwise required by law. In such cases, it is imperative for the bank supervisor to obtain sufficient information from supervisors responsible for such entities. 27. If any majority-owned securities and other financial subsidiaries are not consolidated for capital purposes, all equity and other regulatory capital investments in those entities attributable to the group will be deducted, and the assets and liabilities, as well as third-party capital 10 CU IDOL SELF LEARNING MATERIAL (SLM)

investments in the subsidiary will be removed from the bank’s balance sheet. Supervisors will ensure that the entity that is not consolidated and for which the capital investment is deducted meets regulatory capital requirements. Supervisors will monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall will also be deducted from the parent bank’s capital. 1.3.2 Significant Minority Investments in Banking, Securities and Other Financial Entities Basic minority interests in banking, assurances and other money related substances, where control doesn't exist, will be dismissed from the monetary social occasion's capital by determination where control doesn't exist, will be stayed away from the monetary get- together's capital by remittance of the worth and other managerial hypotheses. Then again, such theories might be, under explicit conditions, hardened on an expert rata premise. For example, pro rata hardening may be legitimate for joint undertakings or where the administrator is satisfied that the parent is legally or genuine expected to help the component on a proportionate reason just and the other basic financial backers have the means and the energy to proportionately maintain it. The breaking point above which minority adventures will be considered tremendous and be as such either deducted or joined on an ideal for rata premise isn't settled forever by open accounting or conceivably regulatory practices. For example, the edge for steady of rata consolidation in the European Union is portrayed as worth interests of some place in the scope of 20% and half. 29. The Committee reaffirms the view set out in the 1988 Accord that corresponding crossholding of bank capital dishonestly expected to expand the capital circumstance of banks will be deducted for capital abundancy purposes. Because of issues of cutthroat equity, some G10 nations will hold their current danger weighting treatment8 as an exemption for the methodologies depicted above and present danger weighting treatment8 as a special case for the methodologies portrayed above and present danger accumulation just on a reliable premise to that applied locally by protection managers for protection firms with banking subsidiaries. The Committee welcomes protection chiefs to grow further and embrace moves toward that consent to the above principles. Banks ought to reveal the public administrative methodology utilized concerning protection substances in deciding their announced capital positions. The capital put resources into a greater part possessed or controlled protection substance might surpass the measure of administrative capital needed for such an element (surplus capital). Administrators might allow the acknowledgment of such excess capital in figuring a bank's capital ampleness, under restricted circumstances. National administrative practices will decide the boundaries and standards, like legitimate adaptability, for evaluating the sum and accessibility of surplus capital that could be perceived in bank capital. Different instances of accessibility rules include: limitations on adaptability because of administrative requirements, to burden suggestions and to antagonistic effects on outer credit evaluation organizations' appraisals. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

Banks perceiving surplus capital in protection auxiliaries will freely unveil the measure of such excess capital perceived in their capital. Where a bank doesn't have a full possession premium in a protection element, surplus capital perceived ought to be proportionate to the rate revenue held. Surplus capital in huge minority-claimed protection elements won't be perceived, as the bank would not be in a situation to coordinate the exchange of the capital in a substance which it doesn't control. 34. Bosses will guarantee that greater part possessed or controlled protection auxiliaries, which are not combined and for which capital ventures are deducted or dependent upon an elective gathering wide methodology, are themselves enough promoted to diminish the chance of future expected misfortunes to the bank. Bosses will screen activities taken by the auxiliary to address any capital setback and, in case it isn't rectified in a convenient way, the deficiency will likewise be deducted from the parent bank's capital. 1.3.3 Insurance Entities A bank that owns an insurance subsidiary bears the full entrepreneurial risks of the subsidiary and should recognise on a group-wide basis the risks included in the whole group. subsidiary and should recognise on a group-wide basis the risks included in the whole group. When measuring regulatory capital for banks, the Committee believes that at this stage it is, in principle, appropriate to deduct banks’ equity and other regulatory capital investments in insurance subsidiaries and also significant minority investments in insurance entities. Under this approach the bank would remove from its balance sheet assets and liabilities, as well as third party capital investments in an insurance subsidiary. Alternative approaches that can be applied should, in any case, include a group-wide perspective for determining capital adequacy and avoid double counting of capital. Due to issues of competitive equality, some G10 countries will retain their existing risk weighting treatment as an exception to the approaches described above and introduce risk aggregation only on a consistent basis to that applied domestically by insurance supervisors for insurance firms with banking subsidiaries. The Committee invites insurance supervisors to develop further and adopt approaches that comply with the above standards. Banks should disclose the national regulatory approach used with respect to insurance entities in determining their reported capital positions. The capital invested in a majority-owned or controlled insurance entity may exceed the amount of regulatory capital required for such an entity. Supervisors may permit the recognition of such surplus capital in calculating a bank’s capital adequacy, under limited circumstances. National regulatory practices will determine the parameters and criteria, such as legal transferability, for assessing the amount and availability of surplus capital that could be recognised in bank capital. Other examples of availability criteria include: restrictions on transferability due to regulatory constraints, to tax implications and to adverse impacts on external credit assessment institutions’ ratings. Banks recognizing surplus capital in insurance subsidiaries will publicly disclose the amount of such surplus capital recognised in their capital. Where a bank does not have a full ownership interest in an insurance entity (e.g., 50% 12 CU IDOL SELF LEARNING MATERIAL (SLM)

or more but less than 100% interest), surplus capital recognised should be proportionate to the percentage interest held. Surplus capital in significant minority-owned insurance entities will not be recognised, as the bank would not be in a position to direct the transfer of the capital in an entity which it does not control. 34. Supervisors will ensure that majority-owned or controlled insurance subsidiaries, which are not consolidated and for which capital investments are deducted or subject to an alternative group-wide approach, are themselves adequately capitalized to reduce the possibility of future potential losses to the bank. Supervisors will monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall will also be deducted from the parent bank’s capital. 1.3.4 Significant Investments in Commercial Entities Significant minority and majority investments in commercial entities which exceed certain materiality levels will be deducted from banks’ capital. Materiality levels will be determined by national accounting and/or regulatory practices. Materiality levels of 15% of the bank’s capital for individual significant investments in commercial entities and 60% of the bank’s capital for individual significant investments in commercial entities and 60% of the bank’s capital for the aggregate of such investments, or stricter levels, will be applied. The amount to be deducted will be that portion of the investment that exceeds the materiality level. 36. Investments in significant minority- and majority-owned and -controlled commercial entities below the materiality levels noted above will be risk-weighted at no lower than 100% for banks using the standardized approach. For banks using the IRB approach, the investment would be risk weighted in accordance with the methodology the Committee is developing for equities and would not be less than 100%. 1.3.5 Deduction of Investments Pursuant to this Part There deductions of investments are made pursuant to this part on scope of application, the deductions will be 50% from Tier 1 and 50% from Tier 2 capital. application, the deductions will be 50% from Tier 1 and 50% from Tier 2 capital. 38. Goodwill relating to entities subject to a deduction approach pursuant to this part should be deducted from Tier 1 in the same manner as goodwill relating to consolidated subsidiaries, and the remainder of the investments should be deducted as provided for in this part. A similar treatment of goodwill should be applied, if using an alternative group-wide approach pursuant. The limits on Tier 2 and Tier 3 capital and on innovative Tier 1 instruments will be based on the amount of Tier 1 capital after deduction of goodwill but before the deductions of investments pursuant to this part on scope of application. 1.4 IMPORTANCE OF INTERNATIONAL BANKING With the era of globalization and skip sectors limits areas and services homelands and territories sacrifice the duty of the banks, the study of the evolution of technological culture 13 CU IDOL SELF LEARNING MATERIAL (SLM)

are at their customers and understand the degree of acceptance of these electronic services to adopt development strategies in technology and information systems to keep pace with this development. The recent period has witnessed a rapid transformation from the traditional form of banks in transactions into electronic format, where the international network of information plays a key role as an intermediary for monetization business electronic banking services and therefore the banks need to a number of equipment and ingredients to the success of its role in promoting the electronic banking operations and development, which is to providing legal and legislative structure and the availability of expertise and human competencies, especially those working in the field of information and internet technology as well as the security of the information and programs that are the customer a special incentive to provide along with the commitment on the part of the bank and the existence of the trust of IT crimes and manipulation of data, programs and others, confidentiality of information and privacy and security as well as social acceptance The bank's customers to new developments and accommodate the desired payback. It is for the growth and development has become the electronic service and customer satisfaction concern for organizations where service has become the focus of interest in customer satisfaction and permanent research and identify the needs and expectations of the customer and provide a service satisfaction. The banking markets are keenly competitive in winning and retaining customers by offering the best banking services. In order to achieve this, banks are adopting a strategic management to improve the quality of banking services provided to build a long-term mutual trust relationship between the bank and its customers and customer satisfaction on them. In order to achieve the objectives of the study, the questionnaire was prepared and distributed to the study community, which is represented by the customers of the Goumhuriya Bank. The researcher was distributed 300 questionnaires to the customers of the Goumhuriya Bank in the Beni Waleed city - Beni Waleed branch and Souf Al-Jeen branch. The results showed that there is a high level of the quality of the electronic services. There is also an increase in the quality of the relationship between the customer and the bank and the existence of a positive relation to the quality of the electronic services in general at the level of quality between the customer and the bank. The study recommended the importance of increasing trust between the bank and its customers by increasing the focus on the efficiency between the customer and the service provider because the cost of maintaining the current customer is less than winning a new customer and achieving full customer satisfaction by further improving the quality of service provided to them and maintaining the level of efficiency and reliability of the quality of services. Electronic banking need work to increase attention to the subject of privacy to maintain customer data and information. The world today lives in an era called the phase information age, and now some call it named the era of knowledge where the attributes and features of this era and its mechanisms and standards radically different from all of the above, therefore imposes all of the commentary, the need for taking concepts and new mechanisms and renewable. He was the most 14 CU IDOL SELF LEARNING MATERIAL (SLM)

dangerous raised this era the emergence of competition basic fact determines the success or institutions failed, including the banks, hence banking institution in a position to become bound by the hard work and continued to gain competitive advantages for the possibility of improving its position in the market or even maintain them in the face of competing pressures, the electronic banking services are considered an element governor in the conditions of competition acute between the various banks where the style quality electronic services that would enable banks to gain a competitive edge to survive and continue in light of the changing environment resulting from renewed economic climate conditions. Importance of research is reflected largely the relationship between the bank and the customer, which is seeking banks to gain access to the client's satisfaction and do more for it, and they say that customer satisfaction is the ultimate goal of business organizations cannot be attained only by providing the best services, which must carry the value to the customer compared to the amount paid by the criticism and dissatisfaction condition for the survival of the enterprise activity. Electronic banking service is a modern concepts that urges organizations and financial institutions, especially banks to consider customers as partners and build with them a long-term intimate relationships and keep their old customers by providing excellent services to them, as many of the services the success depends on the creation-based customer and sustain relationships or interact with customers in such a way to appease them and especially those who use the service by repeating the length of time, and here I have to the service provider that the steps to build confidence and achieve customer satisfaction, and here I had to banks or were necessary urgent for banks to keep pace with the tremendous development in the world of the internet, which has become a pillar every individual and society, institution or organization. 1.5 GLOBALIZATION OF BANKING Web banking refers to the use of web as a distant delivery channel for banking trade. Web based or web banking is poised to become the future face of banking trade. The number of visits to the bank can be minimized effectively by operating from the web account. Thus, the number of contacts required to perform a transaction and solve a problem has been reduced through web banking. The usual twigs of banks have culminated into PC networks, whereby the customer can draw all the benefits and trade of the bank at a single click of the mouse. The number of individuals utilizing web trade has increased considerably. In 2006, about 12% of the 38.5 million web users in India were banking web and the figure for web banking was estimated to rise to 16 million by 2013-14. The web population itself is set to grow to 100 million by 2013-14. The number of individuals utilizing web trade has increased considerably. In 2006, about 12% of the 38.5 million web users in India were banking web and the figure for web banking was estimated to rise to 16 million by 2013-14. The web population itself is set to grow to 100 million by 2013-14. Multiple trade can be offered through web banking such as, bill payment trade, Fund transfer, railway pass etc. 15 CU IDOL SELF LEARNING MATERIAL (SLM)

The Computerization and subsequent development in history of Indian banks can be traced back to 1966 when Indian Bankers Association (IBA) along with exchange banks association signed first wage settlement with the unions, which accounted for the use of IBM or ICT accounting machines for inter-branch reconciliation etc. IN 1970s, SBI installed a ledger- posting machine along with a mainframe PC at selected twigs. A committee on Computerization and mechanization was appointed by RBI in 1983 under headship of Dr. C. Rangarajan. Its objective was to chalk out a plan for mechanization of Indian banking trade. It was recommended that Computerization and installation of Advanced Ledger Posting Machines (ALPM) at branch, regional and head offices of banks will bring around a new era in banking. In 1991 Narasimhan committee paved way for reform phase in banking. In the year 1994 Saraf committee was constituted by RBI that recommended the use of Electronic Fund Transfer System, beginning of electronic clearing trade and extension of Magnetic Ink Character Recognition beyond metropolitan cities and twigs. Over the last five years the rate of adoption of IT by foreign and private sector bank in the country has been significant, which can be attributed to fierce competition and the web phenomena world-wide. The entrance of private and global banks with their greater state of the art technology-based trade pushed the Indian banks to follow the suit by going in for the latest technologies to meet the risk of competitors and keep their customer base. Over the last five years the rate of adoption of IT by foreign and private sector bank in the country has been significant, which can be attributed to fierce competition and the web phenomena world-wide. The entrance of private and global banks with their greater state of the art technology-based trade pushed the Indian banks to follow the suit by going in for the latest technologies to meet the risk of competitors and keep their customer base. Expertise was the normal for bank introducing ATM and POS (Point of sales) in 1970s, telephone banking in 1980s and web banking in 1990s. Shared Payment Network System (SPNS) was set up In Mumbai in February 1997. It was a network of 28 ATMs with 11 banks. ATM card was branded as 'SWADHAN'. SPNS could link with international hubs such as VISA and MASTERCARD. CITI-BANK a US multinational was first bank in India to offer ATM card facility in 1985. In the last four years have seen spectacular changes making customer’s ease critical aspect of banking. Indian metros are swelling ahead in web banking usage. Today the delivery channel of banks includes direct dial up connections, private networks, public networks etc. and the devices include telephone, Personal PCs including Automated Teller Machines, etc. Technology has thus initiated an example shift from branch banking to 'Anywhere Anytime' banking. Today banks are able to manage in much better way, thereby gaining greater efficiency in operations thanks to technology. Electronic-banking is the term that signifies and encompasses the entire sphere of technology initiatives that have taken place in the banking trade. Electronic-banking is a universal term making use of electronic channels through telephone, mobile telephones, web etc. for delivery of banking trade and products. The concept and scope of electronic-banking is still in the transitional stage. Electronic-banking increases efficiency in the sphere of effective payment and accounting system thereby enhancing the speed of delivery of banking 16 CU IDOL SELF LEARNING MATERIAL (SLM)

trade significantly. It allows customers to access banking trade electronically such as to pay bills, transfer funds, view ac-counts or to obtain any banking information and advice. It also facilitates new relationships with consumers, regulatory authorities, sup-pliers and banking partners with digital-age tools. Customers and bank relationships will become more personalized, resulting in new modes of deal processing and service delivery. Banks are faced with a number of significant issues, how to take full benefit of new technology, how electronic-banking modify the ways customers relate with the service provider etc. The banking trade has been considerably prejudiced by growth of technology. The Changing Role of International Banking in Development Finance The Relation between the International banking industry and the developing world is changing, with implications for the growth and financial health of both sides. Significant transformation in the structure of the industry, coupled with rapid economic growth and financial liberalization in the developing world, has created a new locus of mutual interest and new dynamics of engagement extending well beyond the traditional realm of provision of trade credit and financing sovereigns in distress. With over 2,027 local offices established in 127 developing countries, the international banking industry now has the operating infrastructure and technology platforms to book overseas transactions from a large network of local agencies, subsidiaries, and branches located in developing countries. Aided by growing cross-border lending activity, international banks play an increasingly important—in some countries, even dominant—role in the financing structure and growth prospects of developing countries. In many developing countries, international banks now provide the primary gateway through which corporations, sovereigns, and banks transfer funds abroad, borrow in short and medium terms, and conduct foreign exchange and derivatives operations. Foreign claims on developing-country residents held by major international banks reporting to the Bank for International Settlements (BIS) currently stand at $3.1 trillion and account for 9.5 percent of global foreign claims, up from $1.1 trillion in 2002. As of end-June 2007, developing-country residents’ deposits with international banks amounted to $917 billion, a threefold increase since the end of 2002. The resilience of the relationship between international banks and developing countries, however, 81 is being tested by the current episode of financial turmoil. The realization of how powerfully shocks to a relatively small segment of the U.S. credit markets spilled over to capital markets in other developed countries in the summer of 2007 and onward to emerging markets highlights the type of new challenges policy makers and market participants are likely to face in an environment of securitized credit and an increasingly interlinked international banking system. Nine months into the turmoil, it is evident that conventional policy prescriptions borne out of the experience of the string of emerging-market financial crises of the 1990s and early 2000s offer some, but not definitive, guidance. The fact that the primary source of instability this time around resides in mature capital markets with significant global impact calls for stronger international cooperation in monetary policy, banking regulation, and liquidity management, 17 CU IDOL SELF LEARNING MATERIAL (SLM)

all of which need to account for the growing financial links between emerging and mature markets. Although policy coordination to date has mainly taken the form of collaboration in liquidity provision, policy makers, regulators, scholars, and market participants have begun to focus on a longer-term reassessment of the stringency of financial regulation and the role of asset markets in financial stability. This chapter highlights the growing importance of international banking activity for development finance, focusing on financial intermediation, economic benefits, and financial stability consequences of increased presence of foreign banks in developing countries. It identifies the universe of international banks active in developing countries; examines the characteristics of these banks in terms of country exposure, home country jurisdiction, and links with global money markets; and considers how international banks may serve as a vehicle of transmission of global financial shocks to developing countries. The chapter also maps out the broad policy challenges facing developing countries in dealing with the current turmoil, while underlining the longer-term benefits of their integration into global financial system. The participation of foreign banks in developing countries’ financial systems has increased rapidly in recent years. As of 2006, 897 foreign banks had established a majority-ownership stake in developing countries. Foreign-owned lenders account for a particularly high proportion of local banking assets in two regions— 70 percent in several Eastern European countries, and approximately 40 percent in some Latin American countries—compared with less than 10 percent in developed economies such as France and Italy. The presence of foreign banks has increased in developing regions for different reasons: in Sub-Saharan Africa because of the limited reach of local banking infrastructure; in Europe and Central Asia along with regional integration into the European Union; and in Latin America as a way for governments to increase openness to foreign competition. In many countries, however, foreign bank presence was permitted after a financial crisis with local banks suffering from massive nonperforming loans and was motivated by the need to recapitalize and re-establish a functioning banking system. On the supply side, home country legislation has allowed banks to expand in foreign markets, advances in information technology have enabled banks to automate and manage large information flows across national borders, and a fundamental shift in business strategy has brought global banks close to customers through local activities. The increased presence of foreign banks has generated substantial economic benefits to some developing countries through efficiency gains in banking systems, increased access to capital, more sophisticated financial services, and expertise in dealing with ailing banks. Foreign banks operating in regions such as Europe and Central Asia tend to have lower overhead costs and net interest margins than their privately owned and government-owned domestic counterparts, although the impact varies depending on the mode of entry and the policy and institutional environment of the host country. Foreign bank entry can also lead to consolidation of fragmented local banking systems and the realization of economies of scale and scope. These improvements in financial sector development have provided an important avenue for increasing growth in developing countries. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

Like globalization in general, the increased role of foreign banks can also expose developing countries to certain macroeconomic risks. During the current episode, such risks have played out in developing countries’ greater vulnerability to foreign shocks. Preliminary econometric investigation establishes a statistically significant relationship between international bank lending to developing countries and changes in global liquidity conditions, as measured by spreads of interbank interest rates over overnight index swap (OIS) rates and U.S. Treasury bill rates. A 10 basis-point increase in the spread between the London Interbank Offered Rate (LIBOR) and the OIS sustained for a quarter, for example, is predicted to lead to a decline of up to 3 percent in international bank lending to developing countries. Evidence from the international syndicated loan market already reflects this prediction: both the number of syndicated loans signed and the total volume of lending declined considerably in the fourth quarter of 2007 and first quarter of 2008 compared with the same periods in previous years. Countries particularly active in interbank markets— Brazil, China, Hungary, India, Kazakhstan, the Russian Federation, South Africa, Turkey, and Ukraine—need to be concerned about the possibility that their domestic banks will face funding difficulties in international markets should liquidity pressures in interbank markets remain at elevated levels. Also, several countries in Eastern Europe and Central Asia have experienced rapid private credit expansion in recent years on account of their banks borrowing extensively overseas and significant foreign bank presence in their credit markets. 1.6 SUMMARY  Transfer risk is an important part of country risk. Transfer risk reflects the possibility that an asset cannot be serviced in the currency of payment because the obligor’s country lacks the necessary foreign exchange or has put restraints on its availability.  In general, transfer risk is relevant whenever a bank extends credit across international borders and the extension of credit is denominated in a currency other than the obligor’s country of residence. In these situations, an obligor must, in the absence of an ability to obtain and retain foreign currency outside the country of residence, obtain the foreign currency from domestic sources. When a country is beset by economic, political, or social turmoil leading to a domestic shortage of foreign currencies, the obligor could default on its external obligations because it is unable to obtain foreign currency at a reasonable price.  Although a country risk management program must be based on the broadly defined concept of country risk, the federal banking agencies consider transfer risk when assigning classifications, designating cross-border exposures, and determining minimum transfer risk reserve requirements on cross-border exposures.  For sovereign exposures, ICERC’s designation is the only applicable rating. However, if they are carried on the institution’s books as an investment, securities issued by a 19 CU IDOL SELF LEARNING MATERIAL (SLM)

sovereign entity are also subject to the interagency Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by Banks and Thrifts. If a rating is different under the two systems, the examiner should assign the more severe of the two ratings. For private sector exposures, the applicable rating is the more severe of either the ICERC-assigned transfer risk rating for the country or the examiner-assigned credit risk rating (including ratings assigned as a result of the Shared National Credit Program). Further discussion of the application of transfer risk ratings can be found in the ICERC Guide.  Contingent liabilities subject to transfer risk (including commercial and standby letters of credit as well as unfunded loan commitments) that will result in a concomitant increase in bank assets if the contingencies convert into an actual liability (Category I contingent liabilities) should also be considered for special comment or classification, as applicable. Contingent liabilities extended for classification should be classified according to the type and tenor of the bank asset that would result from conversion of the contingency into an actual liability. For example, commercial import/export letters of credit would be accorded the same classification as trade transactions, while commitments to fund long-term project loans would be accorded the same classification as long-term loans. In cases where type or tenor is not easily discernible and the exposure is accorded a split classification, the more severe classification should prevail.  The ICERC consists of representatives from all federal banking agencies that are jointly responsible for providing uniform transfer risk designations. Transfer risk designations serve as a starting point for adverse classifications of all cross-border exposures. Aided by tools such as balance-of-payment statistics and internal studies of country conditions, the ICERC makes decisions on the extent of transfer risk in countries where U.S. bank exposure meets the committee’s review criteria. 1.7 KEYWORDS  Acceptance − A time draft (bill of exchange or usance draft) drawn by one party and acknowledged by a second party. The drawee, known as the acceptor, stamps or writes the word accepted on the face of the draft and, above their signature, the place and date of payment. Once the draft is accepted, it carries an unconditional obligation on the part of the acceptor to pay the drawer the amount of the draft on the date specified.  Account-dealing – Foreign-exchange dealing that involves settlement from bank to bank in the due from accounts. No third party (bank) is involved  Account Party – The party, usually the buyer, who instructs the bank to open a letter of credit and on whose behalf the bank agrees to make payment 20 CU IDOL SELF LEARNING MATERIAL (SLM)

 Ad Valorem – A term meaning according to value, used for assessing customs duties that are fixed as a percentage of the value stated on an invoice.  American Depository Receipt (ADR) – ADRs are depository receipts for shares of stock in a foreign company held in safekeeping by a U.S. bank. The ADRs are purchased and sold through listed exchanges. 1.8 LEARNING ACTIVITY 1. Create a session on Significant Minority Investments in Banking, Securities and Other Financial Entities. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a survey on Banking, Securities and other Financial Subsidiaries. ___________________________________________________________________________ ___________________________________________________________________________ 1.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is banking? 2. Define International Banking? 3. Define Securities? 4. What are Financial Subsidiaries? 5. Write the importance of International Banking? Long Questions 1. Explain the concept of International Banking. 2. Explain the Banking, Securities and other Financial Subsidiaries. 3. Illustrate the Significant Minority Investments in Banking, Securities and Other Financial Entities. 4. Illustrate the Significant Investments in Commercial Entities. 5. Examine the Importance of International Banking. B. Multiple Choice Questions 21 CU IDOL SELF LEARNING MATERIAL (SLM)

1. What happens when as trade between two countries can be useful if cost ratios of goods? a. Undetermined b. Decreasing c. Equal d. Different 2. What is the term Euro Currency market referring to? a. The international foreign exchange market b. The market where the borrowing and lending of currencies take place outside the country of issue c. The countries which have adopted Euro as their currency d. The market in which Euro is exchanged for other currencies 3. Which of the following theories suggests that firms seek to penetrate new markets over time? a. Imperfect Market Theory b. Theory of Comparative Advantage c. Product cycle theory d. None of these 4. What does dumping refer to? a. Reducing tariffs b. Sale of goods abroad at low a price, below their cost and price in home market c. Buying goods at low prices abroad and selling at higher prices locally d. Expensive goods selling for low prices 5. What differs in international trade and domestic trade? a. Different government policies b. Immobility of factors c. Trade restrictions d. All of these Answers 22 1-d, 2-b, 3-c, 4-b, 5-d CU IDOL SELF LEARNING MATERIAL (SLM)

1.10 REFERENCES References book  Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum  Macerich, George (30 June 2000). \"Central Banking: The Early Years: Other Early Banks\". Issues in Money and Banking. Westport, Connecticut: Praeger Publishers (Greenwood Publishing Group).  Compare: Story, Joseph (1832). \"On Deposits\". In Schouler, James (ed.). Commentaries on the Law of Bailments: With Illustrations from the Civil and the Foreign Law (9 ed.), Boston. Textbook references  Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company.  HISTORY OF BANKING\". History World. Retrieved 20 August 2020. The Danish loan [1803] is the first of many such transactions on behalf of governments which rapidly establish the Rothschild family as Europe's most powerful bankers, rising to a pre-eminence comparable to that of the Medici and the Fugger in earlier centuries.  Van Loo, Rory (1 February 2018). \"Making Innovation More Competitive: The Case of Fintech\". UCLA Law Review. Website  https://en.wikipedia.org/wiki/Bank#References  https://www.researchgate.net/publication/271530629_The_Changing_Role_of_Intern ational_Banking_in_Development_Finance/link/54cc0a860cf298d65659fc1c/downloa d  file:///C:/Users/santo/Downloads/gdf_ch03_081-120_web.pdf 23 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2 - INTERNATIONAL COMMERCIAL BANKING STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 International Commercial Bank Liabilities 2.3 Bank’s Sources of Funding 2.3.1 Savings Deposits 2.3.2 Reserve Funds 2.3.3 Shareholders Capital 2.3.4 Retained Earnings 2.4 Eurocurrency Deposit Markets 2.5 Inter-Bank Market 2.6 Summary 2.7 Keywords 2.8 Learning Activity 2.9 Unit End Questions 2.10 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the concept of International Commercial Bank.  Illustrate the Bank’s Sources of Funding.  Examine the concept of Shareholders Capital. 2.1 INTRODUCTION The Industrial and Commercial Bank of China (ICBC), was founded on January 1st 1984. It was the first state owned commercial bank of the Peoples Republic of China (PRC). Its headquarters is in Beijing. Following the economic reforms of Deng Xiaoping’s, which started in the late 1970s, financial businesses concerning industrial and commercial sectors 24 CU IDOL SELF LEARNING MATERIAL (SLM)

were transferred from the central bank to ICBC. The agreement that was set in September 1983 steered the wheels of the coming up of China’s rising specialized banking systems. In October 2006, ICBC started to have public shareholders despite the fact that the government retaining the management of the bank. Forbes “Global 2000” ranked ICBC the world’s largest institution in 2013. The fact that ICBC has control of both private owners and the government makes it a good case study to understand the change in China’s financial industry. The bank has a mission to serve the real economy with its immediate business, and thus along with the real economy it undergoes challenges, notices successes and grows. The bank has been able to manage risks through taking risk-based approach and not taking the minimal things for granted. Furthermore, the bank has been keen to abide by and understand set rules of commercial banks and this has made it a century-old bank. It has been able to enhance a good strategy of mega asset management, mega retail, mega investment banking, embracing the internet and international development though being dynamic to change while maintaining its stability. The construction of big data collection has been of importance to ICBC’s management techniques. In the late 1990s, the bank started focusing on the impact brought about by information technology in their daily activities. Several branches of the bank adopted computerized input. Adapting this technology made their services more efficient and saved a lot on the cost of hiring employees. Computerized records made it easy to access past records and the headquarters of ICBC could easily have a control on the branches. From the investment on big data, there has been an increase in human and economic resources. ICBC invested on a project in 1999, meant to centralize customer data. By 2014, the data centre based in Shanghai had recorded over 430 million customer records, which was a rise of the previous years. Furthermore, ICBC invested on data backup to secure records. Big data innovation has been of importance to the bank to its daily activities. One it has enabled the bank to manage records of individual customers easily. A customer’s data collected from one of the departments is available in all the departments. Thus, the bank is able to evaluate a customer’s comprehensive value. Two, the bank has been able to conduct Email-based marketing. From the information collected from branches, the marketing department is able to locate customers and proceed with marketing. Third, big data has enabled rating of customers. Hence, it is easy to know their qualifications and their levels of earnings. From the set strategies, ICBC has been able to realize some progress in their finances. For instance, at the end of 2018 it recorded a 6.2% rise on its assets higher than the previous year. The bank also realized a huge increase in their net profits of 3.9% compared to the year 2017. The financial services strategies put in place by ICBC brought more proceeds to the bank and enhanced the efficiency of services the customers. 25 CU IDOL SELF LEARNING MATERIAL (SLM)

For an unshakable and vigorous banking system, banks should be examined and analysis done to it such that rectifications and elimination of possible liabilities will be easy. Therefore, CAMELS being a well-known strategy, is normally a recommended tool to be deployed in such scenarios. It was established in United States and was used as a regulatory assessment system to supervise general condition of a bank. CAMELS is an abbreviation that was got from five operations in a financial institution. These are namely, Capital tolerability, Asset worth, Management superiority, Earning capacity as well as Liquidity. The ‘S’ in CAMELS was an additional segment which primarily represents degree of risk in the market but for this paper, it is neglected due to insufficient information. In Nepal, trend of CAMEL was examined using descriptive tactic. Policies of monetary occurrence included restoration in assets, equity as well as income per share. The outcome revealed a drop in all factors during times of economic difficulty. However, this study was incompetent since it failed to employ relevant ways of analysis to investigate impact relationship. The effectiveness of CAMELS in knowing capital appropriateness of institutions in Nigeria was also one of the studies done. It acknowledged that CAMELS assessment is suitable in finding out the ratio of capital required to financial institutions in Nigeria. Similarly, another research concerning comparative enactment of the examination of financial field in Nigeria was done 2005 using CAMELS. It is also evident that there is a link between CAMEL structure and overall performance of a bank. Such studies excluding those of Echekoba et, al. 2014 have included examples preceding those of 2012. New trials nationally influence undertakings of financial institutions like depreciation of Naira from that of the dollar. This however has a negative effect to the economy. An additional strategy of the nation that makes CAMEL essential is institution of Monetary Single Account 2.2 INTERNATIONAL COMMERCIAL BANK LIABILITIES Liabilities and assets play a crucial role in any business and these are helpful to calculate the net worth of the company. This study focused on asset and liability management policies in a company. However, the concept of the ALM framework and the management procedure is described in this study. Apart from that, the importance of this ALM in the organization is described in this study which is essential to mitigate the possible risks of the company. The entire study highlights the application of the ALM in both theoretical and practical aspects. In addition to that, mitigation strategies that are applied by bankers in reducing the impact of risk have also been discussed in this study. The banking sector of the US has been taken into consideration for determining and generating results within 31 commercial banks. Besides, data analysis has been done in the form of descriptive research and that helped in governing the types of loan lending towards its customers. Assets and liabilities are the two most components of the commercial banking sector. Assets refer to what a company and liabilities are what the firm owes. Moreover, both of these elements are listed on the balance sheet of the company. The balance sheet is the financial 26 CU IDOL SELF LEARNING MATERIAL (SLM)

statement that shows the financial health of the company. The net worth of the company can be calculated by subtracting the liability of the company from the assets. This study is based on the management of both assets and liabilities in the commercial banking sector. Both theoretical and practical aspects of the management method will be elaborated in this study by reviewing past literature. The study mainly focuses on the importance of the ALM framework that helps in generating debt factors and risk analysis that is faced by a banking institution Since the 1970s ALM framework has been adopted by several organizations belonging to the commercial banking industry. Zhang et al. stated that at the preliminary stage the management process of assets and liabilities of the company was actually based on a simple gap model which determined the risks of the company in terms of the cash flow as well as gaps between liabilities and assets of the company. As said by Riley et al, it can be evaluated that financial organizations experienced a lot of issues which stated that risk management had evolved in the past several years which developed the gap models day by day. However, rate- sensitive assets and liabilities of the company are important for handling different kinds of financial methods in a proper manner. The auditing process is done in a better manner through adopting the ALM framework in business. Present growth within the capital markets as well as the adoption of technology and theoretical framework in business is beneficial for risk analysis in an accurate manner. As per the reviews of Owusu and Alhassan, successful implementation of the ALM framework in business is dependent on the understanding of the ALM concept in depth. However, comprehensive recognition of different kinds of banking risks helps to enhance the scope of business. Besides providing a venue for releasing the risks of the firm, the ALM framework allows for effective management and quantifiable assessment of multiple risk categories. Apart from this, an improper ALM program in the business also provides the advantages to understand the rewards as well as risk trade-offs in which the banking sector is associated. Another step of implementing the ALM framework in the company is the development of the IS or information system of the company. The risk management process involves monitoring and gathering relevant data in the company. The data set of the company provides authentic and valid information about the level and severity of the financial risk which is affecting the institution belonging to the banking sector of the country. On the other hand, the implementation of a proper decision-making process for the ALM framework in the company helps to follow correct business operations in the company. However, as per the reviews of Duarte et al., it can be stated that the Asset Liability Committee or ALCO takes the responsibility to carry out these methods in the banking industry of several countries. Henceforth, there are different kinds of methods and steps that can be applied by a financial institution to implement the AML framework in the company. Adoption of a correct technique can be helpful for the organization to protect the company from financial risks. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

Adoption of proper methods of asset and liability management is beneficial for achieving growth and development in business. The Liquidity needs can be met by the organization through proper planning of asset and liability management in the company. In addition to this, maturity patterns of the liability and asset management could be arranged through proper liability management strategies in the business. According to the reviews of Albrecher et al., it can be stated that asset management and liability management in business helps to follow the practices of spread and gape management in business. Additionally, analysis of interest sensitivity in business is possible through asset management policies adopted in the commercial banking sector. Moreover, the ALM framework allows the financial institution for quantifying and recognizing all the risks that appeared in the balance sheet of the company. In the opinion of Abou-El-Sood and El-Ansary, the adoption of correct management strategies for handling assets as well as liabilities in the company is beneficial to decrease the risk associated with a mismatch of these two components in business. Hence, a strategic matching process helps to manage all the liabilities and assets of the company. Financial structures like commercial banks could achieve huge profitability and efficiency while reducing the risks of the company. In addition to this, researchers found that the ALM framework is a dynamic and comprehensive method for monitoring, measuring as well as managing different kinds of business risks in corporate banks. As per the ideas of Freire and Kopanyi, the ALM function enhances the management process of market risks, liquidity risks, and trading risks. Along with that capital and funding plans of the company can be done successfully by following a correct approach for asset management in the banking industry. Moreover, growth projection and profit planning can also be done in a proper manner through following proper techniques and models of asset and liability management in the company. There are different kinds of assets of a business such as tangible assets, fixed assets, operating assets, intangible assets, current assets, and long-term assets. In addition to this, liabilities take financial strength out of the company. For example, if a company has taken a loan from another company or individual then it is called the liability management of the company. Liabilities include securities, reserves, and loans of the company. However, deposits, as well as bank borrowing from any other institution, are called the liability of a company. Both of these two elements are important to operate different kinds of functions in the company. Financial market functions can be performed in a proper manner through asset and liability management policies adopted by a firm. Liability and asset management is a major risk management method followed in commercial banking sectors. Hence, proper strategies need to be followed by the organizations in order to follow correct approaches of asset management and liability management in the organization. In the initial step, it is necessary to identify the ALM concept in detail. ALM framework allows us to follow an authentic process in the banking system. In addition to this, banking risks can be recognized in a comprehensive manner by following this strategy. Improvement 28 CU IDOL SELF LEARNING MATERIAL (SLM)

of decision-making methods in the banking system also helps to follow technological approaches for providing a better structure in order to complete financial works in the company. However, proper leadership approaches allow us to take discussions in an accurate manner de Oliveira et al. According to the theory of leadership, proper monitoring and training sessions need to be followed by the organization for motivating all the employees in the company. All though there are significant risks associated with financial activities in the banking industry, implementation of the AML strategy will provide growth and development to firms. All the assets and liabilities are crucial factors in a business as they provide financial strength to the company. Asset and liability management (ALM) is defined as a critical function that is needed in every financial and banking institution for becoming volatile. In addition to that, ALM acts as a comprehensive and dynamic framework that provides better measuring perspective, management, and monitoring risks. As opined by Abou-El-Sood and El-Ansary, asset- liability management acts as evidence towards banks regarding determination of maximizing risks. Apart from that, taking up business decisions is possible through ALM and it further helps in reducing complexities in the financial market. The strategies which are applied through the application of ALM helps in employing a better combination of financial planning and risk management. As stated by Nicoletti, practice of liability and asset is needed to bring adjustment into capital and regulatory frameworks. In addition to that, it is also needed in commercial banking for maximizing investments and increasing profitability in business. Besides, long-term stability is provided through the application of the ALM framework into commercial banking. For example- In the US, banks are responsible for applying ALM as a coordinated process that helps in maintaining the entire balance sheet. In addition, liabilities are easily mitigated over the long-term and that increases chances of growing profitability within the bank. In the case of U.S. Bancorp, it has been found that this bank tends to carry out its methods of working through online investing options and advisor-delivered work. This further helps them in developing an industry composed of better leaders and leadership programs. A balance sheet is an accounting tool that lists assets and liabilities. An asset is something of value that is owned and can be used to produce something. For example, the cash you own can be used to pay your tuition. A home provides shelter and can be rented out to generate income. A liability is a debt or something you owe. Many people borrow money to buy homes. In this case, the home is the asset, but the mortgage (i.e., the loan obtained to purchase the home) is the liability. The net worth is the asset value minus how much is owed (the liability). A bank’s balance sheet operates in much the same way. A bank’s net worth is also referred to as bank capital. A bank has assets such as cash held in its vaults and monies that the bank holds at the Federal Reserve bank, loans that are made to customers, and bonds. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

The “T” in a T-account separates the assets of a firm, on the left, from its liabilities, on the right. All firms use T-accounts, though most are much more complex. For a bank, the assets are the financial instruments that either the bank is holding or those instruments where other parties owe money to the bank—like loans made by the bank and U.S. government securities, such as U.S. Treasury bonds purchased by the bank. Liabilities are what the bank owes to others. Specifically, the bank owes any deposits made in the bank to those who have made them. The net worth, or equity, of the bank is the total assets minus total liabilities. Net worth is included on the liabilities side to have the T account balance to zero. For a healthy business, net worth will be positive. For a bankrupt firm, net worth will be negative. In either case, on a bank’s T-account, assets will always equal liabilities plus net worth. When bank customers deposit money into a checking account, savings account, or a certificate of deposit, the bank views these deposits as liabilities. After all, the bank owes these deposits to its customers, and are obligated to return the funds when the customers wish to withdraw their money. the Safe and Secure Bank holds $10 million in deposits. Loans are the first category of bank assets. Say that a family takes out a 30-year mortgage loan to purchase a house, which means that the borrower will repay the loan over the next 30 years. This loan is clearly an asset from the bank’s perspective, because the borrower has a legal obligation to make payments to the bank over time. But in practical terms, how can the value of the mortgage loan that is being paid over 30 years be measured in the present? One way of measuring the value of something—whether a loan or anything else—is by estimating what another party in the market is willing to pay for it. Many banks issue home loans, and charge various handling and processing fees for doing so, but then sell the loans to other banks or financial institutions who collect the loan payments. The market where loans are made to borrowers is called the primary loan market, while the market in which these loans are bought and sold by financial institutions is the secondary loan market. One key factor that affects what financial institutions are willing to pay for a loan, when they buy it in the secondary loan market, is the perceived riskiness of the loan: that is, given the characteristics of the borrower, such as income level and whether the local economy is performing strongly, what proportion of loans of this type will be repaid? The greater the risk that a loan will not be repaid, the less that any financial institution will pay to acquire the loan. Another key factor is to compare the interest rate charged on the original loan with the current interest rate in the economy. If the original loan made at some point in the past requires the borrower to pay a low interest rate, but current interest rates are relatively high, then a financial institution will pay less to acquire the loan. In contrast, if the original loan requires the borrower to pay a high interest rate, while current interest rates are relatively low, then a financial institution will pay more to acquire the loan. For the Safe and Secure Bank in this example, the total value of its loans if they were sold to other financial institutions in the secondary market is $5 million. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

The second category of bank asset is Treasury securities, which are a common mechanism for borrowing used by the federal government. Treasury securities include short term bills, intermediate term notes and long-term bonds. A bank takes some of the money it has received in deposits and uses the money to buy bonds typically bonds issued by the U.S. government. Government bonds are low-risk because the government is virtually certain to pay off the bond, albeit at a low rate of interest. These bonds are an asset for banks in the same way that loans are an asset: The bank will receive a stream of payments in the future. In our example, the Safe and Secure Bank holds bonds worth a total value of $4 million. The final entry under assets is reserves, which is money that the bank keeps on hand, and that is not loaned out or invested in bonds—and thus does not lead to interest payments. The Federal Reserve requires that banks keep a certain percentage of depositors’ money on “reserve,” which means either in the banks’ own vaults or as deposits kept at the Federal Reserve Bank. This is called a reserve requirement. Additionally, banks may also want to keep a certain number of reserves on hand in excess of what is required. The Safe and Secure Bank is holding $2 million in reserves. The net worth of a bank is defined as its total assets minus its total liabilities. For the Safe and Secure Bank shown, net worth is equal to $1 million; that is, $11 million in assets minus $10 million in liabilities. For a financially healthy bank, the net worth will be positive. If a bank has negative net worth and depositors tried to withdraw their money, the bank would not be able to give all depositors their money. 2.3 BANK’S SOURCES OF FUNDING A commercial bank is a financial institution that helps community members open checking and savings accounts and manages money market accounts. However, as the name implies, a commercial bank also has a broader, business-oriented focus. Most commercial banks offer business loans and trade financing in addition to the more traditional deposit, withdrawal and transfer services. With such a diverse business profile, the sources of funds in commercial banks are varied. 2.3.1 Savings Deposits Deposits remain the main source of funds for a commercial bank. The money collected can go toward paying on interest-bearing accounts, completing customer withdrawals and other transactions. As of February 19, 2018, the total amount of savings deposits held at commercial banks and other banking institutions in the U.S. totalled more than $9.1 trillion. Savings account deposits are especially important to banks as the federal Regulation D law limits the number of times a savings account holder can withdraw money. Currently, the law mandates that account holders can perform six transfers per month in the form of online, telephone or overdraft transfers. This allows banks to use the accounts' funds and still meet the withdrawal needs of the customer. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

2.3.2 Reserve Funds A commercial bank builds a reserve fund with deposits so it can pay interest on accounts and complete withdrawals. Ideally, a bank's reserve fund should be equal to its capital. A bank builds its reserve fund by accumulating surplus profits during healthy financial years so that the funds can be used in leaner times. On average, a bank tries to accumulate approximately 12 percent of its net profit to build and maintain its reserve fund. 2.3.3 Shareholders Capital Some commercial banks that trade on the stock exchange can use shareholders' capital to receive the money it needs to stay in business. For example, if a company sells shares on the market, it increases both its cash flow and its share capital. This process is also known as equity financing. Banks can only report the amount of capital that was initially on their balance sheet. Appreciation and depreciation of shares do not count toward the total sum of a shareholder's capital. Each time a bank makes a profit it can generally make two choices that include paying dividends to their shareholders or reinvesting the money back into the bank. Most banks utilize both options as they will retain a portion of the profit and pay the remainder to their shareholders. The amount reinvested into the bank typically depends on the company's policy and the condition of the stock market. 2.3.4 Retained Earnings A lot of commercial banks earn retained earnings or fees to help fund their business. A retained earning can be collected through overdraft fees, loan interest payments, securities and bonds. Banks also charge fees for providing customers with services such as maintaining an account, offering overdraft protection and also monitoring customers' credit scores. 2.4 EUROCURRENCY DEPOSIT MARKETS It is a market for Borrowing and Lending of currency at the centre outside the country in which the currency is issued. It is different than the Foreign Exchange Market, country in which the currency is issued. It is different than the Foreign Exchange Market, wherein the currency is bought and sold. Euro (€) is a single currency which was launched on 1st Jan’1999. . Now Euro (€) is the official currency of 16 of the 27 member states of the European Union (EU). These 16 states include some of the most technologically advanced countries of the European continent and are collectively known as the Euro zone. The Euro is an important international reserve currency. Euros have surpassed the US dollar with the highest combined value of cash in circulation in the world. The name euro was officially adopted on 16 December 1995. The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. The currency was introduced initially in non-physical forms, such as traveller’s checks and electronic bank in Euro coins and banknotes entered circulation on 1 32 CU IDOL SELF LEARNING MATERIAL (SLM)

January 2002. The Euro is administered by the European Central Bank (ECB) based in Frankfurt, and the Euro system, comprising of the various central banks of the Euro zone nations. After World War II, the number of US Dollars outside the United States increased enormously, both as a result of the Marshall Plan and as a result of imports into the USA. enormously, both as a result of the Marshall Plan and as a result of imports into the USA. As a result, large sums of US Dollars were in custody of foreign banks outside the United States. Many foreign countries, including the Soviet Union, had deposits in US dollars in USA banks. After the invasion of Hungary in 1956, the Soviet Union feared that its deposits in American banks could be frozen as retaliation. A British bank offered the Soviets the possibility of receiving its US Dollar reserves as deposits, outside the USA. This operation was considered the first to create so-called Eurodollars. Gradually, as a result of the successive commercial deficits of the United States, the Eurodollar market expanded until today where it is available in virtually every country. Eurodollar market expanded until today where it is available in virtually every country. Today, Eurocurrency refers to deposits in any currency residing in banks that are located outside the borders of the currency’s country. For example, a deposit denominated in Yen residing in an Australian bank is a Eurocurrency deposit, or more specifically a Euro Yen deposit. Similar external deposits apply to Euro Sterling, Euro Swiss Franc, etc. While opening up of the domestic markets began only around the end of seventies, a truly international financial market had already been born in the mid-fifties and gradually in size and scope during sixties and seventies. This refers to the well-known ‘Eurocurrencies Market’. It is the largest offshore market. Prior to 1980, Eurocurrencies market was the only truly international financial market of any significance. It is mainly an inter-bank market trading in time deposits and various debt instruments. What matters is the location of the bank neither the ownership of the bank nor ownership of the deposit. During 1950s, Russians were earning dollars from the sale of gold and other commodities and wanted to use them to buy grain and other products from the West, commodities and wanted to use them to buy grain and other products from the West, mainly from the US. However, they did not want to keep these dollars on deposits with the banks in New York, as they were apprehensive that the US government might freeze the deposits if cold war intensified. They approached banks in Britain and France who accepted these dollar deposits. Later on, till 1980s, such deposits were by and large in Europe only. So, words coined were Euro Yen, Euro Rupee; in general; Eurocurrency deposits. Since 1990, the markets have expanded geographically and also in volume, but the prefix ‘Euro’ has still remained. Eurocurrency markets are in all the countries having significant international transactions and capital flows. Eurocurrency does not any longer refer to Europe in any way. It strictly and really means ‘offshore’ and not necessarily always refers to Europe. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

Despite the complexity associated with the bond market, a bond is simple and it might be considering a bit boring when compared with a stock. After all, a stock represents a piece of a company's wealth. An evaluation of a stock requires an evaluation of the entire company's worth. An ordinary bond is an agreement that merely entitles one party to make and another to receive a series of cash flows. While differences among forms of equity are small, there is a wide range of bonds; innovative financial engineers are creating new fixed-income securities almost continuously. In this chapter, we will introduce a wide variety of bond types used in international bond markets. Then, we will describe how bond markets are organized around the world. Finally, we will show how tools and concepts used in international bond markets. Debt certificates have been traded internationally for several centuries. Kings and emperors borrowed heavily to finance their wars. In the 14th century, for example, Edward I financed his wars through bond issues launched in Italy by the then big banking families. Centuries later, the great coalition against Louis XIV led by William of Orange was financed by a group of Dutch families operating from The Hague. Later, the Rothschilds became famous for supporting the British war effort against Napoleon I through their European family network. The Eurobond market is an offshore market where borrowers and lenders meet because of its lower costs and lack of regulation. The Eurobond market is just one segment of the so-called Euro market, which also includes Eurocurrency, Euro notes, Euro commercial paper, and Euro equity markets. Euromarkets are offshore capital markets, in the sense that the currency of denomination is not the official currency of the country where the transaction takes place. For example, a Malayan firm deposits USD not in the U.S. but with a bank outside the U.S., for example in Singapore or in Switzerland. This USD deposit outside the U.S. is called a Euro deposit. Today, Euromarkets are well-developed, sophisticated markets where the traded instruments are denominated in many currencies, not just in the major currencies. For example, in 1996, the Eurobond market included issues denominated in the Egyptian pound, Polish zloty and Croatian Kuna. At its inception, however, Euromarkets were just Eurodollar markets. For example, the first Euro market was the market for short-term USD deposits and USD loans, where European banks acted as intermediaries between investors and borrowers. Long before World War II it was not rare for banks outside the U.S. to accept deposits denominated in U.S. dollars. The volume of such deposits, however, was small and the market for them had little economic significance. During the 1950s things began to change. Since Russia and other communist countries had to deal in hard currency for their international trade transactions, the central banks of these countries ended up holding USD balances. Initially these balances were held in New York. But as the cold war tensions increased, the communist government transferred these balances to banks in London and other European centres. While the cold war may have initiated the Eurocurrency market, there were other factors that stimulated its development. Historically, the pound sterling 34 CU IDOL SELF LEARNING MATERIAL (SLM)

played a key role in world trade. A great deal of trade was denominated in GBP. Two events helped to boost the USD as the currency for international trade: The first Euro market to emerge was the market for short-term deposits and loans, where banks acted as intermediaries between investors and borrowers. The Eurocurrency market for short-term deposits Euro deposits rapidly became a reference market for domestic market- makers. For example, several domestic instruments started to be priced taking the interest rate on Euro deposits as the relevant discount rate. When Eurocurrency markets started to emerge, a typical Euro deposit involved a time deposit, that is, a non-negotiable, registered instrument with a fixed maturity. When investing in a Eurocurrency time deposit, the investor commits funds for a certain period of time, at a specified rate. At maturity the investor receives the principal plus the interest. Later, Euro deposits included more flexible instruments. The most popular instrument is the certificate of deposit (CD), which is negotiable -can be sold to another investor at any time- and is often a bearer instrument. There are several kinds of CDs: tap CDs, tranche CDs, and rollover CDs. The tap CD is a standard fixed-time deposit, which is denominated in amounts of USD 1 million or more. The trance CD is a tap CD that has been divided into several portions to make it attractive to small investors. The rollover CD is an instrument by which an investor buys a CD on a continuous basis with floating interest rates adjusted by market conditions when the CD matures and rollovers occur. According to the Bank of England more than 90 percent of the Euro deposits are time deposits. The majority of the Euro deposits have a very short-term duration, for example, one or seven days, or one, three, or six months. For long-term CDs (up to ten years), there is a fixed coupon or floating rate coupon. For CDs with floating-rate coupons, like rollovers, the life of the CD is divided into subperiods of usually six months. The interest earned over such period is fixed at the beginning of the period, the reset date. This interest rate is based on the prevailing market interest rate at the time. This market rate is usually the LIBOR, the London Interbank Offer Rate or the Interbank Offer Rate in the currency's domestic financial centre. Although the majority of Euro deposits are in the form of time deposits, CDs play a significant role in the Eurocurrency market because of a liquid secondary market. Banks, regularly, buy and sell their own CDs in the secondary market to ensure investor of the liquidity of the secondary market, and therefore, making the CDs more attractive. The CD rates shown in newspapers are usually the secondary market rates. Most CDs issued in London are denominated in USD. In general, the deposits will be effective two business days after the contract is in effect, and mature, for example, 30 days later. On maturity, payment is usually made by a transfer in the currency's home country (i.e., Japan for Euro yen). The minimum period for delivery of funds is usually two working days, which is the usual settlement period in the wholesale foreign exchange market. 35 CU IDOL SELF LEARNING MATERIAL (SLM)

2.5 INTER-BANK MARKET The interbank market is a decentralized over-the-counter market between many different players. The interbank market has long been seen as a simple many different players. The interbank market has long been seen as a simple means of reallocating liquidity needs arising from lending and deposit taking activities within the banking system on a short-term basis. In the early 1970s, when interest rates became increasingly volatile, many banks established an asset and liability management (ALM) division. These divisions manage the risks due to mismatches between assets and liabilities. It is therefore likely that decisions on assets (liabilities), such as pricing or volume of certain positions, in hence liabilities (assets) as well, a claim that we aim to investigate in this study. The relevance of the interbank market goes far beyond liquidity management of individual banks. The structure of interbank markets plays an important role for the implementation of monetary policy. Its importance goes even beyond monetary policy. As has been demonstrated during the 2008 financial crisis, the breakdown of the interbank market can lead to tightened renancing conditions and even outright defaults of major financial institutions in the absence of costly government interventions. Such events can spill over to the real economy through reduced lending and other channels, leading to immediate output contractions and long-term welfare losses. A good understanding of interbank markets is thus indispensable for achieving both monetary and financial stability. We describe our contribution to the understanding of interbank markets as follows: we develop a theoretical model in which banks optimize their prots from interbank lending and borrowing simultaneously. This setup allows banks to expand their balance sheet through the interbank market. The model is thus capable of explaining why banks hold interbank assets and liabilities simultaneously, a behaviour that has been documented empirically for many banking systems. The solution of our model shows that interbank lending and borrowing rates are determined simultaneously. We confirm this simultaneity empirically, using standard statistical tests. This leads to an important conclusion, which we consider the main contribution of our paper there is a fundamental reason why interbank lending and deposit rates should be determined simultaneously, and any statistical model of interbank rates or spreads that does not test for the presence of this simultaneity is potentially biased. We document the presence of a significant simultaneity bias for our data set. The breakdown of liquidity in normally robust financial markets presents one of the enduring questions from the recent financial crisis. During the crisis, central bank intervention failed to enhance liquidity, and over short intervals, crowded out private liquidity. In addition, precautionary hoarding by relatively weak banks during the crisis appeared to exacerbate market liquidity problems as well, 1.Given the central role that banks play in providing valuable liquidity to many markets, the interbank market plays a significant role in facilitating market liquidity, 2. In this paper, we study interconnectedness in the European interbank market to explore whether, and how, bank interconnectedness evolves during the 36 CU IDOL SELF LEARNING MATERIAL (SLM)

crisis using two different network structures—the correlation network of bank stock returns and the physical interbank trading network. We study how interconnectedness in these networks is affected by monetary and macroeconomic shocks related to the European Central Bank (ECB) interventions and announcements of both conventional and unconventional ECB operations. Further, we explore whether interconnectedness metrics help to forecast financial and economic activity. We show that during the crisis, physical network connectedness drops significantly, reflecting hoarding behaviour among banks which impairs interbank market liquidity. Conversely, and similar to results in Billio et al., we find that European bank correlation networks reveal increased connectedness during the crisis. These network-based findings show that correlation and physical networks evolve differently and reflect different economic content. While the physical trading network reveals the breakdown between banks, the correlation network reveals that banks equity returns were driven by a common factor during the crisis. Moreover, we find that correlation and physical networks respond differently to monetary and macroeconomic shocks. Early in the crisis central banks intervened heavily to promote funding and market liquidity. Interconnectedness in physical networks adjusts strongly and quickly to these central bank operations and announcements, revealing important market characteristics related to interbank trading at short horizons. Conversely, interconnectedness in correlation networks changes little in response to these events, presumably since these announcements and interventions have little impact on the common factor driving stock returns. In this light, monitoring the response of the interbank market to announcements and interventions is more valuable to policy makers interested in enhancing interconnectedness among banks. We further compare networks to test whether interconnectedness measures might serve to forecast short-term economic conditions. We show that correlation networks can identify (and forecast) periods of impending financial crises. Complementarily, physical interbank trading networks serve to identify weakening interconnectedness in the interbank system that may lead to liquidity problems. 2.6 SUMMARY  We explore these differing dynamics further by analysing how these network structures reflect economic shocks. Given that markets react to announcements, we aim to compare and contrast how announcements are reflected in the stock market and interbank market. We are particularly interested in two types of shocks. The first type refers to European Central Bank (ECB) announcements and interventions.  During our sample period, the ECB adopted both conventional and unconventional monetary interventions. In particular, for the ECB interventions19 we distinguish among Long Term Refinancing Operations (LTRO), Main Refinancing Operations (MRO) and Other Type (OT) of ECB operations. For the announcements, we follow Rogers, Scotti and Wright and consider conventional and unconventional ECB 37 CU IDOL SELF LEARNING MATERIAL (SLM)

operations. The second type of shocks we consider refer to more general changes in macroeconomic conditions.  We first capture these shocks using the real activity indices developed in Scotti the surprise and uncertainty indices. The surprise index summarizes recent economic data surprises and captures optimism/pessimism about the state of the economy. The uncertainty index measures uncertainty related to the state of the economy.20 We also consider the evolution of the European stock market (the Dow-Jones index for Europe) and the London Interbank Offered Rate (LIBOR).  During the recent financial crisis, market dynamics changed dramatically, with some markets seizing up as market uncertainty and asymmetric information between banks created unprecedented problems in the world economy. In this paper we analyse the detailed trading data from the European (e-MID) interbank market to better understand how interbank trading reflected these economic problems.  We construct and examine physical networks of trade that allow us to examine bank connectedness over time. Further, we compare and contrast correlation networks (constructed with Granger-causality between stock returns) with physical networks (constructed from interbank trades) to better interpret results from each. We demonstrate that correlation and physical networks reflect important, but different, economic conditions in the European banking sector. During the crisis, physical bank networks reveal a breakdown in connectivity in the interbank market. Interestingly, correlation networks show increased co-movements in market returns during the crisis that have been interpreted as an increase in connectivity, a connectivity that we ascribe to a common factor unrelated to interbank trading. 2.7 KEYWORDS  Allocated Transfer-risk Reserve (ATRR) – A special reserve established and maintained for specified international assets pursuant to the International Lending Supervision Act of 1983 to cover country risk. At least annually, the OCC, FRB, and FDIC determine which international assets are subject to transfer risk, the amount of ATRR for the special assets, and whether an ATRR previously established for specified assets may be reduced.  Anticipation – A deposit of funds to meet the payment of an acceptance prior to the maturity date. Should be applied to reduce customer’s liability on acceptances.  Amortizing Swap – A transaction in which the notional value of the agreement declines over time.  Arbitrage – Simultaneous buying and selling of foreign currencies, or securities and commodities, to realize profits from discrepancies between exchange rates prevailing 38 CU IDOL SELF LEARNING MATERIAL (SLM)

at the same time in different markets, between forward margins for different maturities, or between interest rates prevailing at the same time in different markets or currencies.  Authority to Pay – An advice from a buyer, sent by their bank to the seller’s bank, authorizing the seller’s bank to pay the seller’s (exporter’s) drafts up to a fixed amount. 2.8 LEARNING ACTIVITY 1. Create a survey on Bank’s Sources of Funding. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a session on Eurocurrency Deposit Markets. ___________________________________________________________________________ ___________________________________________________________________________ 2.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Commercial Bank? 2. Define Reserve Funds? 3. What is Shareholders Capital? 4. What is Retained Earnings? 5. What is Eurocurrency? Long Questions 1. Explain the International Commercial Bank Liabilities. 2. Explain the concept of Bank’s Sources of Funding. 3. Illustrate the Eurocurrency Deposit Markets. 4. Illustrate the Inter-Bank Market. 5. Examine the concept of Retained Earnings. B. Multiple Choice Questions 1. Under which of the following does Share allotment account fall? a. Personal account 39 CU IDOL SELF LEARNING MATERIAL (SLM)

b. Real account c. Nominal account d. Impersonal account 2. How many holders of preference shares will have a right to vote if the dividend remains in arrears for a period not less than? a. 4 years b. 3 years c. 2 years d. None of these 3. What is the minimum share of Application money is? a. 5% of the face value of shares b. 10% of the issue price of shares c. Re. 1 per share d. 15% of the face value of shares 4. What is the premium received on issue of shares is? a. Asset side of the balance sheet b. Liability side of the balance sheet c. Credit side of the P&L a/c. d. Debit side of the P & L a/c 5. What can be used for Premium on issue of shares? a. Distribution of dividend b. Writing of c. Capital losses d. Transferring to general reserve Answers 1-a, 2-c, 3-a, 4-b, 5-b 2.10 REFERENCES References book 40 CU IDOL SELF LEARNING MATERIAL (SLM)

 Acemoglu, D., O. Asuman and A. Tahbaz-Salehi, 2013. Systemic Risk and Stability in Financial Networks.  Acharya, V., L.H. Pedersen, T. Philippon, and M. P. Richardson, 2010.  Acharya V., T. Yorulmazer, 2008. Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures, Review of Financial Studies. Textbook references  Achlioptas, D., Clauset, A., Kempe, D., & Moore, C. (2009). On the bias of traceroute sampling: Or, power-law degree distributions in regular graphs. Journal of the ACM.  Adrian, T. and H-S. Shin, 2010. Liquidity and Leverage. Journal of Financial Intermediation.  Allen, F., and A. Babus, 2010. Networks in Finance. In Network-based Strategies and Competencies, edited by Paul Kleindorfer and Jerry Wind, Wharton School Publishing. Website  https://www.federalreserve.gov/econresdata/feds  https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working_Pape r_202_- _Segmentation_and_efficiency_of_the_interbank_market_and_their_implication_for_ the_conduct_of_monetary_policy.pdf  https://www.bauer.uh.edu/rsusmel/7386/ln12.pdf 41 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3 -INTERNATIONAL COMMERCIAL BANKING STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 REPO 3.3 LIBOR 3.3.1 Introduction 3.3.2 The Origin 3.3.3 In Search of an Alternative Benchmark 3.3.4 The Indian Context 3.4 Euribor 3.5 ECDs 3.6 International Commercial Bank’s Assets 3.7 Forms of International Lending 3.8 Summary 3.9 Keywords 3.10 Learning Activity 3.11 Unit End Questions 3.12 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Illustrate the concept of REPOs.  Explain the concept of LIBOR.  Illustrate the concept of Euribor. 3.1 INTRODUCTION A significant part of this impressive record of financial development in India is attributable to the crucial role played by development in India is attributable to the crucial role played by banks in the financial intermediation process. In India the financial sector comprises the 42 CU IDOL SELF LEARNING MATERIAL (SLM)

banking system (i.e., commercial and cooperative banks), financial institutions (which include term lending institutions, i.e., IDBI, NABARD, ICICI, IRBI, IFCI, EXIM Bank and NHB at the all-India level and SFCs and SIDCs at the state level, besides investment institutions, i.e., UTI, LIC and GIC and other institutions including DICGC and ECGC), non- banking financial intermediaries and the capital market. In recent times, it has been found that commercial banks are getting involved in activities that are appearing in their balance sheet. These activities are therefore known as off-balance sheets (OBS) that help in generating fee income for a bank. It is seen that general contingency is also present within the company due to which potential funding obligations rise in future. As stated, contingent liability management is taken care of by public debt managers of a commercial bank. They are responsible for determining financial risks which are faced during uncertainty of commitments. Apart from that, OBS is found to get increased in the form of activities among commercial banks. It is seen that the risk-taking behaviour of banks is found to be credited by meeting accommodation of customers. In addition to that, intermediaries are responsible for taking care of monitoring other activities such as producing information, monitoring borrowers, and gaining specialization in credit evaluation. The mismatch that is present within non-liquidity loans and short-term deposits tends to look forward towards developing fragile confidence in banks. As opined by Carmona et al. the risk-taking approaches that are taken into consideration are found to get increased due to liquidity risk factors. In the commercial banks of the US, it is seen that asset management is looked after with little care due to which the banks are unable to stop liquidity risks in business. Apart from that, the net stable capital ratio is found to be limited and therefore, short-term liquidity standards are unable to be managed. Nevertheless, adjustment of bank risk-taking behaviour is based completely on the specific channels which are determined through the risk of liquidity assets. It is also seen that fall in liquidity impacts directly on the change that is viewed in liquidity ratios. Furthermore, liabilities in US commercial banking are more than their assets, and thus, it impacts the decreasing ratio of the financial sector. Moreover, it is found that the significant level of liquidity and asset ratio along with total asset ratio and capital adequacy ratio is 0.01%. This rate helps in detecting the global competition that is being faced by commercial banks in the US. Apart from that, identifying the need for resources by determining critical conditions brings in a lack of liquidity in commercial banking. Credit risk is determined as the risk of default that is faced on a debt when all requirements are not fulfilled. It is seen that loss of principal, interest, and collection costs are considered under credit risk factors and thus, these need to be complete or fulfilled in partial. As per the views of Abbas and Masood, large commercial banks are responsible for adjusting their capital ratios in order to have an empirical outcome in their banking growth. Apart from that, an ALM framework is applied to determine non-performing assets and lost assets which are present within the financial sector. In addition to that, credit risk management is required to 43 CU IDOL SELF LEARNING MATERIAL (SLM)

handle credit risk and that is done through determining the adequacy of loans and capital which increases reserves in business. Besides, securing control over credit risks is needed to handle credit risk and increase efficiency in banking activities. Interest rate risk or volatility of interest rates are found in banking sectors and creates a crisis in currency and willingness into credit expansion. It is seen that volatility of interest rates is found to be increased by triggering intense sales of securities in banks. As stressed by Vives, competition and stability in commercial banks tend to increase crisis in future and needs to be mitigated by developing ideas to reduce liabilities and increase assets. In that respect, liquidity ratio needs to be reduced and loans related to foreign currencies need to be avoided. It is also seen that providing loans need to be reduced in order to balance the rate of interest from the commercial banks. It increases reducing interest rate and keeping the banks into profits. The demand for risk related to credit is forced by bankers to grant loans to their most efficient customers. This increases the chances of risk-hedging financial instruments in business. Risk mitigation strategies are applied by bankers of commercial banking in order to reduce chances of risks in banking. It is seen that application of ALM helps in maintaining certain objectives and regulatory constraints. Apart from that, this process is well-coordinated due to which time-consumption and challenging situations are avoided. Bankers are responsible for taking up measures that are performed on a regular basis and are scheduled for better understanding. Apart from that, focusing on time and identifying high-risk areas are considered by them to reduce risks in commercial banking. Moreover, implementing and developing programs for mitigating risks are also taken into consideration. The study will be covering both primary and secondary data collection methods which will be effective in understanding the need of the ALM framework. Besides that, primary data will be collected through surveys of questionnaires among bankers in the US commercial banks. On other hand, secondary research will be carried out through documentation obtained from authors and well-known financial writers. As stated by Abbas et al., credit banking risks are found to be affecting banking activities due to which gathering information through questionnaires is a necessary aspect. The questions that will be selected will be both open and close-ended due to which various different options will be gathered and collected. Data analysis will be done through a statistical approach that requires identification of means and score that is determined during the survey. This will further help in detecting credit risk management and mitigation activities carried out by commercial banks. In that respect, descriptive statistics will be used for determining sample size and carrying out the entire survey successfully. On other hand, portraying respondents helps in revealing responses that are provided without following any pattern. In that respect, it will be helpful and easy to calculate and determine the relationship which is present between selected variables. 44 CU IDOL SELF LEARNING MATERIAL (SLM)

The results will be detected on the basis of risks that are found within the banking sector. Besides, categories of banks will also be present which will help in understanding the type of banks present within the US. It can be said that due to the categorization there will be a possibility of determining the highest rate of risk found within a single category of banking activities. The research that will be carried out is able to provide credit risk mitigation strategies and improve their loan performance within the US. It is seen that credit transfer techniques are also considered for determination of the survey response. Nevertheless, failure of loans and other financial crises is determined that helps in gaining indicators of using debt collector techniques. Apart from that, mechanisms which are needed in business development and determination of retention level will be helpful as a part of the questionnaire. The amount of money that will be provided to customers and detection of their interest rate will be playing a major role in determining the potential eligibility of gaining more assets in business. As stated by Carmona et al. monetary policy helps in achieving price stability and avoids the credit risk managers in the business. In that respect, banks are able to give uncollateralized loans to their customers which will lead to increased credit risks. 3.2 REPO Repo is a money market instrument, which enables collateralized short-term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate. In the case of a repo, the forward clean price of the bonds is set in advance at a level which is different from the spot clean price by adjusting the difference between repo interest and coupon earned on the security. 2.3. In the money market, this transaction is nothing but collateralized lending as the terms of the transaction is structured to compensate for the funds lent and the cost of the transaction is the repo rate. In other words, the inflow of cash from the transaction can be used to meet temporary liquidity requirement in the short-term money market at comparable cost. 2.4. Repo rate is nothing but the annualized interest rate for the funds transferred by the lender to the borrower. Generally, the rate at which it is possible to borrow through a repo is lower than the same offered on unsecured (or clean) interbank loan for the reason that it is a collateralized transaction and the credit worthiness of the issuer of the security is often higher than the seller. Other factors affecting the repo rate include, the credit worthiness of the borrower, liquidity of the collateral and comparable rates of other money market instruments. A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are acquired with a simultaneous commitment to resell. Hence whether a transaction is a repo or a reverse repo is determined only in terms of who initiated the first leg of the transaction. When the reverse repurchase, transaction matures, the counterparty returns the security to the entity concerned and receives its cash along with a profit spread. One factor which encourages an organization to enter into 45 CU IDOL SELF LEARNING MATERIAL (SLM)

reverse repo is that it earns some extra income on its otherwise idle cash. A repo is also sometimes called a ready forward transaction as it is a means of funding by selling a security held on a spot (ready) basis and repurchasing the same on a forward basis. When an entity sells a security to another entity on repurchase agreement basis and simultaneously purchases some other security from the same entity on resell basis it is called a double ready forward transaction. In a repo transaction where there are two legs of transactions viz. selling of the security and repurchasing of the same, in the first leg of the transaction for a nearer date, sale price is and repurchasing of the same, in the first leg of the transaction for a nearer date, sale price is usually based on the prevailing market price for outright deals. In the second leg, which is for a future date, the price will be structured based on the funds flow of interest and tax elements of funds exchanged. This is on account of two factors. First, as the ownership of securities passes on from seller to buyer for the repo period, legally the coupon interest accrued for the period has to be passed on to the buyer. Thus, at the sale leg, while the buyer of security is required to pay the accrued coupon interest for the broken period, at the repurchase leg, the initial seller is required to pay the accrued interest for the broken period to the initial buyer. Transaction-wise, both the legs are booked as spot sale/purchase transactions. Thus, after adjusting for accrued coupon interest, sale and repurchase prices are fixed so as to yield the required repo rate. The excess of the coupon at the first leg of repo would represent the coupon interest for the repo period. Thus, the price adjustment depends directly upon the relationship between the net coupon and the repo amount worked out on the basis of the repo interest agreed upon the total funds transferred. When repo rate is higher than current yield repurchase, price will be adjusted upward signifying a capital loss. If the repo rate is lower than the current yield, then the repurchase price will be adjusted downward signifying a capital gain. If the repo rate and coupon are equal, then the repurchase price will be equal to the sale price of security since no price adjustment at the repurchase stage will be required. If the repo rate is greater than the coupon, then the repurchase price is adjusted upward (with reference to sale price) to the extent of the difference between the two. And, if the repo rate is lower than the coupon then, the repurchase price is adjusted downward (with reference to sale price). Specifically, in terms of repo rate, there will be no price adjustment when the current yield on security calculated on the basis of sale value (including accrued coupon) is equivalent to repo rate. Types Of Repo:  Broadly, there are four kinds of repos accessible in the global market when characterized with respect to development of hidden protections, evaluating, term of repo and so on They grouped as to development of fundamental protections, estimating, term of repo and so forth They include repurchase sell repo, exemplary repo bond acquiring and loaning and three-sided repos. 46 CU IDOL SELF LEARNING MATERIAL (SLM)

 Under a purchase sell repo exchange the bank really claims the guarantee. Here a security is sold altogether and repurchased at the same time for settlement on a later date. In a purchase sell repo, the proprietorship is given to the purchaser and consequently he holds any coupon interest due on the bonds. The forward cost of the bond is set ahead of time at a level which is not quite the same as the spot clean cost by really changing the distinction between repo premium and coupon procured on the security. The spot purchaser/borrower of protections basically acquires the yield on the hidden security give or take the distinction among this and the repo financing cost.  Classic repo is an underlying offer of protections with a synchronous consent to repurchase them sometime in the not-too-distant future. On account of this kind of repo the beginning and end costs of the protections are something similar and a different instalment of \"interest\" is made. Exemplary repo makes it unequivocal that the protections are just security for the advance of the money. Here the coupon pay will be gathered to the dealer of the security.  Under a hold in guardianship repo the counterparties go into an understanding whereby the protections sold are held in care by the merchant for the purchaser until development of the repo subsequently dispensing with the settlement prerequisites.  In a bond loaning/acquiring exchange, the client loans bonds for an open finished or fixed period as a trade-off for a charge. The expense charged would rely upon the sort of basic instrument, size and term of the advance and the FICO score of the counterparty. The exchange would be dealt with by a concurrence on protections loaning and cash or different protections of equivalent worth could be given as guarantee in the exchange.  Under a Tripartite repo a typical caretaker/clearing office organizes authority, clearing and settlement of repos exchanges. They work under a standard worldwide expert buy understanding and accommodates DVP framework, replacement of protections, programmed checking to market, detailing and every day organization by single office which deals with the danger on itself and programmed roll overs while doesn't demand uncovering the characters by counterparties. The framework begins with consenting to of arrangements by all gatherings and the arrangements incorporate Global Master Repurchase and Tripartite Repo Service Agreements. This sort of plan limits credit hazard and can be used when managing customers with low FICO assessment.  Repo period could be for the time being term, open or adaptable. Overnight repos endure just a single day. On the off chance that the period is fixed and concurred ahead of time, it is a term repo where either gathering might call day. In the event that the period is fixed and concurred ahead of time, it is a term repo where either gathering might require the repo to be ended whenever despite the fact that requiring a 47 CU IDOL SELF LEARNING MATERIAL (SLM)

couple of days'notifications. However, there is no limitation on the greatest period for which repos can be attempted for the most part term repos are for a normal time of multi week. In an open repo there is no such fixed development period and the loan cost would change from one day to another contingent upon the currency economic situations. In such cases the bank consents to give cash to an endless period and the understanding can be ended on quickly. Under adaptable repos the loan specialist places reserves, however they are removed by the borrower according to his prerequisites over a concurred period. 3.3 LIBOR When talking about the syndicated loan market, pricing of credits is at LIBOR + rates. The rate is determined by the borrower’s risk in the sense that the high the borrower’s risk, the higher the rate. For example, a lower risk AAA borrower might pay LIBOR + 50 basis points while a high-risk BBB borrower would pay LIBOR + 250 basis points. The Intercontinental Exchange (ICE) administers the London Interbank Offer Rate (LIBOR) and it’s computed for 5 different currencies, having 7 various maturity level spanning from overnight to one year. The five currencies for which it is computed include the euro, Swiss franc, Japanese yen, pound sterling, and the U.S. dollar. The Intercontinental Exchange benchmark administration comprises between 11 and 18 banks which contribute to each currency. The London interbank bid rate is quoted by the bank intending to borrow funds or take deposits from a different bank while the London interbank mean rate (Limean) refers to the average of both of them. Apart from helping in the decision of other transactions, it is also utilized as a trust measure in the financial system. Furthermore, it shows how confident banks are in the financial health of one another. This is the reason for its importance. There is a system that is followed by banks when lending money. This implies that they do not lend money to each other anytime they please. Each day, a set of leading banks submit the interest rate at which they would lend other finance houses. They recommend rates in ten currencies covering fifteen various loan periods, spanning from overnight to twelve months. The 3-month dollar LIBOR is the most important rate. Whatever rates submitted are exactly what the banks know they will pay other banks when borrowing dollars for 3 months provided, they borrowed money on the exact day the rate was set. After this, an average is calculated. This is an easy illustration of how it works. A major review of Libor, as well as, its setting was commissioned by the government after the allegations became known. Libor oversight was passed from the British Bankers Association to the Intercontinental Exchange (ICE). The effect of the term auction facility on the London interbank offered rate. Term Auction Facility (TAF) refers to the first liquidity initiative that was based on auction by the Federal Reserve. It became existent during the global financial crisis and it was established to improve the dollar money market conditions. It was also aimed at improving the dollar money market conditions, as well as, reducing the highly elevated London interbank offered 48 CU IDOL SELF LEARNING MATERIAL (SLM)

rate (Libor). This creative policy tools effectiveness is needed to understand central bank’s role in financial stability. But academic researches disagree on the empirical observation of the Term Auction Facility impact in Libor. This disagreement is as a result of the wrong specification of econometric models. Interbank rate fixings during the recent turmoil, Gyntelberg, J., & Wooldridge, P. This explicates the recent turmoil and how it affected the interbank rate fixings. In the second half of 2007, the turmoil which occurred in global interbank markets resulted in questions about the robust nature of interbank rate fixings. Alternative fixings for alike interest rates were compared which confirmed that they varied to an unusual level. Nonetheless, the design of fixing mechanisms worked as planned to moderate the changing credit quality perceptions, as well as, the effect of strategic behaviour. Tracking the Libor rate. This is based on monitoring the London interbank offered rate. The period tracked is between 2005 and 2008 using Benfords law. This law is present in some financial data sets, as well as, many numerical data sets that occur naturally. Based on the research, it is discovered that in two current periods, Libor rates have significant variance from the anticipated Benford reference distribution. This results in major concerns relative to the impartial nature of the signals that come from the 16 banks from which the London interbank offered rate is computed. The term structure of interest rates in the London interbank market, Hurn, AS Moody, T. & Muscatelli, VA. This work focuses on the London interbank market and its term structure of interest rates. The hypothesis is tested that the longer-term rates which are determined by expectations of future short-term rates are as a result of the highly competitive nature of the London interbank market. The co-integration tests, as well as, the VAR approach are employed. The results generally support the expectations hypothesis and contrary to previous studies that have used the VAR approach, the restrictions suggested by the expectations hypothesis cannot be rejected. Its only at the end of the interbank spectrum that a sign of marginal deviations from the expectations hypothesis may surface. Long-range dependence and multifractality in the term structure of LIBOR interest rates. This paper focuses on the LIBOR interest rates term structure and its long-range dependence and multi-fractal nature. A data set is studies for this research from 2000 to 2005. This is done for six currencies, as well as, various maturities. The results suggest that the level of long-range dependence reduces with maturity, except for interest rates on Indonesian Rupiah and on Japanese Yen. Also, interest rates are multifractal in nature and the multifractality level is much stronger for Indonesia, being an emerging market. Based on the findings, it is discovered that these features should be considered by interest rate derivatives. The term structure of interbank risk, Filipovi, D., & Trolle A. B. This paper is based on interbank risk and its term structure. A term structure of interbank risk was inferred from spreads between London Interbank Offered Rate (LIBOR) indexed swaps, as well as, the overnight indexed swaps. A tractable model of interbank risk is developed in order to breakdown the term structure into both default and also non-default components. The fraction of summary of interbank risk as a result of default risk between August 2007 and January 2011 increased with maturity. When talking about short maturities, the importance of the 49 CU IDOL SELF LEARNING MATERIAL (SLM)

non-default component is in the first part of the sample period and it correlates with funding measures, as well as, market liquidity. Furthermore, the model provides a framework for risk management, pricing and also hedging of interest rate swaps with the significant risk being present. Mean reversion and volatility of short-term London interbank offer rates: An empirical comparison of competing models. International review of economics & finance. This attempts to compare competing models. It pays attention to the short-term London interbank offer rates with reference to its mean reversion and how volatile it is. The stochastic process stated for certain interest rates determines the pricing of many long-dated and short- dated derivatives. In this work, the authors examine the properties of various stochastic processes set to the time sequence of the three-month and six-month London Interbank Offer Rates. For the three-month series, the sample period was between January 1984 and June 1995 while the sample period for the six-month series was between June 1988 and February 1996. In testing the parameter descriptions, the authors used the Euler-Maruyama discrete- time approximation to test and estimate parameter restrictions. The test revealed that none of the three-month or six-month LIBOR is mean reverting. LIBOR: origins, economics, crisis, scandal, and reform, Hou, D., & Skeie, D. R. This paper explicates the origins, crisis, reform, economics, and scandal of London Interbank Offered Rate. LIBOR is widely used to indicate funding conditions in the interbank market. By 2013, LIBOR underpinned over $300 trillion worth of financial contracts with the inclusion of futures and swaps, in addition to more trillions in student loans and variable-rate mortgage. LIBORs volatility during the financial crisis roused questions surrounding its authenticity. Ongoing regulatory findings have revealed misconduct by several institutions. Policymakers around the world now battle with reforming LIBOR after the crisis and scandal. Does the LIBOR reflect banks' borrowing costs? This intends answering the question about LIBOR reflecting the borrowing costs of banks. LIBOR is a major standard interest rate to which financial contracts worth hundreds of trillions of dollars are tied. Of recent, observers have been concerned about LIBOR not accurately reflecting the average bank borrowing costs, its evident target. Based on observable cost measures, it is shown that in the Libor survey, bank quotes are difficult to rationalize. The second evidence is based on an easy model of bank quote choices meant to predict that if banks have the incentive to affect rates, the bunching of quotes should be seen around certain points and there would be no such bunching where these incentives are absent. Reforming LIBOR and other financial market benchmarks. This is based on reforming LIBOR, as well as, other financial market benchmarks. Here, major steps needed to reform LIBOR are outlined in order to enhance its robustness to manipulation. Certain things are discussed. First, the role of financial benchmarks in encouraging over-the-counter market effectiveness by improving transparency is discussed. Next, the process involved in mitigating LIBOR manipulation incentives is discussed. One way is by widening the transaction types used in fixing LIBOR. A Yen is Not a Yen: TIBOR/LIBOR and the. Either LIBOR, set at 11 am London time or TIBOR, set at 11 am Tokyo time determines pricing in the Euro-Yen market. LIBOR refers to the London Interbank Offer Rate while TIBOR refers 50 CU IDOL SELF LEARNING MATERIAL (SLM)