International Banking and Large Community Banks: A Preliminary Look

By Jesswein, Kurt R. | Academy of Banking Studies Journal, January-July 2006 | Go to article overview

International Banking and Large Community Banks: A Preliminary Look


Jesswein, Kurt R., Academy of Banking Studies Journal


INTRODUCTION

Banking has had a rich and illustrious history. Much of its development can be directly related to the banks' ability to provide trade financing, credit, and foreign exchange services, activities specifically designed to overcome many of the impediments to conducting trade and investment transactions that cross political and economic borders.

This paper provides an introductory look at the trends and current state of the U.S. banking industry, specifically those institutions often referred to as large community banks, with regards to providing banking products that service international business and commerce. Despite the reputed benefits to a bank's bottom line (directly from generating fee and interest income, and indirectly from more fully developing customer relationships), the trend has been decidedly negative, as more and more institutions appear to be abandoning international financing during a time period of increasing globalization in business.

BRIEF HISTORY OF INTERNATIONAL BANKING

From Mesopotamia in the third millennium B.C., to Babylon, Greece, Rome, and even to the money changers described in the Bible, elements of banking enterprise have long been a part of human development. "Modern" banking can probably be most directly traced to the twelfth and thirteenth centuries with the rise of great Italian merchant families such as the Medici who began providing banking services essential to the development of international commerce.

Most notable to the advancement of modern banking was the introduction of bills of exchange, financial instruments that provided a means of exchanging currency across Europe. They also provided an important means of providing short-term credit (given the inevitable delays in transporting documents and currency), with interest indirectly charged through the rate of exchange and thus avoiding the prohibitions against usury (Green, 1989).

The next great advances came with the rise of the first truly international merchant banking houses, most notably the Baring Brothers and the Rothschild family, through whom banking, and in particular international banking, first began to reach the Americas. For example, Barings provided the financing for the United States government's purchase of Louisiana from the French and the Rothschilds are reputed to have been involved in financing both sides of the American Civil War. Later, banking houses began to arise within the United States itself, led by names such as Morgan, Oppenheim, and Drexel, alongside the continued development of international banks in Europe and Asia. (Green, 1989)

Although two World Wars and a global depression tempered some of the periodic booms in international banking and finance through the first half of the twentieth century, the Bretton Woods and GATT (General Agreement on Tariffs and Trade) accords after the Second World War provided stability in international monetary relationships and liberalization of trade and capital movements. International banking thrived as the global economy exploded under this new found liberalization.

Concurrently, the introduction and development of the Eurodollar market provided banks the means to overcome local and international restrictions on their international operations, and led to an explosion in institutions providing international banking services. The breakdown of Bretton Woods in the early 1970s, which provided the impetus to floating exchange rates, coupled with the recycling of petrodollars through the Euromarkets beginning with the first OPEC (Organization of Petroleum Exporting Countries) oil embargoes of the mid 1970s, provided institutions with the instability of markets and the ready supply of funds to introduce a wide range of international banking products and services.

It is also in this time frame that we find some of the earliest calls for expanding the banking activities by U. …

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International Banking and Large Community Banks: A Preliminary Look
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