Banking, Offshore

Offshore banking centers are located in places that are outside the customer's home country. Offshore banking is relevant to the field of global studies because of the global distribution and international reach of these financial centers and because of its impact on the global economy.

In the film Bourne Identity, Jason Bourne, an amnesiac assassin, wonders what kind of person keeps money, six passports, and a gun in a safe deposit box in a bank in Zurich. The Economist magazine points out that in the popular imagination, as well as in Hollywood movies, the answer is obvious: customers of Swiss banks do. Although not literally “offshore,” Swiss banks provide a safe haven free from the regulations of a depositor's home country.

All the requirements of the global financial system cannot be met by conventional banking services. The need for secrecy and the desire for shelter from taxation and regulation have led to the proliferation of offshore banking centers. These centers can also be attractive because of convenient time zone differences, sophisticated telecommunications networks, local skilled workers, and politically stable and supportive governments. Offshore banking provides discreet markets where currencies, bonds, loans, and other financial instruments can be transacted outside the attention of regulating authorities or competitors. Offshore banks offer low or no tax settings for savings, and some can be havens for both tax evasion of undeclared income and money laundering.

The term offshore banking initially applied to the Channel Islands because these islands were offshore from the United Kingdom. Although many offshore banking centers subsequently opened on islands (such as the Cayman Islands and Bermuda), not all did; some offshore banks are located in microstates (like Liechtenstein or Andorra), in small countries (such as Switzerland or Luxembourg), or even within a city like New York. As a major financial center, New York benefited in the early 1980s when the Federal Reserve authorized U.S. banks to establish international banking facilities in an effort to attract some of the Eurocurrency market to the United States. Eurocurrency is any currency that is deposited in a bank outside the country in which that currency is the unit of account.

Globally, it is possible to identify five main specialized offshore banking center nodes:

• 1.
  The Caribbean and surrounding area: including the Cayman Islands, the Bahamas, the British Virgin Islands, Antigua, and Aruba, with Bermuda to the north and Panama to the south
• 2.
  Europe: including the Channel Islands, the Isle of Man, Switzerland, Austria, Luxembourg, Monaco, Liechtenstein, Andorra, San Marino, and Cyprus
• 3.
  Southwest Asia (the Middle East): including Bahrain and Lebanon
• 4.
  East and Southeast Asia: including Hong Kong, Macau, Singapore, and Labuan
• 5.
  South Pacific: including Nauru, Vanuatu, and the Cook Islands

A variety of factors have facilitated the globalization of financial services in general and of offshore banking in particular. A crucial factor has been the advances in information and telecommunications technologies, allowing an incredible increase in the digital flow of global capital, that have significantly reduced the transaction and transmission costs associated with moving money internationally. Another has been the institutionalization of savings in richer countries (through pension funds and the like) that has established a large pool of capital managed by professional investors with few geographical allegiances. Another has been the trend toward “disintermediation” whereby borrowers (especially transnational corporations) raise capital and make investments without going through the traditional, intermediary channels of conventional financial institutions. Yet another, [Page 111]and probably more important, factor has been the deregulation of financial markets that occurred in many richer countries beginning in the 1980s (until the global financial crisis beginning in 2007).

...