International Banking and Finance

International banking and finance refers to the institutions, processes, and principles governing financial transactions across national borders. Electronic technology now enables nearly instantaneous global transactions, but the international system is loosely structured — there is no single worldwide banking policy authority.

How It Appears Per Course

ADMN 201

International Payments Process

• Financial settlements between buyers and sellers in different countries are simplified through banks
• A Canadian buyer’s bank converts CAD into the seller’s currency (e.g., euros) to complete the transaction
• If trade between two countries is in balance, money does not actually need to flow — inflows and outflows offset each other
• If trade is out of balance, the difference is settled by an actual flow of currency

Exchange Rates and Currency Valuation

• Business exchanges between countries are affected by the relative values of currencies
• A country may deliberately devalue its currency to make its goods cheaper for other countries to buy, boosting exports
• Determining if a currency is overvalued or undervalued uses the Law of One Price: identical products should sell for the same price in all countries
• The Big Mac Index (The Economist) applies this principle — comparing Big Mac prices in USD across countries to reveal over/undervalued currencies
  • 2021 example: Swiss franc was overvalued (+28.8%); Canadian dollar was slightly undervalued (−6.6%)

The International Bank Structure No worldwide banking system has the policymaking or regulatory power of a single nation’s system. Stability relies on loose agreements among countries. Two key UN agencies support international finance:

Organization	Role
World Bank	Funds national improvements in underdeveloped countries (roads, schools, hospitals); enables borrowing countries to increase productive capacity
International Monetary Fund (IMF)	190 member nations; promotes stable exchange rates, provides temporary short-term loans, encourages international monetary cooperation

• In 2021, the IMF had about $1 trillion available for loans
• The IMF has been criticized for its handling of crises (e.g., European debt crisis), where its austerity prescriptions underestimated unemployment and domestic demand impacts
• Some less-industrialized nations reject IMF requirements to cut social spending

Cryptocurrency in International Finance

• Bitcoin and other cryptocurrencies are increasingly used for international payments off the traditional grid
• Traditional currencies: government-issued, relatively stable
• Bitcoin: not backed by any government; wildly volatile; environmental concerns (energy consumption); risks include hacking, money laundering, and password loss

Cross-Course Connections

InternationalTradeTheory — exchange rates and balance of trade are core international trade concepts
GlobalBusiness — major world marketplaces and why firms go global
TradeBarriersAndAgreements — WTO, trade agreements operate alongside the IMF/World Bank system
Money — currency valuation is determined by the same principles that govern money’s value domestically
BankOfCanada — Bank of Canada rate decisions affect the Canadian dollar’s exchange rate

Key Points for Exam/Study

• No single worldwide banking policy system — stability relies on agreements
• World Bank = funds development projects in underdeveloped countries
• IMF = 190 nations; stable exchange rates + short-term loans; had ~$1T available in 2021
• Law of One Price = identical products should cost the same everywhere when converted to a common currency
• Big Mac Index = practical application of law of one price
• International payments process: banks convert currency; if trade is balanced, no actual currency flows
• Cryptocurrency: alternative to traditional banking; not backed by government; high volatility and risk

Open Questions

• How has the IMF’s role evolved since the 2020 COVID pandemic?
• Should cryptocurrency be counted as part of the money supply (M-1 or M-2)?

graph TD
    INT[International Banking & Finance]
    INT --> PAY[International\nPayments Process]
    INT --> FX[Exchange Rates\n& Currency Valuation]
    INT --> STRUCT[International\nBank Structure]
    PAY --> PAY1[Banks convert currencies\nbetween countries]
    PAY --> PAY2[Balanced trade = no\nactual currency flow]
    FX --> FX1[Law of One Price]
    FX1 --> FX2[Big Mac Index\nas practical test]
    FX --> FX3[Devaluation strategy]
    STRUCT --> WB[World Bank\nFunds development\nin underdeveloped nations]
    STRUCT --> IMF[IMF\n190 nations\nStable exchange rates\nShort-term loans]