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EURODOLLARS AND INTERNATIONAL BANKING This volume is concerned with the nature of the Eurodollar market. It examines the historical evolution of Eurobanks and Eurodollars and offers an economic analysis of the Eurodollar market, a policy analysis of issues surrounding the Eurodollar and finally discusses the impact of international banking facilities. The broader Eurocurrency market represents the most astonishing phenomenon in the modern world of finance because Eurocurrencies consist of bank deposits located in jurisdictions outside that of the currency of denomination. The Eurodollar market emerged in 1957 with transactions dominated mainly in dollars. By 1981 the volume of deposits had reached an estimated $1.6 trillion. The Eurodollar market will undoubtedly continue to play a major part in the equilibrium and disequilibrium of the financial world in years to come. This collection draws on the practical knowledge of international bankers, the experience of prominent central bank officials and the analytical tools of academic observers of the market. Economists, as well as public policy-makers, share the view that banking systems, due to potential bank failures and the monetary role that banks play, deserve special regulation and the intervention of the monetary authorities. This book will be an important step towards understanding where the Euromarket came from, how it really operates now and where it will all end. EURODOLLARS AND INTERNATIONAL BANKING Edited by Paolo Savona and George Sutija in association with M Palgrave Macmillan MACMILLAN © International Banking Center, Florida International University 1985 Softcover reprint of the hardcover 1st edition 1985 978-0-333-36553-3 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended). Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1985 Reprinted 1986 Published by MACMILLAN PUBLISHERS LTD (Journals Division) and distributed by Globe Book Services Ltd Brunei Road, Houndmills Basingstoke, Hampshire RG21 2XS England Filmset by Latimer Trend & Company Ltd, Plymouth British Library Cataloguing in Publication Data Eurodollars and international banking. I. Euro-dollar market I. Savona, Paolo II. Sutija, George III. Florida International University. International Banking Center 332.4'5 HG3897 ISBN 978-1-349-07122-7 ISBN 978-1-349-07120-3 (eBook) DOI 10.1007/978-1-349-07120-3 Contents Preface Vll Notes on contributors ix Introduction Paolo Savona and George Sutija Part I Eurobanks, Eurodollars and International Debt 15 Rene P. Higonnet Comment 52 Jane Sneddon Little Rainer S. M asera Helmut W. Mayer Part II 2 Eurodollars: An Economic Analysis 77 Robert Z. Aliber Comment 98 Peter M. Oppenheimer Paolo Savona 3 The Interbank Market Ill Richard J. Herring 4 Eurocurrency Arbitrage 123 Ian H. Giddy vi Contents Part Ill 5 Eurodollars: Policy Analysis 139 Guido Carli Comment 161 Charles A. E. Goodhart Alexander K. Swoboda Richard C. Williams Part IV 6 International Banking Facilities and the Eurodollar Market 183 Henry S. Terrell and Rodney H. Mills, Jr Comment 206 Patrick H. P. 0 'Sullivan R. Roderick Porter Jeffrey R. Shafer George Sutija Atsushi Watanabe Note on the Permanent Advisory Committee on Eurodollars (PACE) 220 Name Index 221 Subject Index 223 Preface The International Banking Center at Florida International University was created by the Board of Regents of the State University System as a 'centre of excellence' to promote international banking in the state of Florida. Among other activities the Center serves as a forum for discussion of international financial problems. In February, 1983 a conference on Eurodollars was held in Miami organised by the Center and sponsored by local banks under the chairmanship of Paolo Savona and George Sutija, editors of this volume. The editors would like to express their gratitude to the authorities of Florida International University, President Gregory B. Wolfe and Provost Steven Altman as well as to the Director of the International Banking Center John M. Porges for the support received in the organisation of the conferences and the preparation of the manuscript. The editors are particularly grateful to Dr Anna Maria del Prete from the Italian Ministry of Budget and Planning for advice and counsel and Mrs Rosa L. Padron from the International Banking Center for the enthusiasm, dedication and goodwill she always de monstrated in her work. Mr Juan Mario Sutija, student at Florida International University and Mr Davor Peter Sutija, student at the University of Pennsylvania did yeoman's work during the conference. Mr Robert Allan Schwarzreich, student at Florida International University assisted the editors in the preparation of the manuscript with his knowledge of international economics and editorial skills. Miss Francesca Ferrini typed the manuscript with great sense of humour and devotion. The editors would also like to acknowledge their appreciation to the sponsors of the conference, namely, Bank America International, Bank of Tokyo, Chemical Bank International, Credit Suisse, Flagship Banks, Lloyds Bank International, Southeast Banking Corporation and Florida International Bankers Association and also, to the participants who have come from many parts of the world. To our colleagues, Vll Vlll Preface speakers at the conference and the authors of this volume, the editors express their deep sense of friendship and desire for future meetings and collaboration. PAULO SAVONA GEORGE SUTIJA Notes on the Contributors Robert Z. Aliber is Professor of International Finance at the University of Chicago. He was formerly Senior Economic Advisor to the De partment of State, and a staff economist for the Committee for Economic Development and the Commission of Money and Credit. He has written extensively on exchange rates, gold and international financial relations. His publications include The International Money Game, Monetary Reform and Inflation, National Monetary Policies and the International Financial System and Corporate Profits and Exchange Risk. Guido Carli is President of the European Confederation of Industries (UNICE) and serves as a senator in the Italian Parliament. He was formerly Governor of the Bank of Italy and the Minister of Foreign Trade. He was a member of the Board of Directors of the International Monetary Fund and held several other important positions. He has published extensively on problems of international economics, banking and trade. Charles A. E. Goodhart is a chief adviser at the Bank of England. He taught at Cambridge University and at the London School of Economics in the field of monetary economics. He was, briefly, an Economic Adviser in the Department of Economic Affairs in London. He is the author of Money, Information and Uncertainty, and other books and articles, mostly on monetary economics and monetary history. He is widely known for his pioneering study on the relationship between macroeconomic developments and political popularity and he is the famous author of the 'Goodhart Law': any statistical regularity, notably in the monetary area, will break down when pressure is placed upon it for control purposes. Ian H. Giddy is Associate Professor at Columbia University's Graduate School of Business. He served formerly as a financial economist at the Comptroller of the Currency and the Board of Governors of the lX X Notes on the Contributors Federal Reserve System. He has written many articles on international banking, foreign markets and corporate international finance. Most recently he has co-edited the International Money Market and the International Finance Handbook. Richard J. Herring is Associate Professor of Finance and Director of the Wharton Program in International Banking and Finance at the Wharton School of the University of Pennsylvania. He has also served as consultant for the US Department of the Treasury, the Council of Economic Advisors and the Bankers Trust Training Program. He has published several articles on international banking, balance of payments problems, capital controls, international influences on interest rates, and the foreign exchange and Eurocurrency markets. With Richard C. Marston, he has written a book entitled National Monetary Policies and International Financial Markets, and he has recently edited two books of essays commissioned in honour of the Wharton centenary, Managing International Risk and Managing Foreign Exchange Risk. Rene P. Higonnet is Professor of Economics at the International University of Japan. He was formerly Director of the International Banking Center at Florida International University, and was an economist with the International Monetary Fund and the European Economic Commission. He has taught economics in France and the United States, and is the author of many articles on the problems of international monetary and banking relations. Jane S. Little is an economist at the Federal Reserve Bank of Boston. She has been associated with the Bank for the last sixteen years. She is the author of the book Eurodollars: The Money Market Gypsies, as well as many articles on international finance and foreign direct investment. Rainer S. Mastra is head of the Research Department of the Bank of Italy, and a member