LABUAN SCHOOL OF INTERNATIONAL BUSINESS AND FINANCE

GROUP ASSIGNMENT 2
SEMESTER 1 SESSION 2013/2014
COURSE: INTERNATIONAL AND OFFSHORE BANKING
COURSE CODE: GB30503
LECTURER: MISS YANTI AHMAD SHAFIEE
PREPARED BY:
NAME HANDPHONE NO. MATRIX.NO
WONG HSIEN WEI 016-8124421 BG 11110571
LEE YONG HOOI 016-2799088 BG 11110255
TAN TENG WAI 016-5084360 BG 11160663
NG YIE YING 012-4850735 BG 11110351
TAN HOOI SEE 017-4760554 BG 11110531
CHUAH YU LYN 014-7595713 BG 11110142

SUBMISSION DATE:
30
TH
DECEMBER 2013

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1) Discuss the function of Bank Negara Malaysia in the international and
offshore banking arena.
Do you agree that the present rules and regulations have succeeded in
administrating and guarding all the international and offshore banking activities
in Malaysia? (10%)
BNM supervise in International and offshore banking industries to ensure
them subject to the law enforced by BNM. The Banking and Financial Institution Act
989(BAFIA) had enforced by provide for the licensing, regulation and supervision of
institutions. There were several rules and regulations in offshore legislation such as
Offshore Companies Act 1990, Offshore Banking Act 1990, Labuan Offshore
Business Activity Tax Act 1990, Income Tax Act 1967, Exchange Control Act 1953,
Constitution (Amendment) (no.2) Act 1984, and Labuan Offshore Securities Industry
Act 1997.
Moreover, as BNM was act as a central bank and it is also has been known as
the apex banking system, there will be a certain objectives that have been set by the
BNM itself. The objectives are to endorse the monetary stability and a sound financial
structure. Besides that, it has to act as a banker and financial adviser to the
government. This is because that when the BNM take the role as a central bank, they
have to give good adviser towards the government of the country to help and solve the
problem faces by the government. This not only can solve the problem and also can
help the government to make a good and accurate decision. BNM also need to issues
the currency and keep the reserves to the safeguard the value of the countrys
currency. Furthermore, BNM will also promote to reliable, efficient and smooth
operation of national payment and settlement systems and to ensure that those
national payment and the settlement systems policy is directed to the advantage of
Malaysia and it needed to influence the credit situation to the countrys advantage.
Among those rules and regulations, Exchange Control Act 1953 was quite
well known. The Exchange Control Act 1953 enforced to deal in gold and foreign
currencies, payments, issuance of securities outside Malaysia and settlement. Anti-
Money Laundering and Anti-Terrorism Financing Act 2001(AMLATFA) which
contain provision and prevent money laundering.
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BNM also is a key authority responsible for the financial stability and
supervision of financial sector. BNM help by the Labuan Financial Services Authority
when involved with international banking. It also acted as banker and financial
adviser to international and offshore banking. BNM also issue currency and keep
reserves safeguarding the value of currency.
From the view of point, the current rules and regulations are good enough in
administrated and guarding the international and offshore banking activities in
Malaysia. The tax structure, legal framework, structure promotion and marketing had
done such great job. However, it will be more excellent when there are some
amendment and improvement for those rules and regulations.
BNM also should to strengthen the process of procedure of those international
and offshore banking. For example, double check the sources of the money come
from and avoid the money laundering (black Money). Offshore banks should screen
all their customers. They should see their new customers when approving any new
accounts. They also can to see the behaviour of existing customers such like the way
of customers use the services provided by the offshore bank. Of course, they also can
ask for the supporting documents of the customers to as a proof.
Besides that, some of the firm will take advantages through the legal
loophole of the Malaysia Offshore legislation to avoid the taxation. The foreign
investors should be more concerned. Thus, BNM is urged to pay a lot of attention
towards it. Moreover, security is another issue that public concern too. Customer
worried about their confidential and highly privacy information will outflow easily
especially at this IT era. This is due to the information of customer can hold by many
of person. The information can store in other countries too. They have to prevent the
cases of hacker that will hack the information. Lastly, the drug trafficking which
possible will happen in Malaysia but with low possibility. In Malaysia, the law stated
that anyone which owns the drug without legal reason will be sentence. Thus, this
drug trafficking still can be preventing.

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2) International banking consists of international commercial banking and
international investment banking. Explain the services that are offered and the
risks that the bank would be exposed to when providing such services.
I nternational Banking
International Banking is when a bank in one country undertakes activities that
involve in some form of business (loans, advice, securities and insurance) in another
country. International Banks are those institutions heavily engaged in International
Business. An international bank is a financial entity that offers international
companies and individual clients financial services, such as payment accounts and
lending opportunities. Although the term foreign clients include both international
businesses and individuals, every international bank will operate under its own
policies that outline how they carry out their business. Many individuals and
companies participate in international banking in order to minimize their tax liability.
In addition, several international organizations have made recent efforts to control the
use of international banks as tax havens. Furthermore, a bank is a financial institution
and a financial intermediary which functioning in accepting deposits and channels
those deposits into lending activities, either directly by loaning or indirectly
through capital markets. A bank links together customers that have capital deficits and
customers with capital surpluses. Due to their influential status within the financial
system and upon national economies, banks are highly regulated in most countries.
The typical regional bank in the United States possesses the ability to process
checking accounts, savings accounts, or lending practices in limited jurisdictions.
These banks do not handle accounts that are opened overseas nor do they lend funds
to international businesses or customers. International banking services included of:-
i. Facilitate imports and exports of their clients and also in trade financing.
ii. Arrange for foreign exchange-cross-border transactions and foreign
investments
iii. Assist in hedging exchange rate risk
iv. Trade foreign exchange products for their own account
v. Borrow and lend in the Eurocurrency market
vi. Participate in underwriting of Eurobonds and foreign bonds issues
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vii. Provide consultancy and advice on hedging strategies, interest rate and
currency swap financing and international cash management services.
Commercial Banking
First of all, we will discuss and explain on the Commercial bank which
commercial bank is a financial institution where a place that providing services for
businesses, organisations and individuals. Services include offering current, deposit
and saving accounts as well as giving out loans to businesses. This contrasts with
an investment bank whose main business is securities underwriting, mergers and
acquisition (M&A) advisory, asset management and securities trading. A commercial
bank makes their profits by taking small, short-term, relatively liquid deposits and
transforming these into larger, longer maturity loans. This process of asset
transformation generates net income for the commercial bank. Many commercial
banks do investment banking business although the latter is not considered the main
business area. Banks can be classified into International commercial banks and central
bank. Commercial banks are those which provide banking services for profit. The
central bank has the function of controlling commercial banks and various other
economic activities. There are many types of commercial banks such as deposit
banks, industrial banks, savings banks, agricultural banks, exchange banks, and
miscellaneous banks.
There are few types of product & services in the International Commercial
Bank such as the current deposits, saving deposits, fixed deposits, advancing loans,
creation of credit, promote the uses of cheques, financing internal and foreign trade,
agency services and general utility services.
i. Current Deposits
These deposits are also known as demand deposits. These deposits can be
withdrawn at any time. Generally, no interest is allowed on current deposits,
and in case, the customer is required to leave a minimum balance undrawn
with the bank. Cheques are used to withdraw the amount. These deposits are
kept by businessmen and industrialists who receive and make large payments
through banks. The bank levies certain incidental charges on the customer for
the services rendered by it.
ii. Savings Deposits
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This is meant mainly for professional men and middle class people to help
them deposit their small savings. It can be opened without any introduction.
Money can be deposited at any time but the maximum cannot go beyond a
certain limit. There is a restriction on the amount that can be withdrawn at a
particular time or during a week. If the customer wishes to withdraw more
than the specified amount at any one time, he has to give prior notice. Interest
is allowed on the credit balance of this account. The rate of interest is greater
than the rate of interest on the current deposits and less than that on fixed
deposit. This system greatly encourages the habit of thrift or savings.
iii. Fixed Deposits
These deposits are also known as time deposits. These deposits cannot be
withdrawn before the expiry of the period for which they are deposited or
without giving a prior notice for withdrawal. If the depositor is in need of
money, he has to borrow on the security of this account and pay a slightly
higher rate of interest to the bank. They are attracted by the payment of
interest which is usually higher for longer period. Fixed deposits are liked by
depositors both for their safety and as well as for their interest. In India, they
are accepted between three months and ten years.
iv. Advancing Loans
The second primary function of a commercial bank is to make loans and
advances to all types of persons, particularly to businessmen and
entrepreneurs. Loans are made against personal security, gold and silver,
stocks of goods and other assets. The most common ways of lending are
includes Overdraft Facilities, Cash Credit, Discounting Bills of Exchange, and
Money at Call, Term Loans and Consumer Credit.
v. Creation of Credit
A unique function of the bank is to create credit. Banks supply money to
traders and manufacturers. They also create or manufacture money. Bank
deposits are regarded as money. They are as good as cash. The reason is they
can be used for the purchase of goods and services and also in payment of
debts. When a bank grants a loan to its customer, it does not pay cash. It
simply credits the account of the borrower. He can withdraw the amount
whenever he wants by a cheque. In this case, bank has created a deposit
without receiving cash. That is, banks are said to have created credit. Sayers
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says banks are not merely purveyors of money, but also in an important
sense, manufacturers of money.
vi. Promote the Use of Cheques
The commercial banks render an important service by providing to their
customers a cheap medium of exchange like cheques. It is found much more
convenient to settle debt through cheques rather than through the use of cash.
The cheque is the most developed type of credit instrument in the money
market.
vii. Financing Internal and Foreign Trade
The bank finances internal and foreign trade through discounting of exchange
bills. Sometimes, the bank gives short-term loans to traders on the security of
commercial papers. This discounting business greatly facilitates the movement
of internal and external trade
viii. Agency Services
Banks also perform certain agency functions for and on behalf of their
customers. The agency services are of immense value to the people at large.
The various agency services rendered by banks are as follows:
Collection and Payment of Credit Instruments: Banks collect and
pay various credit instruments like cheques, bills of exchange,
promissory notes etc., on behalf of their customers.
Purchase and Sale of Securities: Banks purchase and sell various
securities like shares, stocks, bonds, debentures on behalf of their
customers.
Collection of Dividends on Shares: Banks collect dividends and
interest on shares and debentures of their customers and credit them to
their accounts.
Acts as Correspondent: Sometimes banks act as representative and
correspondents of their customers. They get passports, travellers
tickets and even secure air and sea passages for their customers.
Income-tax Consultancy: Banks may also employ income tax experts
to prepare income tax returns for their customers and to help them to
get refund of income tax.

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ix. General Utility Services
Locker Facility: Bank provides locker facility to their customers. The
customers can keep their valuables, such as gold and silver ornaments,
important documents; shares and debentures in these lockers for safe
custody.
Travellers Cheques and Credit Cards: Banks issue travellers
cheques to help their customers to travel without the fear of theft or
loss of money. With this facility, the customers need not take the risk
of carrying cash with them during their travels.
Letter of Credit: Letters of credit are issued by the banks to their
customers certifying their credit worthiness. Letters of credit are very
useful in foreign trade.
Collection of Statistics: Banks collect statistics giving important
information relating to trade, commerce, industries, money and
banking. They also publish valuable journals and bulletins containing
articles on economic and financial matters.
Acting Referee: Banks may act as referees with respect to the
financial standing, business reputation and respectability of customers.
Underwriting Securities: Banks underwrite the shares and
debentures issued by the Government, public or private companies.
Accepting Bills of Exchange on Behalf of Customers: Sometimes,
banks accept bills of exchange, internal as well as foreign, on behalf
of their customers. It enables customers to import goods.
Merchant Banking: Some commercial banks have opened merchant
banking divisions to provide merchant banking services.
The commercial bank will have their risk, for example interest rate risk,
borrower default risk, regulation risk, deposits risk, credit risk, liquidity risk, market
risk, operating risk and also legal risk. Moreover, as the follow, we will further
explain about the 10 risks.
i. Interest rate risk
Interest rate risk is one of the more common risks for international commercial
banks. Commercial banks are expert at mitigating interest rate risk in their
investment portfolios. However, interest rates are outside the domain of
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commercial bank operations. Federal Reserve, the central bank of the U.S.
exercises considerable influence over interest rates. As a result, commercial
banks try to hedge their loans against any changes in the general interest rate
level in the economy.
ii. Borrower Default risk
Although banks monitor borrowers and analyse their financial position and
ability to pay, commercial banks are still vulnerable to borrower default.
When borrowers are unable to pay and they may default on a loan which will
cause the bank to lose money. Although a general analysis of a bank's loan
portfolio will indicate a small margin of default, widespread borrower default
may jeopardize the solvency.
iii. Regulation risk
Commercial banks are also subject to regulation. Depending on the type of
bank, specialization and state in which they operating, commercial banks work
within a framework of legal regulation. When regulation change, the bank's
operational framework changes, which may impact its ability to generate
profits from loans.
iv. Opportunity Cost risk
Although loans are a significant part of commercial bank operations, banks
may quit lending for fear of widespread default. If a bank's financial analysis
expects lessen economic activity, a commercial bank may expect reduced
capacity of borrower repayment. With a higher default rate, a bank may prefer
to invest only a portion of its capital to make money from a few successful
loans rather than risk more money with the potential for default.
v. Deposits risk
Commercial banks rely partly on attracting deposits from customers to fund
banking investments and loans. To do so, many commercial banks offer
traditional banking services, including certificates of deposit and checking,
savings and money market accounts. In addition, banks may increase the
interest rate payments on these accounts to make them more attractive to
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depositors. Without a consistent flow of deposit funds, commercial banks
would be unable to operate at an optimal level.
vi. Credit risk
Credit risk is the most obvious risk to a bank. A bank's business model is
basically predicated on the idea that the large majority of lenders will repay
their loans on time, but a certain percentage will not. When a bank fails to
adequately estimate and price the rate of losses, or when economic conditions
change significantly, banks may face higher levels of bad which can shrink the
bank's capital reserves to an unacceptable level. Taken to the extreme, if a
bank underestimates the amount of credit losses it will incur.
vii. Liquidity Risk
Banks lend out the vast majority of the funds they receive as deposits,
therefore, there is always a risk that the bank will face a sudden rush of
withdrawals that it cannot meet, with the cash it has on hand. Banks cannot
call in loans on demand and cannot legally forbid depositors from
withdrawing funds. In order to meet sudden liquidity needs, most banks can
call upon lending facilities with other banks or the Federal Reserve. While
capital is usually available for healthy banks, a sudden simultaneous rush from
multiple banks can increase short-term borrowing costs significantly. The
failure of a bank to properly administer its liquidity needs can significantly
harm its profitability.
viii. Market Risk
As banks often hold investment securities on their balance sheet, they are
vulnerable to changes in the market value of those investments. As many
banks hold significant percentages of their reserves in debt instruments widely
thought of as "safe", a sudden market decline in those securities could force
banks to increase capital or pare back on lending, to say nothing of the loss in
shareholder equity from the investment losses.

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ix. Operating Risk
Management may make mistakes regarding acquisitions, expansion, marketing
or other policies, and lose ground to rivals. In the case of banking, operating
risk can have a longer tail than in other industries. Banks may be tempted to
under-price loans to garner market share, but under-priced mortgage loans
can hurt a bank for many years, and over-aggressive lending (lending to poor
credit risks) can threaten the survival of the bank itself.
x. Legal Risk
Banks are also subject to legal risks pertaining to their lending activities.
Banks are required to be fair and unbiased in their lending, and are also
required to disclose a range of information to prospective borrowers, including
the annual percentage rates, terms and total costs to the borrower. Similarly,
banks are subject to laws on usury and predatory lending. While the
definitions of usury and predatory lending arguably seem fairly clear, in
practice they can be subjective; what banks may consider a fair rate to
compensate for the elevated risk of default, regulators or citizens groups may
deem excessive and predatory.
I nvestment Banking
Investment banking is the provision of long-term equity and loan finance for
companies through underwriting of new securities, rather than direct loans. There are
four core functions of investment banking. First, investment bank is underwriting and
selling of shares and bonds to investors. Next, investment bank is making markets in
these securities for the investors who want to buy and sell them. Third, investment
bank has provides advisory services which related to selling of all manner of advice to
large companies and governments. Fourth, the first three business streams are
supplementary by investment management, merchant banking, foreign currency
trading, bridge financing, financial engineering, project financing and leasing.
Investment banking is different from commercial banking and it is higher-risk
business. It depends on the ups and downs of stock markets, interest rates and other
intangible factors, reflecting the high degree of speculation involved. There are four
categories of investment banks according to their sizes. The largest ones are referred
to as the bulge bracket. The term comes from the tendency of those banks names to
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print larger and bolder on public offering announcements and on the front pages of
prospectuses of new issues than the names of other banks making up the underwriting
and distribution syndicate. Those institutions not in the bulge bracket fall into the
categories of major bracket (second tier), followed by sub majors (third tier) and
regional (tied to geographical locations).
There are few types of products and services in International Investment
Banking such as issuing bond, public offerings of debt and equity securities,
originating securitized products, and originators of exchange traded derivatives,
traded securities, brokerage services, risk management and wealth management.
i. Issuing bond
Besides the common debt financing through credits, corporations also have the
opportunity to finance their business on the capital market with debt, e.g. by
issuing bonds. Concerning the issuance of corporate bonds, investment banks
participate in the origination process as well as in the distribution to potential
investors.
ii. Public Offerings of Debt and Equity Securities
Issuing equity is done by executing an initial public offering (IPO) or a private
placement. The tasks of an investment bank in the process of the IPO are
among others the advisory before and during the issuance, the implementation
of marketing activities (e.g. research reports), the determination of the price of
the stock, the conduction of the transaction and the adoption of the risk of
placing the stock (underwriting).
iii. Originating Securitized Products.
Investment banks also help in placing, arranging or originating securitized
products. Securitized products comprise products where different types of
assets are pooled and sold as a security. Examples for those underlying assets
are mortgages (mortgage backed securities (MBS)), or other assets (asset
backed securities (ABS)) such as consumer credits or leasing claims. The
process of securitization helps to make assets marketable that are normally
illiquid. ABS and MBS have the advantage of the enhancement of the equity
ratio, they help to diversify the financing situation of a corporation, they
facilitate the interest rate risk management and they may have tax advantages.
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Those advantages are confronted by a high ratio of fixed costs, making this
instrument only feasible for corporations with high capital needs.
iv. Originators Of Exchange Traded Derivatives
Investment banks also occur as originators of exchange traded derivatives.
Derivatives have the advantage of generating cashflows which cannot be
structured by a combination of other products. Besides the mentioned
products, investment banks also take part in the origination of certificates and
hybrid form of capital and occur as a market maker. In this market maker
function, the investment bank always offers an asking and a bid price in
certain markets and thereby ensures liquidity on these markets.
v. Traded Securities
The secondary market is where securities are traded after they have been
issued. Investment banks act here on behalf of their clients. The securities are
thereby either traded in the banks own name and on their own account and
then sold further to the client (the bank thereby acts as a dealer) or directly
traded in the clients name (brokerage). Trading is performed by the
investment bank in a wide array of instruments, including for example foreign
exchange, stocks, bonds, and commodities, indices of various asset classes,
certificates, derivatives and securitized products.
vi. Brokerages Services
Brokers are commissioned agents who represent either buyers or sellers and
work much as do real estate agents; they carry no securities in inventory and
therefore assume no risk in price variation or interest-charge. Dealers set bid-
and-ask prices for each security they offer for trade; by maintaining an
inventory of securities, dealers assume a price risk since the market may go up
or down during the time they hold the securities. Market Makers establish (and
support) the entire market for a security on either side of a transaction. Brokers
and dealers are regulated by the various exchanges of which they are members
and the National Association of Securities Dealers (NASD), which is the self-
regulating organization to which they all belong.
vii. Risk Management
Hedging positions in interest rates, foreign currency exchanges and
commodity positions through swaps, options and futures are an essential
building block of financial markets. Swaps are the mechanism by which two
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or more parties exchange their debt obligations in order to control more
precisely each partys desired risk/return profile. Swaps work because
different entities have different comparative advantages when pricing different
categories of debt in different financial markets. Parties of dissimilar credit
ratings or financing needs can exchange their obligations (such as, from
shorter term to longer term and vice versa) in order to optimize their financial
strategy and structure. Risk management groups combine expertise in diverse
hedging instruments to develop a complete hedging strategy for enterprises.
viii. Wealth Management
The accumulation of vast wealth by institutional investors (i.e., pension and
insurance funds), and by rich and super-rich individuals, has made money
management a vital business. Investment banks compete with one another, and
with large commercial banks and specialized money management firms in
accumulating assets under management. Hundreds of billions of dollars are at
stake.
In addition, there also have other types of products and services offered by
the international investment banking such as fairness opinions, structured finance or
securitization and alternative investment.
i. Fairness opinions
Fairness options support M&A, leveraged buyouts and restructurings for
public companies. Providing an independent, defensible, expert statement on
values and the fairness of those values is an essential part of any such public
transaction. Investment banks command what may seem to be exorbitantly
high fees for giving fairness opinions, considering the number of hours
worked (and the amount of paper produced). The reason is the significant
liability the investment bank assumes, which can be realized both in the courts
via shareholder suits and in industry reputation. In fact, major investment
banks do not like to provide fairness opinions which the risks is too high for
the fees but generally do so only to serve important clients.
ii. Structured Finance / securitization
Securitized obligations are sophisticated in design and often require statistical
analysis and sensitivity testing of key criteria (for example, default rates,
prepayment profiles, interest rate sensitivity, tax changes, etc.). For example, a
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change from forecasted rates of prepayment (for example, due to interest rate
declines and the resulting refinancing of older, higher-rate mortgages) can
result in shocking differences in returns from initial expectations.
iii. Alternative Investment
The investments in financial products other than exchange-traded stocks and
bonds have become a huge business, such as private equity, real estate,
arbitrage, international, and the like. The development of funds under
management, including private equity and hedge funds, has increased
dramatically, and investment banks both develop their proprietary products
and sell others.

Furthermore, the international investment banking does have their risk such as
the liquidity risk, cross-sectional risk, high fixed costs for investor risk and
intertemporal risk.
i. Liquidity risk
Financial systems may mitigate liquidity risk, the risk of inconvertibility of
assets into a liquid medium of exchange. By pooling different illiquid assets,
securitisation can reduce liquidity risk. But the market making performed by
investment banks in the trade of various assets should also reduce liquidity
risk. In general, information asymmetries and transaction costs can be lowered
by the existence of financial intermediaries. Banks transform liquid shortterm
deposits and longterm illiquid investments.
More precisely, they can choose between lowreturn liquid investments (such
as a deposit or a money market fund) and highreturn illiquid investments
(such as a corporate loan). If there are large enough frictions in financial
markets, banks can better insure savers against liquidity risks while at the
same time fostering longrun highreturn investments, which would be
neglected by investors due to uncertainty about their future consumption
needs. Financial intermediation is growth promoting by eliminating liquidity
risk and therefore making investments in highreturn illiquid asset more
attractive compared to a liquid but unproductive asset.


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ii. Crosssectional risk
The cross sectional diversification of individual risks from projects,
companies, countries etc. This diversification may have an effect on resource
allocation and saving rates and consequently on economic growth. One
important part of investment banking which serves for crosssectional risk
diversification is the emission of derivatives or structured finance products
which can be used to hedge risk. In principle, these instruments relocate
various risks to agents most able and willing to bear them. Similarly, the
design of syndicated loans is a form of crosssectional risk diversification
among the loan participating banks. Finally, the securitisation of assets
distributes risks connected with the underlying pool of assets by enabling
many investors to buy the different tranches associated with different risk
levels. Securitisation also permits investors to diversify geographically and
reduce exposure to locally correlated financial shocks.
iii. High fixed costs for investor risk
Financial intermediaries can reduce these costs by utilising economies of scale
in information acquisition or provide higher quality Investment banks provide
ex ante information to market participants in various ways such as within the
scope of M&A advisory, investment banks specialise in information
generation and value determination of companies, prior to IPOs, investment
banks distribute general information about the company to the public, which
should reduce adverse selection costs and the market making position, which
many investment banks perform on secondary markets, facilitates the efficient
use of information.
iv. Intertemporal risk
Financial intermediaries may also serve for intertemporal risk diversification
or maturity transformation by investing with longrun horizons. When
investors have a shortlived and intermediaries have a long time horizon, a
financial system based on intermediation may induce higher welfare than a
marketbased system. Investment banks facilitate intertemporal risk
diversification by performing a market making function and consequently
lowering contracting costs. An example would be an investor holding a long
term bond and being able to sell it at a fair price.