Basel III and Eurocurrency Market Overview
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Questions and Answers

What is the term used for dollar deposits outside the United States?

  • Euros
  • Foreign currency
  • Europounds
  • Eurodollars (correct)

    • Eurobanks are banks that accept Eurocurrency deposits.

    True

    What major event occurred on January 1, 1999, that created confusion regarding the term Eurocurrency?

    The advent of the common euro currency.

    The Eurocurrency market operates at the __________ and/or wholesale level.

    <p>interbank</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Eurodollars = Dollar deposits outside the U.S. Eurobanks = Banks accepting Eurocurrency deposits Eurocurrency market = External banking system running parallel to domestic banks Federal Reserve Regulation D = Specifies reserve requirements for U.S. banks</p> Signup and view all the answers

    What is one key advantage of Eurodollar deposits over U.S. bank deposits?

    <p>No reserve requirements</p> Signup and view all the answers

    U.S. banks must pay FDIC insurance premiums on Eurodollar deposits.

    <p>False</p> Signup and view all the answers

    What has been the trend of the Eurodollar market since its inception?

    <p>Growth spectacularly.</p> Signup and view all the answers

    What is the minimum Tier I capital requirement under Basel III?

    <p>4.5 percent</p> Signup and view all the answers

    Tier II capital consists primarily of common equity and retained earnings.

    <p>False</p> Signup and view all the answers

    What additional capital buffer percentage does Basel III require banks to maintain?

    <p>2.5 percent</p> Signup and view all the answers

    Under Basel III, Tier I capital is defined to include only common equity, retained earnings, and capital instruments with no fixed __________.

    <p>maturity</p> Signup and view all the answers

    Match the following capital types with their descriptions:

    <p>Tier I Capital = Common equity and retained earnings Tier II Capital = Subordinated debt and loan-loss reserves Capital Buffer = Additional 2.5% for financial stress Global Systemically Important Banks = Higher loss absorbency requirements</p> Signup and view all the answers

    When were the Basel III reforms scheduled for implementation?

    <p>January 1, 2019</p> Signup and view all the answers

    Eurocurrency refers to deposits of money in a domestic bank located in the same country that issued the currency.

    <p>False</p> Signup and view all the answers

    What is a Eurodollar?

    <p>A deposit of U.S. dollars in an international bank located outside the U.S.</p> Signup and view all the answers

    What percentage of wholesale Eurobank external liabilities comes from fixed time deposits?

    <p>90%</p> Signup and view all the answers

    NCDs cannot be sold in the secondary market.

    <p>False</p> Signup and view all the answers

    What do Eurocredits refer to?

    <p>Short- to medium-term loans of Eurocurrency extended by Eurobanks.</p> Signup and view all the answers

    The NCD market began in _______.

    <p>1967</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Fixed Time Deposits = Funds that incur an interest penalty for early withdrawal NCDs = Negotiable certificates of deposit that can be sold in the secondary market Wholesale Eurobank = A financial institution that deals primarily with large deposits and loans Eurocredits = Loans of Eurocurrency extended by Eurobanks</p> Signup and view all the answers

    Which financial center is primarily associated with offering NCDs for currencies other than the U.S. dollar?

    <p>London</p> Signup and view all the answers

    The secondary market for nondollar NCDs is highly liquid.

    <p>False</p> Signup and view all the answers

    What types of entities can receive Eurocredits?

    <p>Corporations, sovereign governments, nonprime banks, or international organizations.</p> Signup and view all the answers

    What do Eurocredit loans primarily originate from?

    <p>International banks</p> Signup and view all the answers

    Euronotes and Eurocommercial paper are not considered important money market instruments.

    <p>False</p> Signup and view all the answers

    Name one service that international banks provide to differentiate themselves from domestic banks.

    <p>Arranging trade financing</p> Signup and view all the answers

    International banks assist clients in hedging _____ rate risk.

    <p>exchange</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Eurocurrency = Deposits made in a currency not native to the country in which the bank is located Eurocommercial paper = Short-term unsecured promissory notes issued in the Eurocurrency market Forward rate agreements = Contracts that determine the future interest rate on a notional amount</p> Signup and view all the answers

    Which of the following is a factor that contributed to the international debt crisis?

    <p>Excessive private bank lending to sovereign governments</p> Signup and view all the answers

    Eurocurrency deposits are created by domestic banks.

    <p>False</p> Signup and view all the answers

    What financial instruments are mentioned as important in the international money market?

    <p>Euronotes, Eurocommercial paper, and forward rate agreements</p> Signup and view all the answers

    What is the primary function of a foreign branch bank?

    <p>To provide a full range of services to MNC customers.</p> Signup and view all the answers

    A foreign branch bank is not legally part of its parent bank.

    <p>False</p> Signup and view all the answers

    What regulations govern U.S. branch banks operating in foreign countries?

    <p>Federal Reserve Act and Federal Reserve Regulation K</p> Signup and view all the answers

    A branch bank provides _____ check clearing compared to a correspondent bank network.

    <p>faster</p> Signup and view all the answers

    Match the following elements with their corresponding descriptions:

    <p>Branch Bank = Subject to regulations from both home and host countries Parent Bank = Provides capital for branch loans Federal Reserve Regulations = Governs U.S. banks in foreign countries Locally Chartered Subsidiary = Operates independently of the parent bank</p> Signup and view all the answers

    Why might a parent bank establish a foreign branch bank?

    <p>To compete locally with host country banks.</p> Signup and view all the answers

    Branch bank loan limits are determined by the capital of the local branch bank.

    <p>False</p> Signup and view all the answers

    What advantage does a branch bank have over a correspondent bank network?

    <p>Faster check clearing</p> Signup and view all the answers

    Study Notes

    Basel III

    • Basel III redefined Tier I capital to include only common equity, retained earnings, and capital instruments with no fixed maturity.
    • Tier II capital now includes subordinated debt and loan-loss reserves.
    • Tier I capital requirement increased to 4.5%.
    • Added a 2.5% capital buffer, bringing Tier I capital to 7% and total capital to 10.5%.
    • Implementation date was January 1, 2019.
    • Global Systemically Important Banks (G-SIBs) are required to have higher loss absorbency capacity due to their increased risk to the financial system.

    Eurocurrency Market

    • Eurocurrencies are time deposits held in international banks outside the issuer country.
    • Eurobanks are banks that accept Eurocurrency deposits.
    • Example: Eurodollars are US dollar deposits held in banks outside the United States.
    • Eurocurrency market operates parallel to domestic banking systems.
    • Eurobanks are not subject to reserve requirements or deposit insurance, reducing operating costs.
    • Eurocurrency market has grown rapidly due to reduced costs.
    • Eurocurrency market operates at the wholesale level with banks and nonbanks.
    • Most Eurobank liabilities come from fixed time deposits, followed by negotiable certificates of deposit (NCDs).
    • NCDs provide liquidity as they can be traded in the secondary market.

    Eurocredits

    • Eurocredits are short- to medium-term loans of Eurocurrency made by Eurobanks to corporations, governments, and non-prime banks.

    International Banking Services

    • International banks provide services like international trade financing, foreign exchange services, and hedging against exchange rate risk through forward and options contracts.
    • Branch banks operate locally but are legally part of the parent bank, subject to regulations of both home and host countries.
    • Foreign branch banks offer a wider range of services compared to representative offices.
    • Branch banks have higher loan limits based on the parent bank's capital.
    • Branch banks offer faster check clearing within the same organization.
    • Foreign branch banks can compete locally with banks of the host country.

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    International Financial Management (Chapter 11) PDF

    Description

    Explore the key concepts of Basel III, including Tier I and Tier II capital requirements and the implications for Global Systemically Important Banks. Additionally, delve into the Eurocurrency market, its structure, and how it differs from domestic banking systems. This quiz will test your understanding of these crucial financial topics.

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