Page 248 - DMGT545_INTERNATIONAL_BUSINESS

Unit 13: Basics of International Accounting and Financial Management

Deregulation by Government notes

Financial services have been the most tightly regulated of all industries. Many of these restrictions
have been crumbling since the early 1980s. In past, this has been a response to the development
of Eurocurrency market, which forms the beginning, was outside of national control. It has also
been a response to pressure from financial service companies, which have long wanted to operate
in a less regulated environment. Increasing acceptance of the free market ideology associated
with an individualistic political philosophy also has a lot to do with the global trend toward
the deregulation in a number of key countries have undoubtedly facilitated the growth of the
international capital market.

In addition to the deregulation of the financial services industry, many countries beginning in the
1970s started to dismantle capital controls, loosening both restriction on inward investment by
foreigners and outward investment by their own citizens and corporations.
13.1.3 the eurocurrency market

A Euro currency is the time deposit of money in an international bank located in a country
different from the country that issued the currency. For example, Euro dollars are deposits of
US dollars in banks located outside the US, Euro sterling are deposits of British pounds in banks
outside UK, Euro Yen are deposits of Japanese yen in banks outside Japan. The prefix Euro is
somewhat a misnomer since the bank in which deposit is made need not be located in Europe.
The depository bank would be located in Europe, the Caribbean or Asia.
The origin of the Euro currency market can be traced back to the 1950’s and early 1950’s when
the former Soviet Union and Soviet block countries sold gold and commodities to raise hard
currency. Because of anti Soviet sentiment, these communist countries were afraid of depositing
their US dollars in US banks for fear that the deposits could be frozen or infringed. Instead, they
deposited their dollars in the French bank whose telex address was Euro-Bank. Since that time,
dollar deposits outside the US have been called Euro dollars and banks accepting Euro currency
deposits have been called Euro Bank.
The Euro currency market is an external banking system that runs parallel to the domestic
banking system of the country that issues the currency. Both banking systems seek deposits and
give loans to customers from deposit funds. In United States, banks are subject to the Federal
Reserve recognition in specifying reserve requirements on time deposits. Additionally, US banks
are required to buy FDIC insurance premium on deposit funds. Euro dollars are not subject to
reserve requirements or deposit insurance, hence the cost of operations is less. The Euro currency
market has grown spectacularly since its inception.
!

Caution Domestic banking system runs parallel to Euro currency market but differs in
administration and system of banking.

important features

The important characteristics of the Eurocurrency market are the following:
1. International Market under no National Control: By its very nature the Eurodollar market
is outside the direct control of any national policy. The growth of the market owes a great
deal to the fact that it is outside the control of any national authority.
2. Short-term Money Market: The deposits in this market range in maturity from one day
to several months and interest is paid on all of them. Although some Eurodollar deposits
have a maturity of over one year. Eurodollar deposits are predominantly a short-term
instrument.

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