Foreign banking

Offshore consultant

foreign banking

 institutions and features

The term foreign banking covers all financial institutions operating outside the country of residence of a person or company.

The progressive removal of barriers to international trade, promoted from governments and institutions as part of the globalization of the world economy, has also inevitably entailed the liberalization of financial markets. Transactions between different countries and even continents are more and more frequent, which has given a greater role to foreign banking.

The free movement of capital at an international level has its source in the dramatic expansion of large banking groups, which have embarked on major operations of purchases and alliances. But not only have financial institutions and multinational companies benefited from this liberalization of the capital market. It is increasingly common for the small investor or individual saver to turn to foreign banks in search of profitable investments or better terms for their savings.

Therefore, nowadays it is no longer strange to open a brokerage account in any major overseas business center, take a look across the border in search of a more favorable loan or mortgage or to use foreign banking to obtain better interest rates for a term deposit or savings account.

The internet has substantially contributed to this phenomenon, which has facilitated the spread of offers by foreign banks, in addition to having simplified the contact and procedures for opening accounts. Although regulations against money laundering and terrorism have made more difficult the conditions for checking the identity of people accessing banking services, in some cases it is still possible to open bank accounts by mail, without physical presence, provided the necessary documentation duly certified is made available to the bank.

Another common reason for resorting to foreign banks is the pursuit of financial stability. People living in countries with high inflation, with a weak national currency or in a politically, socially and economically unstable setting, often seek shelter for their savings in a reliable international financial centre. Many individuals and companies transfer capital to tax havens to benefit from the tax advantages they offer and enjoy a higher level of privacy.

It is precisely in tax havens, and to a smaller degree in other major financial centers, where we find a particular type of foreign banks, which are known as offshore banks. Such banks are targeted to citizens and non-resident companies and are regulated by special offshore banking laws. These do not only remove most of the limitations imposed on traditional banks, such as exchange controls and on foreign transactions, but they also exempt both the deposited capital and the corresponding interests from tax.

The other banks, including both those in the country of residence as well as traditional foreign banks, are not covered by these special laws, therefore we may define them as onshore banks. As for the different types of banks that exist (whether they are onshore or offshore institutions), we could classify them by line of business. Thus we have:

Central banks. They issue the national currencies of the different countries and define their monetary policies.

Correspondent banks. They are banks that provide services to other banks within a country. The intervention of correspondent banks is very common in international transfers, especially when changes of currency are made.

Investment banks. They operate in the stock and financial markets. They are basically engaged in the sale of shares, the management of mutual funds and the search of finance for large companies. Within this group we can find the so-called private banks, focussed on people with large financial resources, offering them a more personalized service. Many offshore banks are in fact private banks.

Corporate or business banks. They specialize in medium and large companies to which they provide services related to trade such as loans, letters of credit, etc...

Commercial or retail banks. They are the “regular” banks we all use and whose main customers are individuals and small businesses. Opening current and savings accounts, writing checks, granting mortgage loans and consumer credit, and so on, are among their most common services.

It is worth mentioning:

Savings banks. They operate the same way as regular retail banks, but usually dedicate their profits to charitable causes. Many have public capital or have originated from foundations established by people committed to good causes. They are very popular in Europe.

Postal banks .They operate in a similar way to savings banks, but they depend on the postal service. In some countries such as Switzerland, they are eligible under specific legislation and they are very creditworthy institutions.

Ethical banks. They are created by individuals and institutions critical of the financial and monetary system. One of the highlights is that they invest in ethical and environmentally defensible projects.

Islamic banks. These are institutions created to meet Islamic law (sharia), which prohibits operations such as the payment and collection of interest, considering the practice as usury.

Finally, we must not forget a host of licensed institutions that perform similar activities to banks but do not need a full banking license to practice. They are usually private cooperatives, seeking to provide better conditions for its members. The best known are the so-called Building Societies, especially focused on mortgages, or the Credit Unions.

Note that the classification we have made should not be taken strictly. Many banks perform different functions and it is not uncommon to find institutions that offer commercial services to individuals, but also corporations, operating as investment or correspondent banks, and so on. They are the large financial groups which often combine these different activities because they have specialized departments for each type of service.

In conclusion we can say that foreign banks, especially offshore banks, offer many interesting opportunities for investment and savings. The possibilities of each person and the benefits they can get will depend, to a greater extent, on their financial capacity, their place of residence and the type of institution chosen for this purpose.

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