ABSTRACT
Over the past three decades, that is, since the collapse of the Bretton Woods regime in 1973, banks and non-bank financial institutions have been expanding their operations outside their countries of incorporation. As a result, financial markets around the globe have become increasingly entangled, and banking activity has been increasing across country borders, a phenomenon that many, in the economics as well as in the banking profession, have dubbed ‘financial globalization’. This process has left banks with the challenge of managing liquidity in multiple currencies and jurisdictions (Committee on Payment and Settlement Systems 2006b: 6). Indeed, over the past thirty-five years or so, banks’ foreign businesses have grown and become more complex: ‘some banks have established subsidiaries or branches in local markets, whereas others rely primarily on correspondent relationships with local banks’ (ibid.: 10). Looking ahead, as the banking sector continues to expand as well as to consolidate across borders, direct participation of foreign banks in a country’s payment and settlement systems could become more important, particularly in those groups of countries – such as Latin America and East Asia – where financial liberalization has been carried out very rapidly and without any structurally integrated approach (as well as control) by the general government sector.
