Leading money center banks in the United States have accelerated their investment banking activities all over the world in recent years, purchasing corporate debt securities and stock from their business customers and reselling those securities to investors in the open market. Is this a desirable move by these organizations from a profit perspective? From a public interest point of view? If you were the CEO of a corporation that had placed large deposits with a bank that was engaged in those activities, would you be concerned about the risk? Why or why not?
In the mid 1960s, the United States the realised commercial advantages of lending internationally and has been has been involved in the international lending business ever since (Schuler, 1977). Several large banks in the country have earned a significant amount of net income from these dealings in comparison to the income derived from domestic assets (Schuler, 1977). As depositories for the vast OEPC surpluses, the powerful banks continued their foreign lending spree into the early 1970s, and this was not even curbed by the huge losses suffered due to such foreign operations in 1975 (Schuler, 1977). The American banks were accused of being obsessed with monetary growth (Schuler, 1977). This is because they showed an excessive dependence on assets from the most lackadaisically recovering and economically backward countries, which in turn will have large deficits as the likelihood of paying their loans decreased (Schuler, 1977). The question that arises is, have the lessons from the economic downfall of 2008, which drove in the importance of lending loans to creditworthy parties or individuals only, also taught the American banks the importance of assessing the creditworthiness of a country?
An increasing volume in international investment activities is an indication of a general development of the global economy, and this is indeed true as firms and governments in countries across the world are extensively involved with large-scale projects in industrial projects such as mining and infrastructure. The recent financial crisis has taught the banks the importance of geographic diversification should be balanced with the appropriate assessment of risky activities by external investors (Pinheiro, Gulamhussen, and Pozzolo, 2010). It cannot be denied that there is an immense political pressure to stamp out the position of large international banks, owing to the suggestions of their risky international activities, their interrelatedness, and the possible moral perils they can plunge the country (Pinheiro, Gulamhussen, and Pozzolo, 2010). However, research shows that in the United States, internationally diversified banks trade at a premium (Pinheiro, Gulamhussen, and Pozzolo, 2010). While international activities are instigated because they increase a banks value for its shareholders, it is also estimated that the by internationally diversifying, the excess value of a bank becomes statistically and economically important (Pinheiro, Gulamhussen, and Pozzolo, 2010). Moreover, the banks’ excess value remains healthy for diverse perceptions of diversification, for the probable impact of outliers, and for managing any endogeneity issues—in fact, geographic diversification of banks can be considered an endogenous selection, as commercial banks, which have a higher value in the market, have more opportunities of diversifying their activities in international locations as well (Pinheiro, Gulamhussen, and Pozzolo, 2010). It is recommended that the factors of bank risk and the means of avoiding and controlling such risks should be under constant and accurate analysis, especially in context to risk-taking associated with geographic diversifications (Pinheiro, Gulamhussen, and Pozzolo, 2010).
While it is the economic and moral responsibility financially developed countries to support promising market economies, internationally lending banks must be acutely aware of the shocks in the borrowing companies. However, it has been shown that the reimbursement on international investments, including lending operations of multinational banks, is compensated with profits companies, and thus, the economic value of the lending bank and the country is maintained or enhanced. Thus, the CEO of a corporation having large deposits in a bank engaged in international lending activities need not be unduly worried about the risks the bank is undertaking. However, this is provided that the bank adheres to the norms of responsible lending and is transparent in its dealings.
References
Schuler, H. D. Key Issues in International Banking-Evaluation of Risk in International Lending: A Bank Examiner’s Perspective Federal Reserve Bank of Boston. 1977. Print.
Pinheiro, C.M, Gulamhussen, M. A., and Pozzolo, A. F. “Do Multinational Banks Create or Destroy Economic Value?” Finance Meeting EUROFIDAI - AFFI.: December, 2010. Print.
