ssIndex

Sr.No Particulars

1 Introduction of offshore banking

2 History of offshore banking

3 Definition of offshore banking

4 Features of offshore banking

5 Offshore banking payment system

6 Benefit of offshore banking

7 Offshore trade in Banking services

8 Important event in offshore banking – Reason for growth of
offshore banking
9 Risks of offshore banking

10 Types of offshore banking

11 Offshore banking regulation
12 Conclusion
13 Bibliography

1
 CHAPTER 1
INTRODUCTION OF OFFSHORE BANKING

Offshore Banking has been one of the major growth stories of the century. The momentum of growth was
provided by the European and US banks under a new global financial system after the Bretton Woods
System and establishment of the International Monetary Fund (IMF) And World Bank thereby augmenting
global trade. However, advancement of technology also provided support to cross-border financial
markets and their gradual integration. In the twentieth century, growth in Offshore Banking was closely
linked to the phenomenal economic growth of the emerging Asian markets transforming into closer
relationship between these economies.

Offshore Banking is a process that involves banks dealing with

money and credit between different countries across the political boundaries. It is also known as Foreign
/Offshore Banking. In another words, Offshore Banking involves banking activities that cross national
frontiers. It concerns the international movement of money and offering of financial services through off
shore branching, correspondents banking, representative offices, branches an agencies, limited branches,
subsidiary banking, acquisitions and mergers with other foreign banks. All the basic tools and concepts of
domestic bank management are relevant to Offshore Banking. However, special problems or constraints
arise in Offshore banking not normally experience when operating at home.

2
 CHAPTER 2
HISTORY OF OFFSHORE BANKING

Led by British institutions, banks in the nineteenth century promoted two distinctly different types of international
lending- trade financing and investment banking. The former, short-term commercial lending on the traditional basis of bills
of exchange was typically used to finance commodity exports and imports or to deal in foreign exchange. The latter, a
pioneering development of the era consisting of the placement of long-term funds in fixed interest securities of an agency or
undertaking basis was used more for infrastructural and industrial investment. Trade financing was only a relatively small
part of the story in the nineteenth century. Far more important was the development of investment banking which accounted
for the great bulk of international lending, where, financial houses acted primarily as agents or underwriters for the placement
of long-term debt or equity issues with the broader investing public rather than as lenders on their own account. Risk was
borne by the tens of thousands of individual savers who invested in the capital market, rather than directly by the shareholders
or partners of banks themselves.

In the 1920s, New York rapidly supplanted London as the centre of global finance and American banking
institutions came to dominate the market for international lending. England and France declined notably as sources of new
funds and Germany – hamstrung by its mammoth reparations burden – was transformed into one of the biggest borrowers.
The sale of foreign investment by Americans during the euphoric Roaring Twenties transcended records set by Europeans
in the previous century.

The Offshore Banking system became one of the main victims of the Great Depression and World War II. A rash
of bank failures, default and violent contraction in international trade and investment shattered confidence in international
lending. Banking across national borders ground to a halt in the early 1930s and really did not resume until after World War
II.

The establishment of the Bretton Woods monetary systems restored confidence in international trade and
investment, establishing a new set of rules governing trade, finance and exchange rates that formed the basis of the post-war
world economy. With a secure financial framework in place multinational business blossomed and revolutionalised
economic life by creating global financial centres. Modern communications and information technology soon bound banks
together in a single global financial market.

Perhaps the most remarkable development that the financial industry has experienced since the end of World War
II has been the internationalization of banking. The banks that took the lead and embarked on multinational banking were
individual institutions from Canada, France, Germany, Switzerland, UK and the United States and also Japan. Undeterred
by geographical and other political and regulatory barriers to entry, these banks embarked upon the creation of worldwide
networks of outlets and became actively engaged in international operations. The international expansion of these banks has
brought about the increasing integration of worldwide banking systems. Despite apparent differences in the patterns of their
international expansion these banks have become a truly multinational set of competing financial institutions.

Offshore Banking has become one of the dominant features of the international monetary and financial system of since
the first oil crisis of 1973. The main factors in this development have been

3
(a) the unspent oil receipts of the low absorbing oil- exporting countries which were mainly deposited with the US and
European banks
(b) And the increasing financial needs of non-oil Less Developed Countries (LDCs) which were mainly covered by
loans from those banks. On a purely technical side, the development progress in the telecommunications sector.

4
 CHAPTER 3
DEFINITION OF OFFSHORE BANKING

Aliber defines “Offshore Banking” as a subset of commercial banking transactions and activity having a
cross-border and/or cross-currency element.
In other worlds, Offshore Banking comprises
a range of transactions that can be distinguished from purely domestic operations by
(a) The currency of denomination of the transaction,
(b) The residence of the bank customer and
(c) The location of the booking office.

A deposit or loan transacted in local currency between a bank in its home country and a resident
of that same country may be termed pure domestic banking. Anything else, in one form or another, is
Offshore Banking. The range of possible variations of international (or cross-border) banking is obviously
considerable.

The term Offshore Banking refers to the cross-currency facets of banking business. For example, cross-border
lending can occur in the traditional manner of taking deposits from foreigners and making loans to foreigner in the currency
of the country where the bank is located. Lending by banks in New York to foreigner in US dollars is an example of this
traditional activity. Until the 1960s, banks conducted the great bulk of their Offshore Banking transactions from offices in the
home country. But now loans in US dollars may be made by banks located in London. If the foreign currency loans by UK-
based banks are to foreigners they are cross- border claims and come under the definition of Offshore Banking. When such
loans are made in US dollars to UK residents they are cross- currency claims and are also included in the definition of Offshore
Banking.

5
 CHAPTER 4
NEW CHARACTERISTICS AND DIMENSIONS

As stated above, Offshore Banking is certainly a very old business, but since 1973 it has acquired new characteristics and
dimensions. First, the number of participants, which at the beginning of the period were mainly American banks, has
considerably widened to include German, UK, Japanese, French and Italian banks operating directly or through foreign
branches and subsidiaries. Second, the foreign component of total assets of the big international banks has grown at a rate
considerably above the average so that many major banks have now more international loans outstanding than domestic
ones. Third, a large part of the deficit of LDCs has probably been financed by commercial banks. Fourth, the amount of
individual loans has risen considerably thus increasing the risk from individual borrowers. Fifth, there has been a lengthening
of maturities.

Two novel kinds of overseas bank operations characterized international bank expansion in the late 1960s and 1970s.
The first was the multinational consortium bank, a new bank created by several established parent banks. The second was
the shell branch mainly in offshore centres, which is not really a bank at all but a device to get around domestic government
regulation.

Distinctive Features of the Growth of Offshore Banking in post- war years that set it apart from the earlier phase:-

One feature is simply that of scale. Another is the extent of business carried out in so – called offshore cnetres – where the
conduct of banking is facilitated by favorable and/or flexibly administered banking laws, exchange control and tax structures
and in which the volume of business is unrelated to the size and needs of the domestic market. The third one came when
banks operating in London and elsewhere began marketing loans in US dollars as well as in a wide variety of currencies
which lead to the development of Eurocurrency markets. Previously the location of bank’s operations determined the
currency in which it would make loans.

Features of Offshore Banking

Following key aspects distinctly highlight features of Offshore Banking which are absent in domestic banking:

1) Currency Risk:-

International Banks operate in different currencies. Currencies may weaken or strengthen with respect to each other.
Accordingly wealth value of the bank may vary. This is a significantly sensitive aspect in international arena.

2) Complexity of credit risk:-

Credit risk has additional dimensions of sovereign- political risk and also socio- cultural factor about honoring credit.

3) Competition for market share among banks:-

Competition is stiff because of presence of many giant bankers. This in effect reduces margins and demands highly
efficient performance.

6
4) Cyclical nature with periodic crises:-

World economies are not moving in unison. Cycles of growth and recession move from one continent to another.
Multinational Banks face these waves and also occasional crisis such as crash of an economy.

5) Competition for bank loans from the international bond market:-

Threat of disintermediation is more because Offshore Banking has many big value transactions which may
eventually bypass banks. Bond market is matured in developed countries, even for foreign currency denominated bonds.

6) Importance of international interbank market (IIBM) as source of liquidity and funding for banks:-

Interbank transactions in multiple currencies area common in Offshore Banking. In effect bankers enjoy better
liquidity solutions.

7) Role of risk management activities:-

Being in forex market, banks deal with additional hedging instruments such as currency futures/ options, etc.

7
 CHAPTER 5
THE INTERNATIONAL PAYMENTS SYSTEM

A payments system is the system of instruments and rules which permits agents to meet payment obligations and to receive
payments owed to them. As was noted in Chapter 1, banks, as intermediaries, are important players in the payments system
because they are the source of the legal currency and they facilitate the transfer of funds between
agents. Denial of access to payments can be used as an entry barriers in banking. If the payments system
extends across national boundaries, it becomes a global concern. Typically, major banks acts as clearing
agents not only for individual customers but also for smaller banks. There is a high degree of automation in the
Offshore Banking system. The key systems are outlined below :

INTERBANK MARKET

 SWIFT

SWIFT, the Society for Worldwide Interbank Financial Telecommunications, which was
established in Belgium in 1973. A cooperative company, it is owned by roughly 2000 financial
institutions, including banks, worldwide. The objective of SWIFT is to meet the data communications and
processing needs of the global financial community. It transmits financial messages, payment orders, foreign exchange
confirmations, and securities deliveries to over 3500 financial institutions on the network, which are located
in 88 countries. The network is available 24 hours a day, seven days a week throughout the year. The messages
include a wide range of banking and securities transactions, including payment orders, foreign exchange transactions, and
securities deliveries. In 1992, the system handled about 1.6 million messages per business day. Real time and on-
line, SWIFT messages pass through the system instantaneously.

 FEDWIRE

Fedwire and Chips both of these systems are for high value, dollar payments. FEDWIRE, the
Federal Reserve’s Fund Transfer System, is a real – time gross settlement transfer system for domestic funds, operated
by the Federal Reserve. Deposit –taking institutions that keep reserves or a clearing account at the Federal
Reserve use FEDWIRE to send or receive payments, which amounts to about 11000 users. In 1992, there were 68million
FEDWIRE funds transfers, with a value of $199 trillion. The average size of a transaction is $3 million.
FEDWIRE, there is multilateral netting of payments transactions, and net obligations are settled at the end of each
day.

 CHIPS

CHIPS, the Clearing House Interbank Payments System, is a New York – based private payments system,
operated by the New York Clearing House Association since 1971. CHIPS is an online electronic payments system for the
transmission and processing of international dollars. At 1630 hours (Eastern Time), CHIPS informs each
participant of their net position. Those in net deficit must settle by 1745 hours, so all net obligations are
cleared by 1800. Most of the payments transferred over CHIPS are international interbank transactions, including
dollar payments from foreign exchange transactions, and Eurodollar placements and returns. It also makes payments

8
 associated with commercial transactions, bank loans, and securities. Obligations on other payments or
clearing systems can be settled through CHIPS. In1992, there were 40 million payments, valued at $240 trillion.

 CHAPS :

London – based, the Clearing House Automated Payments System was established in 1984 and permits same –day
sterling transfers. There are 14 CHAPS settlement banks, including the Bank of England, along with 400
other financial firms which, as sub-members, can engage in direct CHAP settlements. The 14 banks are responsible for
the activities of sub-members, and settle on their behalf at the end of each day. The closing time in 1510 hours
(GMT). The Bank of England conducts a daily check of the transfer figures submitted to them. In 1992, the total value of
payments through CHAPS was $20 928 billion, equivalent to a turnover of British GDP every seven days. There
are other payments systems in the UK; CHAPS is for high-value, same-day sterling transfers. CHAPS accounts for just over
half the transfers in the UK payments system; the average daily values transferred through the UK system was $161 billion
in 1993. A framework for introducing real time gross settlement was drawn up in 1993. It will mean transactions across
settlement accounts at the Bank of England will be settled in “real – time”, rather than at the end of each day.

A number of the large global banks run their own electronic payments systems, primarily to facilitate internal
global payments. These systems are run alongside SWIFT and other public systems. The internal systems
are also used to attract corporate business. SWIFT is the most popular electronic fund transfer system
because if offers real time gross settlement 24 hours a day and is a cooperative, non-profit maximizing
system. CHIPS and CHAPs were criticized for their limited opening hours and excessive charges,
especially for erroneous messages. Also, member banks effect transactions in CHIPS and CHAPS, so competitors
must use these banks as their agents. All three systems have problems arising from complex and incompatible software,
leading to high staff training costs. A potential competitor in the future will be a secure internet system
which use e-cash to settle transactions in real time.

 THE EUROMARKETS

The euro bond and euro equity markets were discussed earlier in this chapter. However, their
contribution to the flow of global capital is worth stressing. Prior to their development, foreign direct
investment was the predominant source of global capital transfers between countries. The euro markets
enhanced the direct flow of international funds.

9
 CHAPTER 6
THE COSTS AND BENEFITS OF OFFSHORE BANKING

The costs and benefits of the Offshore Banking system are reviewed with the objective of assessing the
effect of the Offshore Banking development on the welfare of the national economies. The key benefit from Offshore
Banking is a rise in bank consumer surplus, the difference between what a consumer is willing to pay for a bank service and
what the consumer (who in the case of Offshore Banking, is probably a corporate customer) does pay. For bank products,
consumer surplus will increase if deposit rates rise, loans rates fall, and fees for bank service decline. As the globalization
of banking increases, consumer surplus should rise, for several reasons.

First, Offshore Banking should increase the efficiency of the international flow of capital. Prior to recent
developments, the transfer of capital was achieved primarily through foreign direct investment and aid related financed. The
Eurocurrency markets have enhanced the efficient flow of capital by bringing together international
lenders and borrowers. For example, the absence of regulation on the Euromarkets has permitted marginal pricing on loans
and deposits – the unconstrained LIBOR rates have eliminated credit squeezes which tend to arise under an administered
rate. New capital movements will be observed if, prior to the emergence of the system, interest rates varied across
countries. As was observed earlier, there is no doubt the Euromarkets enhanced the transfer of new capital between
countries. MNBs will increase the number of banks present in the country, thereby increasing competitive pressure
by eroding the traditional oligopolies of the domestic banking system.

Greater competition among the international banks should reduce the price of international bank products. Domestic
banking systems will also be under greater competitive pressure if some of the country’s consumers are able to
purchase international bank products and by-pass higher prices in the domestic market. As a result, there should be
more competitive pricing in domestic markets, for those customers who have the option of going offshore
(mainly corporate).

Offshore Banking activities can also be responsible for a number of welfare costs. First, revenue for central
government may be reduced. If a central bank imposes reserve requirements on deposits in the banking system, the
introduction of Offshore Banking facilities will lead to the flow of funds out of the domestic banking
system and into the international system where deposit rates are higher. A reserve ratio requirement is a form
of taxation on the banking system because it requires idle funds to be held at the central bank. The reduced volume
of domestic deposits as they move offshore will reduce government revenues accruing from this source. These will be
reduced still further if the competition forces the central bank to abandon the reserve ratio requirement, or eliminate
controls on deposit rates. To make good the loss from the implicit tax on bank reserves, the government may
impose a new type of distortionary taxation.

Second, the Offshore Banking system is not truly global, because it is largely confined to the
wholesale banking market. This means there is discrimination in loan and deposit rates, those having access to the
offshore banks getting more favorable terms than their fellow nationals. Since only some of the customers in a national
economy gain, it will not be possible to judge whether there is a net gain accruing to residents of a give country.

10
 Third, the diversion of banking activity from onshore to offshore alters the real resource costs of
banking. Whether they increase or decline is governed by the cost differential between inshore and offshore
banking. The movements of the loan and deposit rates in the Euromarkets since their operation began suggests the real
resource costs have been lower. But they may have been underestimated for several reasons. For example, the
banks underestimated the cost of lending in the Eurocurrency markets, especially in the case of sovereign loans; banks
thought this type of lending was almost risk –free, because a country could not be declared insolvent. More
generally, banks lack experience in setting the prices for newer financial products, commensurate with their risk.
Information asymmetries are normally more pronounced in Offshore Banking. In a domestic system a bank officer is able to
assess creditworthiness on the basis of direct knowledge about the borrower.

In the Euro market only the final lender has certain knowledge of who the borrower is, the average
deposit passing through several banks before being loaned to a non-bank borrower. Often, the exposure of other banks in the
Euromarkets is unknown to each individual bank. If global banking aggravates information difficulties,
confidence is undermined, making bank runs more likely.

In 1984, the Institute for International Finance (IIF) was established by banks to collate
information on international bank activity. Its establishment suggests banks thought they may have underestimated
the costs of information gathering in Offshore Banking. But it may not be the optimal solution. Given increasing
return to the pooling of costly information, the IIF may not be the most cost effective way of collecting
information, because it consists of a small coalition of international banks. Also, it could encourage
oligopolistic tendencies in Offshore Banking. To conclude, there have been both welfare costs and benefits associated
with the development of Offshore Banking. Though some of the resource costs associated with Offshore Banking are
difficult to quantify, it is generally accepted that the net welfare effects have been positive because new flows
of capital created by the system have increased global productivity.

11
 CHAPTER 7
OFFSHORE TRADE IN BANKING SERVICES

International trade theory may be used to address the issue of why banks engage in the trade of international
bank services. Comparative advantage is the basic principle behind the international trade of goods and services. A country
is said to have comparative advantage in the production of a good (or service) if it is produced more efficiently in this
country than anywhere else in the world. The economic welfare of a country increases if the country exports the goods in
which it has a comparative advantage and imports goods and services from countries which are relatively more
efficient in their production. At firm level, firms engage in international trade because of competitive
advantage. The exploit arbitrage opportunities.

A firm will export a good or service from one country and sell it in another because there is an
opportunity to profit from arbitrage. The phenomenon of trade in Offshore Banking services is best explained by appealing
to the theories of comparative and competitive advantage. In banking, the traditional core product is an
intermediary service, accepting deposits from some customers and lending funds to others. The intermediary
function involves portfolio diversification and asset evaluation. A bank which diversifies its assets can offer a risk
/ return combination of financial assets to individual investors /depositors at a lower transactions cost than
would be possible if the individual investor were to attempt the same diversification. Banks also offer the
evaluation of credit and other risks for the uninitiated depositor or investor. The bank acts as a filter to
evaluate signals in a financial environment where the amount of information available is limited.

If banks offer international portfolio diversification and/ or credit evaluation services on a global
basis, they are engaging in the international trade of their intermediary service. For example, a bank may
possess a competitive advantage in the evaluation of the riskiness of international assets, and therefore, its
optimal portfolio of assets will include foreign currency denominated assets.

A by- product of intermediation is bank participation in the payments system, including settlement, direct
debit, and chequing facilities. If some of its corporate or retail customers engage in international trade activity, they
will require global money transmission services. The simplest example is the provision of foreign
exchange facilities across national frontiers is now well developed. In parts of Europe, it is possible to use a debit card
from one state (for example, the UK) to obtain local currency in another state (for example, Spain).To conclude, if a bank
offers its intermediary or payments services across national boundaries, it is engaging in international trade
activities and is like any other global firm which seeks to boost its profitability through international trade.

12
 CHAPTER 8
IMPORTANT EVENTS IN OFFSHORE BANKING – REASONS FOR GROWTH OF
OFFSHORE BANKING

 INTEGRATION OF WORLD ECONOMY

There is uneven distribution of natural resources across the globe and there is interdependence for
those natural resources which forms the base for international cross border trade, service, investment,
lending and borrowing. Absolute advantage theory and comparative cost advantage theory also allocate
the same thing. As per the absolute advantage theory those countries having natural resources are in a
position to export those goods and services and countries lacking those natural resources has no alternate
but to import it. Comparative cost advantage theory assumed two country two product model. The country
which is having mass scale production will always have comparatively lower cost. Price is the main
consideration for cross border trade, services, investment and lending and borrowing. Ongoing research
and development also affects cost of production. The country which is having lesser price will be in a
position to export goods and services and country which is having higher price will import it.

 OIL CRISIS AND EFFECTS ON US ECONOMY 1973-74

Between October 1973 and January 1974 world oil prices quadrupled. By putting an end to decades
of cheap energy, the 1973-74 oil crisis, which was led by Arab members of the Organization of Petroleum
Exporting Countries (OPEC), exacerbated the economic difficulties facing many industrialized nations,
forced developing countries to finance their energy imports through foreign borrowing, and generated
large surpluses for oil-exporters.

The oil crisis started when OPEC (Organization of Petroleum Exporting Countries) announced
that they will no longer ship petrol to those nations which had supported Israel in the war with Egypt. Due
to this factor oil crisis increase by 17% In the year 1973 oil crisis increased from US dollar 3.65 per barrel
to 80 US dollar par barrel. This affected all western countries and specifically USA. USA with 6% of
world population is consuming 35% of oil.

 COLLAPSE OF BRETTON WOODS SYSTEM

In the back crop of global financial crisis of 1944 members of 44 countries met in bretton woods,
Hampshire in U.S.A. and resolve and gave birth to 3 important institution.

13
1. International Monetary Fund (IMF)

I. To promote proper and stable exchange rate system.

II. To established multinational system of payment between member country.
III. To lift foreign exchange restriction.
IV. To promote international trade.
V. To provide short term finance to members.

2. International Bank for Reconstruction and Development (IBRD- World Bank)

I. To provide long term finance for reconstruction and development of member country.
II. To encourage capital investments (long term)
III. To promote private foreign investment.
IV. To promote international trade.
V. To create environment of non- discriminatory and free trade environment.

3. General Agreement on Trade and Tarff (GATT)

Due to effect of WW-II all the member countries were having protectionist approach in which
members countries encourage export by giving incentives to the exporter and discouraging importer
by imposing tariff and non- tariff barrier. Member country were also protecting their domestic
economies from outside competition. Due to protectionist approach international trade came to stand
still. The objective of GATT as under:-

I. Reduction of tariff as well as non-tariff barrier.

II. Create environment of free trade.
III. To eradicate protectionist approach of the members countries.

Apart from the above following important resolution where adopted by the members countries.

I. US dollar was accepted as a global currency

II. USA has declared par value of a US dollar against gold US dollar 35 for 1 OUMCE of gold.
III. All the member countries started their trade with USA for accumulating their US dollar or 1
OUMCE of gold.
IV. Members countries were required to fix par value of their currencies in terms of US dollar with a
bond of + or – 1% (system was known as adjustable peg).
V. Member countries were required to keep reserve of either of their gold or US dollar to maintain
par value of their currencies. Most of the member countries started accounting gold reserves
instead of US dollar. US could not maintain of US dollar with gold as such this system collapse in
the year 1971.

14
 EMERGENCE OF EURO MARKET

After World War II most of the countries formed regional group. Euro currency market is one of
them where in Euro dollars and Petrol dollars are invested and traded. The term Euro originated in 1950
when USA imposed Marshall Plan. The dollars which are invested and traded outside in USA are known
as “Euro Dollars”.

The European Union will enter Stage Three of Economic and Monetary Union (EMU) in 1999.
The development of euro financial markets and thickness externalities in the use of the euro as a means of
payment will be the major factors determining the importance of the euro as an international currency. As
euro securities markets become deeper and more liquid and transactions costs fall, euro assets will become
more attractive, and the use of the euro as a vehicle currency will expand; the two effects interact, as we
demonstrate. We use a three-region world model as a framework for alternative steady-state scenarios.
With forex and securities market data, we assess the plausibility of those scenarios and the implications
for economic efficiency (welfare). We find that the euro may take on some of the current roles of the
dollar. The welfare analysis reveals potential quantitatively significant benefits for the euro area, at the
cost of the US and (to a lesser degree) Japan.

 LIBRALISATION, PRIVATISATION AND GLOBALISATION OF WORLD ECONOMY:-

Globalization is a process by which people culture societies economies and market get integrated.
Economic globalization integrates national economies into international economies through cross border
trade and cross border capital flow. Following are responsible for liberalization, privatization and
globalization

I. Removal of trade barrier (tariff and non- tariff barrier).

II. Advancement in communication transportation and information technology.
III. Diversification of products and services.
IV. To attain economies of scale.
V. Push factor and Pull factor.

 EFFECTS OF WORLD WAR II

Due to devastating effects of World War II all the international economic activities came to stand
still. Global economic growth was severally affected. There was no proper exchange rate system (barter).
As such each and every country objective was to reconstruct and developed their economies most of the
countries where suffering from higher inflation. Each and every country was suffering from ‘Balance of
Payment Problem’ (shortage of foreign exchange)’

15
REASONS FOR GROWTH OF OFFSHORE BANKING

Numerous explanations have been offered to account for the growth of Offshore Banking. The
“follow- the- leader” explanation suggest that banks expand across national borders to continue to service
customers who themselves establish branches or subsidiaries abroad because it is profitable to do so.
Another explanations sees expansions abroad as a result of competition. Banks operating under intense
competition in some home markets are forced to develop low cost technologies for financial
intermediation and have then an incentive to exploit their competitive advantage in other markets.

A third explanation drawn from the analysis of foreign direct investment, argues that banks use
management technology and marketing knowhow developed for domestic uses at very low marginal cost
abroad. Fourth, market imperfections due to domestic rules, regulation and taxation combined with a
drastic reduction in the cost of communications, have been seen as a major cause behind the growth of
Eurocurrency banking. Finally, inter- country differences in the cost of capital have also been used as an
explanation. Firms in general are able to expand their market share when their cost of capital is lower than
that of their competitors; because of high leverage of equity in banking, this general principle is seen as
particularly relevant to explain the pattern of growth of banks on the world market.

Phillip Callier has advanced another reason for the growth of Offshore Banking. The argument
elaborated by him in his article “Professional Trading, Exchange Rate Risk and the Growth of Offshore
Banking” asserts that, thanks to the establishment of money market and foreign exchange operations in
major trading centres throughout the world, large banks can significantly reduce the risk of those
operations or increase their return. The argument rests fundamentally on the well- known fact that the
Earth executes a complete rotation around its axis once in every 24 hours. Generating in the process a
sequence of days and nights so that the financial market never sleeps.

16
Explanations can be classified into three categories:

1. Financial Activity Following Real-Sector Transactions:

Cross- border financial institutions through affiliated offices abroad improve services for existing
non- financial customers who themselves had established operations abroad.

2. Financial Activity Leading Real- Sector Transactions:

(a) Cross- border financial transactions, conducted from home offices of financial institutions that
proceeded in advance and independently of cross- border trade in goods and services.
(b) Establishment by financial institutions of affiliated offices abroad in advance and independent
of the current requirements of existing non- financial customers in the home country.

3. Regulatory, Tax and Supervisory Explanations:

(a) Lowering of national separation fences.

(b) Establishment by financial institutions of affiliated offices abroad to escape from more
stringent regulation, taxation and supervision in the home environment

17
 CHAPTER 9
RISKS IN OFFSHORE BANKING

In any business activity, as in life, there is always an element of risk. Some risks are big, others
are small. The word “Risk” is derived from the early Italian “Risicare” which means “to dare”- therefore
risk is choice rather than a mere faith. Risk in the banking industry have been perceived all through the
history of banking. The risks were understood instinctively and through experience. But in the early
period, the control measures or the risk limiting exercises were not formalized. In the recent past, there
has been more awareness of identifying the risks and a need was felt to set-up risk control mechanisms.
Various risks, as they are perceived today, are presented in the following:

 CREDIT RISK

Banking in any form- private bankers, co-operative banks, national banks or international banks-
would traditionally involve lending activity. Thus, most common risk across the banking sector is the
credit risk. This risk may be in the domestic sector or in overseas operations depending upon the nature
of activities of the bank. Credit risk is one of the well- understood risks in banking and banks normally
have documented strategy to deal with it. A bank usually has a well- defined credit policy. The credit
policy would lay down the rules or guiding principles stipulating limits of exposure to individuals, groups.
Industries, regions, etc. The Central bank, or in deregulated conditions the bank itself, would limit its total
credit as a certain percentage of its resources.

In India, the Reserve Bank of India stipulates the percentages of Cash Reserve Ratio and Statutory
Liquidity Ratio. Thus, banks in India need to park part of their deposits in cash, bank balances and
approved securities. The remaining portion can be utilized for lending purposes. Banks also have their
norms restricting their credit exposures to an individual borrowers or to a group. The restriction is
normally placed as a percentage of the bank’s own funds. This is usually the regulator’s prescription.
However, a bank may set its limit lower than the prescribed levels. The limits may also be placed in
absolute terms. Banks may also have limits set on their exposure to a particular industry.

The 1988 Basle Capital Accord developed credit risk based capital standards. Basle Agreement
laid down a uniform standard for capital adequacy. Over a hundred countries have adhered to this
agreement. The most important aspect of the Basle Agreement is high capitalization.

 MARKET RISK

The market means the total market of the whole economy. With the price change of each and every
commodity the market price of the total market also changes. And the change can have adverse effect on
the financial system, which is referred as market risk. The calculation of market risk is quite difficult, as
it is related to the entire market of the sovereign state. The specialists have found scenario analysis and
stress testing as an effective technique to measure the market risk, which provided a pathway to establish
an effective market risk management technique. Market risk as early described it totally inter-related to
18
 the price of commodities in the whole market. So market risk management combines of the total process
of taking affective action so that adverse impact on the financial system can be easily managed, as well as
equity analysis is also important.

Market risk is the sensitivity of the value of a financial instrument or portfolio to changes in market
parameters. These parameters include interest rates, foreign exchanges rates, equity market indices and
commodity prices. For risk management the first step is to understand the risk and then to measure it. To
understand market risk quantitatively, a single parameter is not adequate.

The first challenge of risk management is to identify the risk factors. In the banking world. Two
major market risk factor are the interest rate risk and the foreign exchange risk. These are:

(a) Interest rate risk:

Movement in interest rates brings about changes in the value of underlying assets and
liabilities. This could arise due to mismatched positions. This risk directly affects the profitability
of a bank. Review of maturity patterns and limits on maturity gaps along with the study of interest
rate movements on an ongoing basis are some of the measures taken to control the risk.

(b) Foreign Exchange Risk:

Fluctuations in exchange rates pose a major risk to all banks and, in particular, international
banks. This risk is attributed to open positions in foreign exchange. It can be controlled by
minimizing open forex positions.

 SETTLEMENT RISK

Although settlement risk has always been a part of financial institutions, it has not received a high
level of management attention. One of the most serious crisis of Offshore Banking, the collapse of the
German bank_ Bankhaus Herstatt- in 1974, caused havoc with the settlement process and drew the
attention of the banking community to settlement risk. On 26 June 1974, the banking license of this bank
was withdrawn. It was also ordered into liquidation during that banking day, but after the close of the
inter- bank payment systems in Germany. Before the announcement of closure, many counter- party banks
had irrevocably paid Deutsche Marks to Herstatt against anticipated receipt of US dollars later the same
day in New York. This action left Herstatt’s counter- party banks exposed for the full value of DEM
deliveries made. This is ‘settlement risk’. A settlement risk is often called ‘Herstatt risk’ because of its
strong association with the Herstatt crisis.

To control the systemic risk inherent in setting foreign exchange transaction, it is necessary to
understand the nature and scope of the forex settlement process. The amount of risk in setting a foreign
exchange trade equals the full amount purchased. The risk starts when the payment instruction for the
currency sold can no longer be unilaterally cancelled. It lasts until the bank to come to know about the

19
 receipt of funds should be kept in mind. The bank that receives the purchased currency first has obviously
no settlement risk. The duration of forex settlement exposure typically lasts for two to three business days.

To control the settlement risks, banks need to impose separate bank wise limits for settlements. In
addition, bilateral netting services should be used to reduce settlement risks.

 LIQUIDITY RISK

There are two types of liquidity risks. One is related to a specific product or market and the other
to general funding of the institution. The first is the risk that a bank may not be able to offset at or near
the previous market price due to inadequate market depth or because of market disruptions. Suppose a
bank builds-up an over-bought position in a particular security, When the bank finds that it is not able to
sell these securities at the market price due to lack of buyers or possible disruptions in communication
channels, it faces liquidity risk. However, if the general liquidity position of this bank is satisfactory, then
it does not face liquidity risk of a general nature.

Liquidity risk of a general nature may affect the very existence of a bank. Well structured, adequate
and balanced liquidity management is an important aspect for a bank. In India, CRR and SLR restrictions
ensure adequate liquidity of a general nature. However, one should not lose the perspective the excess
liquidity is harmful for the profitability of a bank. It is, therefore essential to have a balanced approach to
this problem. For individual securities or products a bank needs to have suitable limits, so that an
unforeseen, unexpected situation is not encountered.

 OPERATIONAL RISK

Sometimes the shortcomings in procedures or controls may result in unexpected losses. This risk
is associated with human errors, system failures and inadequate procedures and controls. This is a broad
range of risks that are internal to a bank.

Again the organizations and financial institutions due to their operation faults, human error,
management misconduct and natural disaster fell prey to some uncertainty, which is referred as operational
risk. Finance people along with the management people found that, inadequate skill, faulty process of
management etc are the main reason behind their reason of being victimized by this specific risk. This
specific risk is of the same importance as of the other, as it also can have systematic affect such as bank
run etc.

To counter the operational risks, banks need to have well- documented procedures and systems
and also independent and meaningful inspections. The procedures and systems should be reviewed from
time to time. With rapid technology changes and innovations in financial markets, the systems need to
20
 keep pace. Technology does provide solutions, expedites operations but at the same time controls and
systems need to evolve to match such changes. A strong system management apparatus is the need of the
hour.

 LEGAL RISK

International banks operated in transborder situation. The legal provisions may differ across
countries. It has therefore become necessary for banks to understand legal implications in different
countries. Contracting and conducting business with external parties and employees are to be carried out
with due care, keeping in mind the underlying legal framework. Compliance with the local regulatory
structure is essential. The risk includes not only the question whether the documentation is enforceable,
but also whether the bank has discharged its own legal and regulatory responsibilities. The cost of such
failures can be enormous.

Standardization is evolving across the world in case of trade related documentation. The
jurisdiction also can be stated specifically in the contract. These measures do help to understand the legal
position clearly. However, still differences in legal positions, regulatory responsibilities do prevail. For
example, a contract with a 19-years-old person is valid in India, but may not be so in some other countries
like Singapore.

 CURRENCY RISK

Currency risk is a form of risk that originates from changes in the relative valuation of currencies.
These changes can result in unpredictable gains and losses when the profits or dividends from an
investment are converted from the foreign currency into U.S. dollars. Investors can reduce currency risk
by using hedges and other techniques designed to offset any currency-related gains or losses.

International investors have several options when it comes to managing currency risk, including
things like currency futures, forwards and options. But these instruments are often expensive and
complicated to use for individual investors. One simple, flexible and liquid alternative to hedge against
currency risk are currency-focused exchange-traded funds (ETFs).

There are several large financial institutions that offer currency-focused ETFs. The two most
popular providers are Currency Shares and Wisdom Tree, which both offer a wide variety of ETFs
covering a number of different currencies around the world. These currencies include popular international
investment destinations ranging from Canada to emerging markets like China and Brazil.

21
 CHAPTER 10
TYPES OF OFFSHORE BANKING OFFICES

At the heart of international finance are international banks, which come in different structures and
roles. "The Handbook of Offshore Banking" notes that international banks have helped pave the way for
the globalization of finance. Since people across the world hold diverse interests and pursuits in the
financial world, it is natural that global banks conform to a diversity of roles to accommodate the nature
of Offshore Banking.

The services and operations which an international bank undertakes is a function of the regulatory
environment in which the bank operates and the type of banking facility established.

 CORRESPONDENT BANKS

Correspondent banking implies a relationship between at least two banks, including those in
differing countries. Multinational corporations (MNCs) may utilize these banks for conducting global
business, according to the University of Michigan. Correspondent banks are usually small, and may have
representative offices serving MNCs outside of the bank's home country. A correspondent bank
relationship is established when two banks maintain a correspondent bank account with one another. The
correspondent banking system provides a means for a bank’s MNC clients to conduct business worldwide
through his local bank or its contacts.

 A REPRESENTATIVE OFFICE

A representative office is a small service facility staffed by parent bank personnel that is designed
to assist MNC clients of the parent bank in its dealings with the bank’s correspondents. It is a way for the
parent bank to provide its MNC clients with a level of service greater than that provided through merely
a correspondent relationship.

 FOREIGN BRANCH BANK

These banks operate in countries foreign to the parent bank to which they are legally tied. They
must abide by banking regulations established in the home and host countries. A foreign branch bank
operates like a local bank, but legally it is a part of the parent bank. As such, a branch bank is subject to
the banking regulations of its home country and the country in which it operates. The primary reason a
parent bank would establish a foreign branch is that it can provide a much fuller range of services for its
MNC customers through a branch office than it can through a representative office.

22
 SUBSIDIARIES AND AFFILIATES

A subsidiary bank is incorporated in one country, but is either partially or completely owned by a
parent bank in another country. An affiliate works in a similar manner except it is not wholly owned by a
parent company and operates independently. A subsidiary bank is a locally incorporated bank that is either
wholly owned or owned in major part by a foreign subsidiary. An affiliate bank is one that is only partially
owned, but not controlled by its foreign parent. Both subsidiary and affiliate banks operate under the
banking laws of the country in which they are incorporated. U.S. parent banks find subsidiary and affiliate
banking structures desirable because they are allowed to engage in security underwriting.

 EDGE ACT BANKS

This designation applies to certain U.S. banks, and is based on a 1919 constitutional amendment.
While physically located in the United States, Edge Act banks conduct business internationally under a
federal charter. Edge Act banks are federally chartered subsidiaries of U.S. banks which are physically
located in the United States that are allowed to engage in a full range of Offshore Banking activities. A
1919 amendment to Section 25 of the Federal Reserve Act created Edge Act banks. The purpose of the
amendment was to allow U.S. banks to be competitive with the services foreign banks could supply their
customers. Federal Reserve Regulation K allows Edge Act banks to accept foreign deposits, extend trade
credit, finance foreign projects abroad, trade foreign currencies, and engage in investment banking
activities with U.S. citizens involving foreign securities. As such, Edge Act banks do not compete directly
with the services provided by U.S. commercial banks. Edge Act banks are not prohibited from owning
equity in business corporations as are domestic commercial banks. Thus, it is through the Edge Act that
U.S. parent banks own foreign banking subsidiaries and have ownership positions in foreign banking
affiliates.

 OFFSHORE BANKING CENTER

A "Swiss bank account," commonly referred to in Hollywood movies, is an example of an offshore

banking center's services. According to the University of Michigan, these centers are actually countries
with banking systems allowing foreign accounts that function independent from the country's banking
regulations. An offshore banking center is a country whose banking system is organized to permit external
accounts beyond the normal economic activity of the country. Offshore banks operate as branches or
subsidiaries of the parent bank. The primary activities of offshore banks are to seek deposits and grant
loans in currencies other than the currency of the host government.

 OFFSHORE BANKING FACILITIES (IBF)

In 1981, the Federal Reserve authorized the establishment of Offshore Banking Facilities (IBF).
An IBF is a separate set of asset and liability accounts that are segregated on the parent bank’s books; it
is not a unique physical or legal entity. IBFs operate as foreign banks in the U.S. IBFs were established
largely as a result of the success of offshore banking. The Federal Reserve desired to return a large share
of the deposit and loan business of U.S. branches and subsidiaries to the U.S.
23
 Offshore
Banking Representative
Facilities
Offices

Offshore
Offshore Banking Foreign
Banking Offices Branch Bank
Centre

Edge Act Subsidiaries

and Affiliates
Banks

RECENT DEVELOPMENTS IN OFFSHORE BANKING

Banking crises in emerging markets in the 1990s were associated with major macroeconomic disruptions: sharp
increases in interest rates, large currency depreciations, output collapses and lasting declines in the supply of
credit. Bank credit has since recovered in a number of countries, and there have been significant changes in banking
structure, performance and risk management capacity. Drawing on contributions by senior central bank
officials from emerging market economies and staff of the Bank for International Settlements, the volume seeks to
shed light on recent developments by addressing five broad topics.

 RECENT TRENDS IN BANK CREDIT

After peaking in the second half of the 1990s, bank credit to the private sector has recently risen in a
number of emerging market economies, partly because of stronger demand for loans associated with robust growth
and low interest rates, and partly because of greater supply of loans associated with improved bank balance
sheets. The share of bank credit to the business sector has nonetheless declined in part because lagging investment
spending has curbed corporate loan demand, and also because of the availability of financing in bond and equity
markets. In some countries risk adverse banks have held government securities rather than lend to the corporate private
sector. Financial institutions have increased lending to households but this exposes them to new forms of risk, as
illustrated by difficulties in the credit sector in Korea earlier in this decade. One concern is that banks in some
countries have transferred a significant amount of interest rate or exchange rate risk to households through floating
rate credit or loans denominated in foreign currency.

 THE PACE OF STRUCTURAL CHANGE

Banking systems in emerging economies have been transformed by privatization, consolidation and foreign bank
entry. Bank efficiency and performance have improved, apparently in response to a more competitive climate. More recently,

24
 reforms appear to have slowed, in part because the easy work had been done and because of alternative approaches to reform.
For example, rather than engaging in full scale privatization, countries like China and India are only gradually
transferring ownership of major state-owned banks to the private sector. As for bank consolidation, it has been
market-driven and foreign banks have played an important role in central and Eastern Europe and Mexico, while
the state has played a larger role in Asia. Increased concentration was not seen as a threat to competition and access
to bank financing had improved with the growing presence of foreign banks. However foreign banks raised
political concerns because of perceived high profits and were also difficult to supervise because parent banks'
global goals and information flows did not always coincide with the needs of host country supervisors.

 EVOLUTION IN AND MANAGEMENT OF RISKS FACING BANKS

Macroeconomic vulnerabilities (particularly to external shocks)appear to have declined, reflecting

a mix of favorable temporary conditions as well as improved policies (higher foreign reserves, more flexible
exchange rates, domestic debt market development and improved fiscal policies). However, some central banks were
still concerned about vulnerability to certain shocks (e.g. to domestic demand, to increases in oil prices or interest rates
or declines in property prices),particularly given the exposure of banks to interest rate or exchange rate risk and the need in
some countries for further fiscal consolidation. Banks increasingly relied on systematic risk assessment
procedures and quantitative risk management techniques, with lending being influenced less by government direction or
special bank relationships with borrowers. However, challenges still arose from lack of data on loan histories
for estimating default probabilities, and risks related to liquidity and credit risk transfer. Regarding
liquidity risk, there is a need to ensure that banks rely on the interbank markets, rather than the central bank for liquidity.
Regarding credit risk transfer, notwithstanding significant benefits associated with the growing use of credit risk
transfer instruments, their rapid spread might in some cases outpace the capacity of financial institutions to assess
and price risks.

 PREVENTING SYSTEMIC BANKING CRISES

One indicator of stronger banking systems is that the volatility of output and inflation has fallen in
emerging market economies while their capital ratios have risen significantly. This reflects

(i) policies designed to improve bank governance and information disclosure that enhances market
discipline,

(ii) regulatory measures to dilute risk concentration, limit connected lending, establish realistic
provisioning rules and to improve inspection process;

(iii) The evolution in supervisory strategy from "ratio watching" (checking bank positions against predetermined prudential
ratios) to examining the bank's risk management process. The ability to take early action to deal with
incipient problems before a crisis develops has also been enhanced increased authority, independence and legal
protection for supervisors. At the same time, explicit and limited deposit insurance has helped make clear
that not all bank deposits are guaranteed by the government. The payment of fixed premia have encouraged banks to
monitor the strictness/effectiveness of supervisory authority and ensured weak banks share the burden of any payouts.
Some of these improvements have been helped by efforts to adopt international standards for best practice
25
 (Basel Core Principles for Effective Banking Supervision, Basel I and Basel II) and outside assessments
of financial stability (i.e. Financial Sector Assessment Programs, or FSAPs). Challenges remain,
including changing the culture in supervisory agencies as well as audit departments of banks towards more
effective risk management, and the lack of adequately trained staff.

 CHANGING FINANCIAL INTERMEDIATION: IMPLICATIONS FOR MONETARY

POLICY

Bank deregulation and global integration has on the one hand made monetary policy in emerging
markets more potent by allowing a wider range of transmission channels, including asset market and
exchange rate channels. Domestic bank loan rates also appear to be more responsive to changes in money
market rates in countries with profit-driven banking systems, perhaps reflecting the recovery in the health
in banking systems(pass through is lower in countries with weak bank systems e.g. post 1997-1998 crisis).
On the other hand, external factors unrelated to monetary policy have also shaped bank behavior. For
example, demand for bank deposits has depended on exchange rate expectations. Global integration had
also led to some convergence in long-term interest rates.

26
 CHAPTER 11

OFFSHORE BANKING REGULATION

Offshore Banking regulation refers both to foreign banks engaging in banking in the
United States as well as U.S. banks engaging in banking abroad. While these activities are
decidedly separate, they have been linked by certain policies in U.S. banking law and regulation such as “national treatment”
of foreign banks in the United States.

 FOREIGN BANKS IN THE UNITED STATES

Foreign banks have been operating in the United States for hundreds of years, in fact predating U.S. banks. These
banks are offered the choice between chartering a de novo U.S. bank subsidiary or opening up branch offices that can engage
in many of the same activities as U.S. banks. Each option offers significant advantages and disadvantages.

Until 1978, foreign branches were largely subject to state regulation. This began to change in 1978, when the
Offshore Banking Act of 1978 was passed. The IBA put federal restrictions on foreign banks operating in two or more states
and permitted foreign branches to obtain FDIC insurance and offer insured deposits. It also offered a federal license for
foreign bank branches that would be supervised by the OCC. In 1991, the Foreign Bank Supervision Enhancement Act of
1991 withdrew the offer of deposit insurance for foreign banks and required the Federal Reserve to approve any new foreign
bank branch (in addition to the approval of the licensing entity, whether state or federal). The Federal Reserve, among other
things, is now required to certify that the country from which the foreign bank is located subjects its banks, including the
applicant, to comprehensive, consolidated supervision (“CCS”). This standard has significantly retarded the approval to do
banking business in the United States for foreign bank branches from non-industrialized and third-world countries.

A U.S. bank owned by a foreign bank may engage the full range of activities permitted to all banks, and is subject to
the full comprehensive set of U.S. laws and regulations applicable to such entities, including U.S. capital requirements.

A U.S. branch of a foreign bank is generally permitted to engage in most of the same activities as are U.S. banks. A
significant limitation is that U.S. branches of foreign banks (with a few grandfathered exceptions) are not eligible for FDIC
deposit insurance, and therefore may not accept retail deposits. However, these branches are not subject to U.S. capital
requirements, though certain States require branches to deposit certain cash amounts in a U.S. bank based on the amount of
assets held by the branch. Once a foreign bank establishes a branch in the United States, the bank itself it is treated as if it is
a U.S. bank holding company and is subject to many of the restrictions applicable to those entities; such a foreign bank may
also certify itself as a financial holding company if it is well-managed and well-capitalized and meets the other criteria.

A significant difference in the supervisory treat

ment between a U.S. bank and a U.S. branch of a foreign bank is with respect to how insolvency is managed. The
insolvency of a U.S. bank is generally managed as a receivership pursuant to the Federal Deposit Insurance Act US Active
14874993.1 -2- by the FDIC. Under the federal depositor preference law, insured and uninsured depositors are paid prior to
any unsecured creditors. U.S. branches of foreign banks are liquidated subject to the laws of the state (or federal) from which

27
 they received their license. These laws vary significantly. Some states, such as New York, are extremely creditor friendly
and offer significantly better treatment to creditors vis a vis depositors.

 U.S. BANKS INTERNATIONALLY

U.S. banks also have a variety of methods by which they can engage in banking activities outside of the United
States. First, subject to local law they can act directly. Second, they can open branches in non-U.S. countries. Finally, they
can charter banking subsidiaries in foreign countries.

U.S. law offers the so-called “Edge Corporations” to U.S. banks to permit them to engage outside the United States
in a broader range of activities than they may perform within the United States. These entities are managed by the Federal
Reserve pursuant to Regulation K. Edge corporations are incorporated under federal law, and are empowered to compete
effectively with similar foreign-owned entities in the United States and abroad. Edge corporations may buy, sell and discount
all forms of indebtedness, can buy and sell government and state securities, may accept bills and drafts drawn upon them,
may issue letters of credit, may purchase and sell bullion and currency, may borrow and lend money, may issue debentures,
bonds and promissory notes, may outside of the United States receive deposits (and do so within the United States only as
incidental to its foreign business), and may exercise incidental powers approved by the Federal Reserve. Edge corporations
may establish branches, and may invest in any one foreign corporation up to ten percent of an entity’s capital.

U.S. banks may also open branches abroad. National banks must gain the approval of the Federal Reserve to open
a non-U.S. branch. These branches may engage in any activity that is permitted in the United States, as well as those that are
usual in connection with the banking business in the foreign country where it is located. State member banks may establish
foreign branches with the approval of the Federal Reserve; state non-member banks may do so with the approval of the
FDIC.

28
CASE STUDY

THE SWISS CASE

One of the main differences between the Swiss banks and those in other countries is ways in which
these banks get access to financial resources of foreigners. While banks from most countries need to open
international branches in other countries in order to attract foreign resources, the banks in Switzerland
attract those resources without opening foreign branches.

Therefore, one might wonder what the main reasons are that allow Swiss banks to have this
comparative advantage.

The main reason for the popularity of Swiss bank accounts has to do with the legendary privacy
such accounts provide (Swiss-Bank-Accounts.com). Swiss banks are under obligation to keep any
information about investors or their accounts strictly confidential. This Bank secrecy is one of the strictest
in the world and stems from an old financial tradition. Any banker who reveals information about an
individual or company without his/her consent is subject to both civil and criminal legal penalties. The
only cases where exceptions are made are those involving serious crimes, such as drug trafficking and
smuggling.

Another important aspect of the Swiss privacy laws is that it is not lifted for tax evasion. The main
reason for this fact is that as opposed to most other countries, failure to report income and assets is not a
crime in Switzerland (Lewis 2001). Therefore, neither the Swiss government nor any other government
can obtain information about bank accounts even for tax purposes. In order to get access to privacy-
protected information, they first need to convince a Swiss judge that the account owner has committed a
serious crime that is punishable by the Swiss Panel Code. Privacy codes also will not be lifted for private
matters such as divorce and inheritance if one has kept his/her information strictly confidential. Therefore,
plaintiffs can decide if they wish to prove that the account exists if they wish to pursue the case.

Another important advantage of Swiss bank accounts to foreigners is that Switzerland does not
levy any taxes on Swiss accounts owned by non residents. There are only three exceptions to this rule:
Swiss withholding tax: dividends and interests paid by Swiss companies are subject to a 35% withholding
tax; US persons: US persons (i.e. US citizens, green card holder and US taxpayers) are faced with these
choices: Either they renounce to invest in US securities from their Swiss bank account, or they have to
report it to the IRS. EU residents: Starting in 2005, clients who live in the European Union will have to
pay a withholding tax on the interest paid by certain investments, which could be between 15% and 35%.
Although the tax for US persons might lead some Americans to avoid Swiss accounts, one can also follow
a common strategy for US clients, which is to use their bank accounts in the US to invest in US equities
and use their Swiss bank account to diversify into non-US investments.

29
 Swiss privacy laws and tax system are the two main reasons for the attractiveness of Swiss bank
accounts. Therefore, the Swiss banks enjoy these advantages exclusively, because they are brought to
them by the system of their government.

30
 CHAPTER 12
CONCLUSION

This project has explored the global dimension of banking. It was argued that Offshore Banking
is best understood in terms of international trade in banking and services and the growth of Offshore
Banking. Like any other firm, a bank will seek to boost its profitability through trade if it has a competitive
advantage in the provision of at least one banking service. The growth of international payment system,
the development of global interbank market and the emergence of sophisticated Euromarkets demonstrate
how bank rely on a global network to profit from trade in Offshore Banking services

The emphasis is on the theory and practice of Offshore Banking, because of its critical importance
in the modern banking framework. Offshore Banking is not a new phenomenon; international
bank activity can be traced back to as early as the 13th century. In this topic we understand the difference between
Indian banking and international. Offshore Banking helps us to know how important Offshore Banking
for the progress of India and also for the counter. It is one of the most important factors responsible for
economic growth of the nation.

31
 CHAPTER 13
Bibliography:

IMF-BOOKS

W e b l i o g r a p h y:
1. www.google. com
2. www.Wikipedia.com
3. www.economictimes.com

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