Global Bank Corporation is a major international bank headquartered in New York City, with branches in eleven other countries: Australia, Brazil, Canada, Dubai, France, Germany, Great Britain, Hong Kong, Japan, Netherlands, and Singapore. Total assets in 2010 were $90 billion, and the bank was among the top 500 banks in the world. The bank is organized into three main divisions: retail banking, institutional banking, and investment banking. Global retail banking undertakes transactions with individual customers—for example, savings accounts, checking

and money market accounts, issuance of certificates of deposit, operation of automated teller machines, loans to individual customers for different purchases, funds transfer facilities, and so on. The institutional banking division carries out business with the bank’s institutional and corporate customers: the trusts of major companies and other large clients. Much of the work of the institutional banking division is concerned with devising comprehensive financing arrangements for its clients. The investment banking division of Global has three main functional areas:

1. The capital markets group, which provides a wide range of services to companies seeking to raise funds in the international financial markets

2. The private banking group, which provides fund management and advisory services to large net-worth clients

3. The foreign exchange division, which carries out exchange trading, handles foreign exchange transactions, and provides advisory services

The foreign exchange trading function of the bank is decentralized to levels of operation for each country and further to each individual trading operation. Each level of decentralization, however, has to operate within established trading and exposure limits that are laid down by the corporate risk management committee of the bank, which meets every month at the headquarters in New York City. A typical trading operation at Global Bank Corporation is divided into two main areas: interbank exchange market trading and customer-based trading. The former is primarily a speculative operation aimed at generating substantial profits for the bank from interbank trading, while the latter operation provides customers with a wide range of foreign exchange services, ranging from risk management to a simple sale or purchase of different foreign currencies. The interbank trading division has been fairly successful in the past four years and has consistently made profits, although the level of profits has varied over the years. The main focus of the trading activity is the Tokyo, New York, and London markets. At other centers, the trading operations of the bank are more oriented toward meeting the foreign exchange needs of customers.

In the past twenty years, the Singapore and Hong Kong markets have become extremely active and a large number of international banks have set up trading operations to generate profits from the booming interbank market. The investment banking division is planning to set up new operations in this area. Both markets have an environment relatively free of regulation and excellent communication and other infrastructural facilities for establishing trading operations. Hong Kong seems to be a less stable alternative because the pro-business climate there could eventually be hindered by decisions of the Chinese government. While the Chinese government

has said that Hong Kong will operate as it has historically, some business leaders and political activists in Hong Kong fear that free speech will be eliminated by new regulations out of the mainland. While this has not occurred as of this time, business professionals in Hong Kong remain skeptical.

Singapore, therefore, seems a better choice for Global Bank Corporation’s new operations. Singapore has all of the technological advantages of Hong Kong without the political uncertainty. Despite its advantages, however, the possibility of establishing a new interbank trading center in Singapore has given rise to some doubts. The bank has not opened a new

trading center for the past seven years and will have to hire a new team. Some senior investment banking division executives feel that while interbank trading is a good source of profit that helps to strengthen the company’s bottom line, it is also risky. Having a fourth interbank trading operation will increase the overall exposure of the bank and will make controls more difficult to enforce.

Other executives feel that because the exchange market is an around-the-clock operation, a presence in the Singapore market will allow the bank to have an active presence in all time zones and increase the effectiveness of overall global trading operations. Further, the proponents of the Singapore trading location argue that once this trading location has stabilized, a fifth location can be opened somewhere in the Middle East, for example, in Bahrain. The profits from the Singapore trading center in the interbank market could be used for aggressive pricing of corporate foreign exchange products to later capture increased market share.

Discussion Questions

1. Should Global Bank Corporation set up a new foreign exchange operation in Singapore? If so, what functions, such as interbank trading or customer Telex sources, should be given priority?

2. What additional information would you consider relevant in evaluating a proposal to set up a new foreign exchange trading operation?

Answer rating: 100% (QA)

1 Yes Global Bank Corporation should establish a foreign exchange business in Singapore since the ci... View the full answer