lecture 3: offshore and onshore markets galina a schwartz depatrment of finance business school...
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Lecture 3: Offshore and onshore markets
Galina A Schwartz
Depatrment of Finance
Business School
University of Michigan
Plan of today’s lecture
Onshore markets Offshore markets Comparison of onshore and
offshore Levich, chapter 9 (and 10)
Onshore markets
Features: Subject to bank regulations
Interest rate ceilings on deposits (deposit rate ceilings) (Regulation Q)
Reserve requirements Why offshore? To avoid the
regulatory burden
Offshore markets Ironic birth of the eurodollar market
+1957 (Bank of England restriction on use of sterling for financing foreign trade and external loans)
Actual reasons for offshore markets emergence (& existence)
Many international contracts are dollar denominated
Fear of expropriation if held in US Eurodollars are not subject of US
bank regulations
Offshore markets (continued) Feature: narrower spreads
between the interest paid on deposits and the interest earned on loans
Advantages of Eurodollars (from narrow spread and no regulation) For borrowers: better rates For depositors: better returns
Onshore & Offshore Markets
Coexist and Compete Levich, p. 286, Box 9.2 Arbitrage & competition between
onshore and offshore improve efficiency
Regulatory response – a trend to relax regulation
The Wells Fargo-Citibank Case Levich, p 296 –297, Box 9.3 June 1983 W-F – 2mln in Citibank Manila
Branch (6 months) October 1983 Philippine government
imposes exchange controls December 1983 Citibank does not repay QQ:
New-York or Philippine law? Deposits should be repaid from N-Y or
worldwide assets? Does it violates Philippines exchange
control law?
I. Keywords (concepts) London inter-bank bid rate (LIBID) London inter-bank offer rate (LIBOR) LIBID and LIBOR are overnight rates Feature: extremely competitive (spread
rarely exceeds 0.125-0.25), p. 285 Levich, Figure 9.5
New-York Prime lending rate > LIBOR LIBID>Federal Funds rate(Prime rate – Federal Funds rate spread
is 2 –3 %)
II. Keywords (concepts)
International Banking Facilities (IBFs) Eurodollars = dollar- denominated
deposits in the banks outside US. (Thus, not subject to US bank regulation)
Eurocurrencies (Euroyen, Euromark, etc.)
Eurobonds: Euro-$ bond, Euro-DM bond,…
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