Banking term paper

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“International money and foreign exchange markets have developed enormously over the past several years. This is largely the result of increasing trade and international investment, but it also reflects improvements in technology and know-how on the part of the major banks and their clients. The once modest Eurocurrency money market has now emulated its U.S. counterpart in variety of instruments available for trading, in types of investors served, and even in volume of trading. Global investors and issuers of securities now have a very large choice of instruments and rates, and they may move from one market to the next in search of a better deal. Such choices serve to bring rates together and thereby integrate the money markets in the United States with those outside it. As the Eurocurrency market has developed in size and complexity, money has been drawn away, or disinter mediated, from commercial banks. To address this competitive threat, many major international banks have adapted their products to the markets and have become active suppliers of ECP and EMTNs to their customers. Foreign exchange trading has also grown substantially during the past several years with increasing volatility and cross-border investment activity. Banks have benefited from the many market-making opportunities that these developments have presented. Some non-bank financial service firms have also been attracted to the foreign exchange markets for the first time and have prospered in it. In both foreign exchange and money markets, trading skills are increasingly useful, and the most successful banks have made their trading activities into one of their most important non-interest activities.”
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“According to Noland (1996), structural weaknesses of Korean financial institutions contributed to the economic crisis. First, the Korean economy has repressed financial markets. Financial repression implies that the government intervenes heavily in the economy, segmenting financial markets, placing artificial ceilings on interest rates, and directly allocating credit among enterprises as it sees fit. As mentioned, the government, through the banks, directed the financing of chaebols. Banks in repressed financial markets are subject to greater risk because of a lack of portfolio diversification. Restrictions on foreign bank activities further reduce potential diversification from the standpoint of the national economy. Second, there are lending booms, especially in real estate and equities, as part of an asset bubble. The commercial banking sector was significantly exposed to risks associated with lending to property developers and construction companies during the late 1980s. Third, government involvement in the financial system has given rise to politicization of lending decisions, moral hazard problems, and so on. As a result, banks could not (and did not) pay much attention to the creditworthiness of borrowers (Goldstein 1998).

Fourth, the problems of liquidity-maturity balance sheet mismatches tend to be magnified by weak reporting standards and provisioning for bad loans. Banks and their corporate customers (mainly chaebols), in an effort to lower borrowing cost, undertook most of their foreign borrowing at short maturities and in foreign currency (Goldstein 1998). However, chaebols invested in long-term projects. This resulted in liquidity mismatches. On the other hand, currency mismatches also occurred since borrowers have difficulty in repaying loans denominated in foreign currencies such as the U.S. dollar when the value of the Korean won falls.”
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“One of the dominant factors in many interstate banking strategies today is access to new deposits. Bankers like to enter and build a base for future expansion in those states that generate the heaviest deposit volumes. Interstate expansion is often a vehicle for attracting the most loyal "core deposits," which are expected to stay with a bank even through wide swings in interest rates and economic conditions. The accepted definition of "core deposits" focuses on the interest-rate elasticity of these funds--core deposits have very limited sensitivity to interest-rate movements, so they remain loyal to a bank even through substantial changes in the overall level of market interest rates. Most core deposits arise from household and small business customers and generally involve deposits well under $100,000 apiece, unlike volatile money-market accounts ("hot money"), which flow into and out of a bank on short notice as market interest rates change. State and local areas that seem to promise strong growth in these more stable deposit sources usually appear high on most interstate bank acquisition lists.”
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