Understanding Interbank Clearing and Foreign Exchange
Interbank Clearing Systems
The interbank clearing system facilitates transactions between banks. Current systems often allow for the detention of effects without requiring the submission of paper documents, thanks to computer processes. This is known as truncation or elimination of paper documents or magnetic computer keys.
The National Electronic Clearing System (NECS) streamlines the compensation of documents and payments, including transfers, money orders, debits, and standing orders. This system
Read MoreUnderstanding Spain’s Balance of Payments
The balance of payments (BoP) measures transactions between residents and non-residents. These measurements are made on an annual basis. The institution in charge of making the measure is the Bank of Spain, following the directions of the Sixth Edition of the Balance of Payments and International Investment Position Manual (BPM6) of the International Monetary Fund.
Components of the Balance of Payments
- Credits: Exports of goods and services, income receivable, reduction in assets, or increase in liabilities.
Key Formulas and Concepts in International Finance
Formulas
GDP = GDI
GNI = GDI + Resident’s Net Factor Income from Abroad
%Δ in Foreign Currency Value = [(1/S1) – (1/S0)] / (1/S0)
%Δ in Value of Dollar = (S1-S0)/S0
Bilateral RER = (Foreign Currency / Domestic Currency) / (Pfor / Pdom)
The %Δ in the Real Exchange Rate = %Δ in the Nominal Exchange Rate – the Inflation Differential (from US perspective means US on the bottom or second in the subtraction equation)
Current Account = X-M
Trade Balance (X-M) + Services Balance + Net Factor Income from Abroad
Read MoreRegional Economic Integration and Global Markets
Regional Economic Integration
Regional economic integration refers to agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other. These agreements foster interdependence and increased influence. There are five levels of economic integration:
- Free Trade Area: Eliminates all barriers to the trade of goods and services among member countries. Examples include the European Free Trade Association
Bank Financial Analysis: Key Ratios & Metrics
Risk-Adjusted Return on Capital (RAROC)
RAROC is calculated as:
(Expected Income – Financial Costs – Provisions – Operating Expenses) / Risk Capital
- Expected Income: (Loan * Interest Rate)
- Financial Costs: (Loan * Cost of Financing)
- Provisions: (Loan * Loss Given Default * Probability of Default)
- Risk Capital: (Loan * Loss Given Default * Unexpected Default Rate)
A higher RAROC is better, and it should be greater than the bank’s capital cost to create value. Value creation occurs when RAROC exceeds the
Read MoreInternational Purchases: Accounting and Tax Treatment
Accounting and Tax Treatment of International Purchases
The accounting and tax treatment of purchases of goods made abroad differs from domestic purchases primarily due to:
- Administrative, commercial, and tax regulations, including specific procedures.
- Customs duties on imports.
- Value Added Tax (VAT) application and treatment.
- Currency exchange operations for payments and euro recording.
- Specific payment arrangements in international trade.
Two types of operations are considered, based on the goods’ country
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