The world’s three most important financial centers are London, New York, and Tokyo. Traditional exchanges may become obsolete unless they continue to modernize, cut costs, and provide new customer services. In fact, trading over the Internet and other systems might increase the popularity of offshore financial centers.
Offshore Financial Centers
An offshore financial center is a country or territory whose financial sector features very few regulations and few, if any, taxes. These centers tend to be economically and politically stable and provide access to the international capital market through an excellent telecommunications infrastructure. Most governments protect their own currencies by restricting the amount of activity that domestic companies can conduct in foreign currencies. So companies can find it hard to borrow funds in foreign currencies and thus turn to offshore centers, which offer large amounts of funding in many currencies. In short, offshore centers are sources of (usually cheaper) funding for companies with multinational operations.
offshore financial center
Country or territory whose financial sector features very few regulations and few, if any, taxes.
Offshore financial centers fall into two categories:
■ Operational centers see a great deal of financial activity. Prominent operational centers include London (which does a good deal of currency trading) and Switzerland (which supplies a great deal of investment capital to other nations).
■ Booking centers are usually located on small island nations or territories with favorable tax and/or secrecy laws. Little financial activity takes place here. Rather, funds simply pass through on their way to large operational centers. Booking centers are typically home to offshore branches of domestic banks that use them merely as bookkeeping facilities to record tax and currency-exchange information.3 Some important booking centers are the Cayman Islands and the Bahamas in the Caribbean; Gibraltar, Monaco, and the Channel Islands in Europe; Bahrain and Dubai in the Middle East; and Singapore in Southeast Asia.
Global banking giant HSBC recently added Dubai, United Arab Emirates, to its list of key offshore banking centers. The Dubai office will serve customers from the Middle East, North Africa, and Pakistan. HSBC also chose Dubai as its offshore center for Sharia-compliant products and services (those complying with Islamic law). HSBC Bank International is based in Jersey, Channel Islands, and has four other offshore centers in Jersey, Hong Kong, Miami, and Singapore.
Source: Ali Haider/epa–CORBIS-NY.
1. What are the three main purposes of the international capital market? Explain each briefly.
2. Identify the factors expanding the international capital market. What is meant by the term securitization?
3. What is an offshore financial center? Explain its appeal to businesses.
Main Components of the International Capital Market
Now that we have covered the basic features of the international capital market, let’s take a closer look at its main components: the international bond, international equity, and Eurocurrency markets.