What Are the Functions of International Banking Facilities?

What Are the Functions of International Banking Facilities?
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The functions of an International Banking Facility (IBF) are to book foreign-based deposits and loans at existing United States bank locations. IBFs represent a separate set of books kept under the umbrella of a U.S. bank that are not subject to U.S. monetary regulations. IBFs were established in December 1981 as a means of moving offshore euro dollars to the U.S. banking system. Euro dollars are dollars that are kept outside of the U.S.

Separate Books

One of the main reasons for the establishment of IBFs was to eliminate the transactional pricing advantages of offshore euro dollar-denominated banks, as opposed to the conduct of the same transactions at United States-based banks. The IBF regulations allow existing U.S. banks to set-up separate branch books for foreign transactions without having to incur the costs of providing reserve requirements, Federal Deposit Insurance Corporation (FDIC) insurance, assessments and interest rate ceilings. These cost-saving measures that were enjoyed by off-shore banks helped to attract euro dollars to the U.S. from branches of U.S. banks located in the Caribbean, as well as from other institutions. Furthermore, some states have granted special tax treatment for the operating profits of IBFs. For example, in Florida, IBFs are entirely exempt from state taxes.

Loans and Deposits

The main functions of an IBF are to take deposits and make loans to non-resident persons, entities and banks. In order to insure that IBFs are not competing with domestic markets, the initial maturity for deposits taken must be at least two working days, which prevents IBFs from establishing checking accounts. The minimum transaction with an IBF must be $100,000 unless interest is being withdrawn or an account is being closed. Furthermore, IBFs may not offer negotiable instruments, such as certificates of deposit, because they would directly compete with U.S. markets. Deposits and loans must also not be related to the non-resident's domestic activities, such as the financing of a factory in the U.S.

Interbank Activities

IBFs that need to borrow money in order to make loans or lend money because of excess deposits use the interbank markets. They are allowed to conduct transactions with foreign banks, other IBFs and their parent bank. The same limitation rules apply to interbank activities as outlined above for loans and deposits. However, IBF transactions tend to be quite large and the IBF interbank market helps to reduce exchange and interest rate risk by the conduct of swap transactions. For example, if the maturity of a large loan is nine months from now, but the books of the IBF do not contain a matching nine-month deposit at an appropriate interest rate, the IBF will swap one of its deposits with another IBF or foreign bank that has a matching maturity and appropriate interest rate, thereby helping to insure that the loan is properly covered.