In days gone by, banking and saving money was a distinctly local affair, with building societies renowned for their customer-centric approach, small business funding industrial designer, and genuinely competitive savings rates of between 4% and 6%.
However, the age of globalisation has precipitated the rise of international banking, which is now part of a global financial system and entity that also comprises legal agreements, institutions such as Gallagher and various economic actors.
But what exactly is international finance, and what are the core main challenges and risks encountered by global banks in the modern age?
What is International Banking?
While the core principles of banking are universally applicable, the international space sees familiar services and transactions take place across a number of different nations.
To describe international banking in more straightforward terms, this describes the arrangement or delivery of a financial service by one country’s bank to the residents of another.
Typically, international banks and financial industrial designer with the capacity to operate across borders are utilised by multinational companies and individuals (such as expats) for processing transactions in differing amounts and currencies.
For example, the iconic American technology firm Microsoft currently operates a base in the UK capital of London. When it needs to source funding as a way of meeting its working capital requirements, it has the capacity to avail a variety of banking services from a major London bank, from loans to extended overdraft facilities.
In this type of scenario, a residential bank is able to provide funding and services to an American firm, creating an international arrangement that’s indicative of the global fiscal system in place today.
As we can see, this offers tremendous accessibility to international firms, particularly in terms of funding and transacting in different currencies across the globe.
In these respects, it also affords considerable flexibility to multinational firms and individuals, with major currencies such as the pound, US Dollar and Euro all readily available and traded across the globe.
What are the Risks Facing International Banks?
Despite these benefits, there are numerous risks and challenges associated with international banking, with the so-called “credit risk” arguably the single most prominent.
This occurs when borrowers or their counterparties fail to meet contractual obligations, by either defaulting on a principal or interest loan payment. These issues can occur on any form of secured debt, but it’s most commonly associated with mortgaged and fixed income securities.
This risk is particularly significant given the size of multinational firms and the international banking industry, with global credit downturns leaving institutions overexposed to a category with large and potentially disproportionate losses.
International banks must also consider the impact of operational risk, which typically take the form of human error, system failure or interrupted processes.
While this type of risk is typically less impactful from the perspective of international firms and banks, it’s possible for such glitches to cause significant losses for large-scale operations such as sales and trading.
Another issue here is that smaller operational errors are easy to make and can easily accumulate across different businesses, creating an incremental problem for international bankers.