3.9: The International Banking Structure

Policymaking and regulatory powers are different in every nation; local standards and laws also vary greatly, which means that banking systems vary greatly. These two United Nations agencies — the World Bank and the International Monetary Fund — assist in financing international trade.

The World Bank

The World Bank is an important source of economic assistance for poor and developing countries. With backing from wealthy donor countries (such as Canada, the United States, Japan, Germany, and the United Kingdom), the World Bank provides loans, grants, and guarantees to some of the world’s poorest nations. Loans are made to help countries improve the lives of the poor through community support programs designed to provide health, nutrition, education, infrastructure, and other social services.

The International Monetary Fund

The International Monetary Fund (IMF) is governed by and accountable to its 191 member countries and has three critical missions: furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity.^[1]

These countries combine their resources to:

• encourage the development of a system for international payments;
• promote the stability of exchange rates;
• provide temporary, short-term loans to member countries; and
• encourage members to cooperate on international monetary issues.

The IMF loans money to countries with troubled economies, such as Mexico in the 1980s and mid-1990s, and Russia and Argentina in the late 1990s. There are, however, strings attached to IMF loans; in exchange for relief in times of financial crisis, borrower countries must institute sometimes painful financial and economic reforms. In the 1980s, for example, Mexico received financial relief from the IMF on the condition that it privatize and deregulate certain industries and liberalize trade policies. The government was also required to cut back expenditures for such services as education, health care, and workers’ benefits.

Some nations have declined IMF funds rather than accept the economic changes that the IMF demands. In 2021, according to the IMF website, the IMF had about $1 trillion available for loans. Despite the fact that the U.S. has been instrumental in promoting global free trade for decades, the recent Trump Administration has stated its plans to withdraw from the WTO in 2025. The 2025 Trump administration has also been a proponent of tariffs and has implemented new tariff initiatives for many imports to the United States. Much of this is happening at the same time as this book is being written, so please keep abreast of the economic and trade policies of the Trump administration in 2025 to ensure you are up to date with the newest decisions.

Canadian Banks in the International Marketplace

The financial marketplace spans the globe, with money routinely flowing across international borders. Canadian banks play an important role in global business by providing loans to foreign governments and businesses. Multinational corporations need many special banking services, such as foreign currency exchange and funding for overseas investments. Canadian banks also offer trade-related services, such as global cash management, which help firms manage their cash flow, improve their payment efficiency, and reduce their exposure to operational risks. Sometimes, consumers in other nations need banking services that banks in their own countries do not provide. Therefore, large banks often look beyond their national borders for profitable banking opportunities.

Foreign funding has been crucial to Canada’s economic development, with the Canadian capital market being an integral part of the international capital market. Canadian provinces often secure financing in foreign markets like London and New York, and projections suggest that foreign capital will remain essential to meeting Canada’s future financial needs.

Some Canadian banks have established a presence in overseas markets, opening offices in Europe, Latin America, and Asia. These banks often offer superior customer service compared to local institutions and have access to diverse funding sources. However, international expansion poses challenges. Canadian banks face competition from foreign institutions that operate under less stringent regulations, enabling them to offer more competitive pricing. Some governments also protect domestic banks by restricting foreign competition. For instance, in China, foreign banks face high fees, deposit limits, and interest rate controls, which favour government-owned Chinese banks. Despite these obstacles, certain Canadian banks continue to do business in China.^[2]

International banks operating in Canada significantly contribute to the economy by creating jobs, paying taxes, and making operational and capital investments. Most employees in these institutions are Canadian citizens, further supporting the domestic workforce.

Nonetheless, international banking carries risks, including political and economic instability. The financial crisis of 2007–2009 highlighted these vulnerabilities, with countries such as Greece, Portugal, Spain, and Ireland experiencing severe economic disruptions. Recovery in these nations has been slow, but financial assistance from the European Union and the International Monetary Fund has played a critical role in stabilizing both regional and global economies.

Currency Values and Exchange Rates

Currencies are traded in the foreign exchange market. Like any other market, when something is exchanged, there is a price. In the foreign exchange market, a currency is being bought and sold, and the price of that currency is given in some other currency. That price is expressed as an exchange rate.

When an exchange rate changes, the value of one currency will go up while the value of the other currency will go down. When the value of a currency increases, it is said to have appreciated. On the other hand, when the value of a currency decreases, it is said to have depreciated.

The Canadian dollar fluctuates against the American dollar in a range of 65-70 percent. In November 2007, the Canadian dollar was stronger than the U.S. dollar, at USD $1.09. After a few years of parity, the Canadian dollar retreated to approximately USD $0.76 in June 2018.^[3] These fluctuations have an impact on businesses.

International Payment Process

International financial settlements between buyers and sellers are different in many countries. Canadian banks provide services to buyers and sellers to support their clients during global financial transactions. Country-to-country transactions rely on an international payment process that moves money between buyers and sellers in different countries. For example, payment from a Canadian buyer starts at a local bank that converts funds from dollars into the seller’s currency, say British pounds sterling, to be sent to a seller in England. At the same time, payments and currency conversions from separate transactions are also flowing between British businesses and Canadian sellers in the other direction. A balanced trade between the two countries implies that money inflows and outflows are equal for both countries. If inflows and outflows are not in balance at the Canadian bank or the British bank, then a flow of money, either to England or Canada, is made to cover the difference.

Future Trend: A Centralized Digital Currency

Digital currencies are currencies that are only accessible with computers or mobile phones because they only exist in electronic form. Digital money is not physically tangible like a dollar bill or a coin. It is accounted for and transferred using online systems. The difference between digital currencies and cryptocurrencies is that digital currencies are centralized, meaning that transactions within the network are regulated in a centralized location, like a bank. Cryptocurrencies are mostly decentralized, and the regulations within the network are governed by the majority of the community.

The Bank of Canada revealed in 2016 that it was developing the CAD-coin as a digital version of the Canadian dollar, a move in response to the rise in popularity of bitcoin and other blockchain-based digital currencies. The initiative will involve issuing, transferring and settling the central bank’s monetary assets by way of a computerized ledger rather than by way of printed dollars. Research and experiments have been ongoing since 2016. Some major banks in Canada are participating in this new initiative, including Royal Bank of Canada, CIBC and TD Bank Group, and institutional partners such as Payments Canada and TMX Group.

Despite their claim of being the money of the future, current private digital currencies, like Bitcoin, do not work well for making payments or saving for the future. Because of their fluctuating values and slow clearing times, very few merchants accept them. It is possible that in the future, digital currencies could at least partially solve these problems, leading to greater adoption. However, the widespread adoption of private digital currencies would carry important risks to both the economy and the financial system. The issuer could go out of business or fall victim to cybertheft; either situation could cause a loss of confidence in the payment system.

Exploring the idea of a central bank digital currency makes sense. In theory, it could provide the safety of cash, with the convenience of modern electronic payments. It could take many forms, but two broad approaches are:

• value-based — people transfer money from their bank account to a card or a phone app; or
• account-based — people or businesses open accounts at the central bank.

Either way, payments made using a central bank digital currency could allow payments to remain private to the parties involved, just like cash, but traceable to law enforcement, just like bank accounts.

Central bank digital currencies could give consumers more choice while maintaining competition among financial service providers like banks, the way cash does now. Depending on their design, they could even act as a backup if other payment methods become temporarily unavailable.

Basically, central bank digital cash would act like current electronic payment methods, the only difference being that it would not be tied to a commercial bank the way bank accounts and debit cards are.^[4]

Media Attributions

“Bitcoin, Cryptocurrency, Finance image” by BenjaminNelan, used under the Pixabay license.