A foreign branch operates just like a local bank. It is legally owned by the parent bank. As such, the branch bank operates under the rules and regulations of the parent branch country and the host country. One of the reason why the parent bank finds it important to open a foreign branch office is to “provide a much fuller range of services for its MNC customers through a branch office than it can through a representative office” (Ratna, 2006 p. 6). A foreign branch is “an overseas office of a bank incorporated in a foreign country and constitutes a higher level of commitment than a representative office. Foreign bank branches are characteristically involved in wholesale banking. According to Ratna:
The main activity of a foreign commercial bank branch is to carry out, on its behalf, credit operations from funds received from the public. Its main activity can be fiduciary operations and portfolio management on behalf of other parties. The branch can carry out brokerage activities and can perform all operations related or complementing its main activities (2006, p. 12).
Also, the foreign branch offices can benefit from the capital and the financial strength of the parent bank. In addition, capital account is another function which touches on this aspect. Nonetheless, the activities of the foreign branch offices have some limitations, especially at the operational level. For example, “in Canada, bank branches are not allowed to take retail deposits, while a lending branch will not be permitted to take deposits, large or small, or borrow from the Canadian public; the primary business is to make loans” (Ratna, 2006, p. 45).
Supervision and monitoring is the most important aspect of foreign bank branches. Prudential regulation in regard to domestic financial institutions is usually common in most countries. For example, “in the Indian Foreign Bank Branch/Subsidiary Policy, foreign financial institutions have to undergo on-site as well as off-site inspection, which is equal to that of domestic financial institutions” (Ratna, 2006, p. 46). Satisfactory supervision of these banks requires an adequate allocation of roles between the host country’s supervisory authorities and the parent bank.
International banks usually open foreign branch offices to achieve their growth and expansion strategies. The strategy also helps the international banks increase their market share as well as “supporting their organic growth with inorganic growth” (Ratna, 2006, p. 49).
Functions such as Eurocurrency are a common role for many foreign branches. It involves “taking deposits and lending in currencies other than that of the country in which the banking office is located” (Ratna, 2006, p. 50). In addition, the foreign branches are involved in offering variety of sophisticated financial products to the firms and residents of the host country. The foreign bank operations can be described as a counterpart role of the international banks. The foreign branches act as borrowers as well as investors in the home country money market. As such, the branches participate in advancement of loans to businesses as well as individuals (Resnick, 2009).
The foreign banks facilitate holding of Eurodollar deposits by non-bank entities, and on behalf of the international banks. Likewise, Eurodollar loans from the bank foreign offices are crucial sources of credit for companies from home country, including the banks and non-banks institutions. Considering that they are close alternatives for the banks from home country, Eurodollar deposits of non-bank institutions which operates from abroad are considered as part of home country’s responsibility (Resnick, 2009).
References
Ratna, A. (2006) A report by Nepal Rastra Bank Task Force on Foreign Bank Branches and the Health and Stability of Nepal’s Financial System. Web.
Resnick, B. (2009) International Financial Management. New York: McGraw – Hill