Photo Credit: Artem Beliaikin

Among six papers that composed the book, Eurodollars and International Banking, I think I can only complete the first paper contributed by Rene P. Higonnet. Hence, this will be the last article on the subject. I am doing this for two reasons, the difficulty of this field and my shifting interest.

In this post, I want to share three areas of disagreement between Higonnet and his interlocutors. To achieve this, I intend to answer the following three questions:

Is regulation really the answer to the problem in the Eurodollar market?
What is the proper place of uniform reserve requirement in the Eurodollar market?
How should we view the Eurodollar market? Is it really necessary? Or is international banking better without it?

Before we proceed to respond to the above questions, allow me to first provide the professional background of the author of the first paper and his three critics.

A Brief Academic and Professional Background

Rene P. Higonnet is Professor of Economics at the International University of Japan. He was formerly Director of the International Banking Center at Florida International University, and was an economist with the International Monetary Fund and the European Economic Commission. He has taught economics in France and the United States, and is the author of many articles on the problems of international monetary and banking relations (p. x).

Jane S. Little is an economist and has been associated with the Federal Reserve Bank of Boston for the last sixteen years. She is also an author of a book on the Eurodollar market and has written numerous articles on international finance and foreign direct investment (FDI).

Rainer S. Masera is head of the Research Department of the Bank of Italy and a member of the G-10 Group of Deputies. He was formerly an economist with the Bank for International Settlements (BIS) and taught at the Universities of Bergamo and Rome. He was co-chairman (with Robert Triffin) of the Monetary Policy Group of the Center for European Policy Studies. He is the author of three books as well as numerous articles and essays on domestic and international monetary and financial economics (p. x).

Helmut W. Mayer is Assistant Manager with the Bank for International Settlements. He has been associated with the Bank for the last twenty years, working on international monetary relations, with special emphasis on international banking. He has served on various central-bank committees concerned with the Euro-Market, international banking statistics, and the international coordination of banking supervision. In addition, he is the author of numerous publications in the field of international banking and exchange markets (p. xi).

As you can see, the identified four authorities in international finance are almost of the same standing when it comes to their academic and professional background. What I find interesting is that though all of them are considered experts in the Eurodollar market, the three commentators did not arrive at a similar conclusion as Higonnet did.

Relative Freedom Doesn’t Mean Absence of Supervision

Jane S. Little’s primary disagreement with Higonnet’s thesis focuses on the latter’s regulation proposal. Though she appreciated Higonnet for providing an overview of the numerous events that surrounded the development of the Eurodollar market, for her, Higonnet’s perspective is not broad enough. In her mind, the reason why the Eurodollar market came into existence in the first place is due exactly to the kind of proposal Higonnet is advocating. The market is a reaction on the part of bankers and their customers to avoid national regulations causing unnecessary expenses.

Little further argued that the relative freedom of the Eurobanks that Higonnet saw as an indication of the absence of regulation is inaccurate. Moreover, she argues that there is an ongoing attempt to put the international banking system under surveillance. She doubts Higonnet's positive outlook that regulation could really help solve the problem in the Eurodollar market.

As to the reason for the rapid growth of the Eurodollar market, Little found them in enjoying advantages like favorable interest rates, lower risk, and convenience. These advantages are closely connected to the relative freedom from regulation enjoyed by the market.

Little doesn’t share Higonnet’s positive outlook about implementing a control mechanism on the Eurodollar market. He saw it more as part of the problem than the solution.

Uniform Reserve Requirement

Another point of disagreement between the two camps of experts is in the area of providing a uniform reserve requirement. This time it is Rainer S. Masera that concentrates to expose the weakness in Higonnet’s proposal.

Masera criticizes Higonnet’s proposal of imposing a uniform reserve requirement on Eurobanks. For him, this is unfeasible for such a rule would “require the integration of internal methods and tools of control in all the major countries” (pp. 2-3) and at the same time will put unnecessary burdens on each of the currencies.

Masera agrees with Little as to the reason for the exponential growth of the Eurodollar market. He found this in the “inherent competitive advantages and the efficiency of Eurobanks themselves in spurring financial innovation . . .” (p. 59).

To further advance the impracticability of uniform reserve requirements, Masera raised another interesting observation. This time it is directed against Higonnet’s idea that the Eurodollar market is unnecessary. According to Masera, Higonnet compared the story of Eurodollar to the “mystery story of puzzled magicians pulling unexpected rabbits out of hats where they had previously hidden chickens” (ibid.). Such an analogy implies that those in the Eurodollar market are actually committing financial crimes by way of combining commercial banks’ unsound banking policies and the consent of central banks. In order to prevent the perpetuation of these offenses, Higonnet found the solution in the imposition of uniform reserve requirements.

Masera doesn’t share such a dark picture of the Eurodollar market as portrayed by Higonnet. Though he doesn’t deny the existence of the problems, he argues that the solution offered by Higonnet will create more complications that solve the problem in the Euro market.

Masera raised more questions than I identified in this post, but I think I gave a fair treatment as to his basic disagreement with Higonnet’s proposal.

A Balanced Perspective of the Eurodollar Market

Similar to Jane Little’s interpretation, Helmut Mayer questions Higonnet's positive outlook about the imposition of a control mechanism on the Eurodollar market. For him, such control is no longer necessary for it is already being implemented at the national level.

However, I see Mayer primary disagreement with Higonnet’s paper due to the unbalanced interpretation of the latter about the Eurodollar market. The reason given is that Higonnet failed to identify the positive contributions of the market in the past. As a result, Higonnet gave us a biased perspective. For Mayer, a “realistic interpretation” must include at least three contributions, and I want to limit my reflection to just two of them:

1. Heterogenous set of influences

The fast growth of the Eurodollar market is attributed by Mayer to what he designates as a “heterogeneous set of influences” (p. 66). They include “numerous regulatory advantages such as the exemption from minimum reserve requirements, interest ceilings and various other macro, micro and fiscal constraints which constitute an artificial incentive for the growth of the market” (ibid.).

Furthermore, in the mind of Mayer, the growth of the Eurodollar market is “just one aspect of a much broader development, namely the increasing economic and political integration of the world as a whole,” which he later labels as “the internationalization of banking” (p. 67). “This internationalization of banking, in turn, has been closely related to the growing importance of multinational corporations and the increasing weight of international trade” (ibid.).

Attaching such importance to the Eurodollar market, Mayer is uncomfortable to hear Higonnet saying that the market is unnecessary. For him, “it would be more correct to say that, given the direction in which the world was moving, the emergence of a truly international banking market was unavoidable” (ibid.).

2. The highly polyvalent character of the Eurodollar market.

Mayer interprets the highly polyvalent character of the Eurodollar market as serving three purposes:

One, the Eurodollar market “acts as an international money market for the banks themselves in which they can place their liquidity surpluses and meet their own needs for loanable funds” (p. 68).

Two, the Eurodollar market “serves as a financial intermediary for the private non-bank sector, acting either as a parallel market to the domestic market or as a source of finance for international trade and investment” (ibid.).

And three, the Eurodollar market “is used by the official sector as a source of balance of payments and development finance and as a deposit outlet for official reserves” (ibid.).

Conclusion

In concluding this article, I intentionally skip some details due to their complexity. Of course, the areas of disagreement between Higonnet and his interlocutors can be expanded to more than three. However, I limit my reflection for the sake of readability.

As to my reason to change my topic the next time I will publish a post, the present subject is consuming much of my time in rereading the material, reflecting on it, and trying my best to provide the clearest explanation possible. This is because the discussion on the Eurodollar market is really tough and very challenging.

In closing, I would like to mention Mayer’s warning against those who want to impose a control mechanism on the Eurodollar market. For him, “the only macroeconomic instrument that would be able to effectively curb the growth of Euro currency credit would be some sort of direct quantitative controls on the growth of such credit” (p. 73). Nevertheless, he said that if such measures will be implemented, this “would open up Pandora's box of problems, conflicts, abuses, and inefficiencies” (ibid.). Contrary to Higonnet, Mayer believes that though on a modest scale, the Eurodollar market will continue to play a significant role in international bank lending, particularly in the area of balance of payments and development finance.