lecture 3: offshore and onshore markets galina a schwartz depatrment of finance business school...
TRANSCRIPT
![Page 1: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/1.jpg)
Lecture 3: Offshore and onshore markets
Galina A Schwartz
Depatrment of Finance
Business School
University of Michigan
![Page 2: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/2.jpg)
Plan of today’s lecture
Onshore markets Offshore markets Comparison of onshore and
offshore Levich, chapter 9 (and 10)
![Page 3: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/3.jpg)
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
![Page 4: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/4.jpg)
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
![Page 5: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/5.jpg)
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
![Page 6: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/6.jpg)
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
![Page 7: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/7.jpg)
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?
![Page 8: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/8.jpg)
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 %)
![Page 9: Lecture 3: Offshore and onshore markets Galina A Schwartz Depatrment of Finance Business School University of Michigan](https://reader036.vdocuments.site/reader036/viewer/2022072013/56649e4e5503460f94b454cf/html5/thumbnails/9.jpg)
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,…