International Banking for a New Century This new textbook provides an up-to-date overview of international banking as the second decade of the twenty-first century unfolds. Integrating geo-economic, operational, institutional, and regulatory changes in the financial sector, the vol- ume’s methodology incorporates specific case studies and research, combining theory with practical examples to illustrate the impact and consequences of past and present financial crises. The volume considers the core aspects of international banking, including its structural and technical features, historical context, institutional evolution in core markets, and wholesale, retail, investment, and private banking. It uses specific examples from past and present literature, post-2008 case studies and histories, and research materials, offering a fully updated overview of how international banks respond to global crises, the origin, efficacy and evolution of financial markets, and the regulatory framework within which they function. One chapter is devoted to the evolution and potential of new markets, including the financial sectors of the BRICS and other emerging economies. Each chapter examines background, causes, impact, and resolution, focusing on specific cases and their broader implications for the sector. This textbook is a guide to the new, and at times uncharted, landscape to be navigated by large domestic, cross-regional, and global banks, and will be invaluable reading for students of finance, business, and economics, as well as for those in the financial sector. Irene Finel-Honigman is Adjunct Professor in banking and European economic history at Columbia University’s School of International and Public Affairs (SIPA), USA. Fernando B. Sotelino is Adjunct Professor in banking and finance at Columbia University’s School of International and Public Affairs (SIPA), USA. This page intentionally left blank International Banking for a New Century Irene Finel-Honigman and Fernando B. Sotelino First published 2015 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business. © 2015 Irene Finel-Honigman and Fernando B. Sotelino The right of Irene Finel-Honigman and Fernando B. Sotelino to be identified as authors of this work has been asserted by them in accordance with the Copyright, Designs and Patent Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. Library of Congress Cataloging in Publication Data Finel-Honigman, Irene. International banking / Irene Finel-Honigman and Fernando Sotelino. pages cm 1. Banks and banking, International–History. 2. International finance–History. I. Sotelino, Fernando. II. Title. HG3881.F4394 2015 332.1’5–dc23 2014047700 ISBN: 978-0-415-68132-2 (hbk) ISBN: 978-0-415-68133-9 (pbk) ISBN: 978-1-315-72317-4 (ebk) Typeset in Times New Roman by Cenveo Publisher Services Contents List of Illustrations vi Acknowledgments viii Introduction ix 1 History of international banking: international banks (almost) never die 1 2 International wholesale banking 35 3 International personal banking 62 4 Bank failures and systemic crises 83 5 Sovereign debt crises and the ramifications for international banking 113 6 International bank regulation and supervision 135 7 Banking in emerging economies 168 8 Financial fraud, corruption and illegal activities 191 9 International banking trends and challenges 215 References 224 Index 234 Illustrations Figures 2.1 Global loan new issuance by region 42 Tables 1.1 Global systemically important banks (G-SIBS) 2 1.2 Monetary policy frameworks 14 1.3 Major mergers and acquisitions involving OECD banks, 1986–2008 33 2.1 Commercial banks’ acquisitions of investment banks, 1989–2006 37 2.2 Global syndicated loans, 1Q 2014 43 2.3 Global debt and equity issues, 2013 51 2.4 Global fixed income issues, 2013 52 2.5 All bonds in Euro, 2013 53 2.6 Global equity and equity related issues 54 2.7 Global M&A advisory 58 3.1 Private banking versus consumer banking 63 3.2 Top 25 private banks worldwide by assets under management, 2013 67 3.3 Breakdown of UBS’s 2013 operating profits before tax 70 3.4 AMEX net revenues and net income, 2010 80 6.1 Selected credit risk weights under Basel I 140 6.2 Risk weights for corporates 143 6.3 Minimum capital requirements, Basel III 149 6.4 Capital conservation standards 150 6.5 LCR and NSFR conversion factors 153 6.6 G-SIBs’ buckets and minimum additional loss absorbency cushion stock of highly liquid assets 155 6.7 Indicator-based measurement approach 157 6.8 Additional loss absorbency requirement for G-SIBs (2013) 158 7.1 Mexico’s largest domestic lenders (2013) 171 7.2 Brazil’s largest domestic lenders (2013) 174 Illustrations vii 7.3 India’s largest domestic lenders (2013) 176 7.4 IPOs by major Chinese banks 177 7.5 China’s largest domestic lenders (2013) 179 7.6 Indonesia’s largest domestic lenders (2013) 181 7.7 South Africa’s largest domestic lenders (2013) 183 7.8 Russia’s largest domestic lenders (2013) 185 7.9 Turkey’s largest domestic lenders (2013) 188 9.1 Strategy panel 222 Boxes 1.1 Barings banking dynasty 18 1.2 The house of Rothschild 18 2.1 International steel loan syndicate 40 2.2 Global transaction services at Citicorp 47 2.3 Global investment banking at Deutsche Bank 59 Acknowledgments We are extremely grateful to Provost John Coatsworth (Columbia University) and Dean Merit Janow (Columbia SIPA) for their generous support for this project. Our colleagues at Columbia SIPA, Columbia Business School, and Columbia Law School have offered invaluable advice, inspiration, and encouragement, in particular Associate Dean Dan McIntyre and Professors Georges Ugeux, Volker Berghahn, Albert Fishlow, Richard Robb, Richard Goldberg, and Alessia Lefebure. We have benefitted greatly from the lectures of and discussions with friends in the corporate world, media, and academia including Mordecai Kreinin, Bernard Shull, Albert Eckes, Lucio Vinhas de Souza, Marc Chandler, Kathleen Hays, Thomas Trebat, Lisa Schineller, Robert Albertson, Rodrigo Gonzalez, Markus Jaeger and many others with whom we have shared our professional lives. Finally, we want to express our deep appreciation to Geraldine McAllister at Columbia University whose knowledge and editorial skill brought this book to fruition. Introduction Since 2007, we have taught the core international banking course in the Master of International Affairs Program (International Finance and Economic Policy Concentration), at Columbia University’s School of International and Public Affairs (SIPA). Coming from complementary backgrounds in economics, finance, bank management, and intellectual history, we have sought to offer our students a comprehensive perspective of the evolution of international banking, including economic, geopolitical, and cultural determinants. In 2010, Routledge invited us to develop a textbook in international banking encompassing the financial crisis of 2008 and its implications for banks and bank- ing systems globally. We were excited by this opportunity, if slightly daunted by the enormity of the task. Yet, we could not have foreseen the extent to which events such as the EU sovereign debt crises, the gradual (but still incomplete) convergence of new banking regulations, the expanded supervisory roles of central banks, and too-big-to-fail legislation would necessitate rewrites and updates. Banks have shown extraordinary resilience, aided in part by innovative programs introduced by governments during the worst of the crisis to make funds available to financial institutions, but we have witnessed an important erosion of the trust of society at large in these institutions. Our challenge has been to address the critical elements of this process, while the identity and culture of banks, and the fundamental role played by them, continue to be questioned and redefined. Methodology This volume is organized into nine chapters. In Chapter 1, we present an historical overview from the origins of international banking through the first decades of the twenty-first century. We explore the evolution of banks from domestic to global institutions; from separate deposit, savings, investment, and custody functions to the universal banking model; and from institutions bound by national jurisdiction to globally-interconnected institutions. The individual cases that we examine in this chapter include institutions once instrumental in domestic and cross-border economic development, but which, since the early 1990s, have been dissolved or have undertaken a much-reduced scope of activities (Barings, Rothschild, and Crédit Lyonnais), as well as institutions that have achieved global predominance x Introduction since their inception, despite challenges and setbacks (HSBC, Citibank, JPMorgan, Deutsche Bank). In Chapter 2, we consider international wholesale banking, and examine how, between the late 1980s and early 2000s, international