Financial Intermediation by International Banks

Financial Intermediation by International Banks- Financial intermediation at the international level involves intermediation similar to the home country’s range of bank and non-bank financial intermediaries.

The international financial intermediation process is essentially a recycling process and on a global basis, one country’s surplus is equal to another country’s deficit. International banking intermediates world financial imbalances and maturity preferences.

The intermediation includes matching the preferences of Organization of the Petroleum Exporting Countries (OPEC) states for short-term claims with medium-term debt offered by countries in current account deficit. The OPEC states also get the risk inherent in lending to sovereign states ‘sovereign risk’ reduced. Along with this, the reduction of risk arising out of a diversified portfolio held by an intermediary is also reduced.

As in the case of other forms of financial intermediation, international banking is also involved in maturity transformation. This process has been eased with roll-over credits where syndicated loan may be financed by banks borrowing money with a six month maturity. The interest rate risk here in such a maturity mismatch is transferred from the bank to the borrower. This is based on the practice whereby interest rate is reset every six months on the basis of interest rate paid by the bank (LIBOR) on six month money.

The Euro-dollar market has seen to it that surplus OPEC states avoid currency mismatch since the desired currency mix of depositors and borrowers might vary. International banks remedy this. The Euro-dollar market also lets banks adjust their overall liquidity position in both domestic and foreign currencies. Bank’s constituents are offered forward exchange positions without the banks themselves incurring an undesired open forward position.

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