A country is said to have comparative advantage in the production of a good (or service) if it is produced more efficiently in this country than anywhere else in the world. The economic welfare of a country increases if the country exports the goods in which it has a comparative advantage and imports goods and services from countries which are relatively more efficient in their production. At firm level, firms engage in international trade because of competitive advantage. The exploit arbitrage opportunities. A firm will export goods or service from one country and sell it in another because there is an opportunity to profit from arbitrage.
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The phenomenon of trade in international banking services is best explained by appealing to the theories of comparative and competitive advantage. In banking, the traditional core product is an intermediary service, accepting deposits from some customers and lending funds to others. The intermediary function involves portfolio diversification and asset evaluation. A bank which diversifies its assets can offer a risk / return combination of financial assets to individual investors / depositors at a lower transactions cost than would be possible if the individual investor were to attempt the same diversification.
Banks also offer the evaluation of credit and other risks for the uninitiated depositor or investor. The bank acts as a filter to evaluate signals in a financial environment where the amount of information available is limited. If banks offer international portfolio diversification and/ or credit evaluation services on a global basis, they are engaging in the international trade of their intermediary service. For example, a bank may possess a competitive advantage in the evaluation of the riskiness of international assets, and therefore, its optimal portfolio of assets will include foreign currency denominated assets.
A by- product of intermediation is bank participation in the payments system, including settlement, direct debit, and chequing facilities. If some of its corporate or retail customers engage in international trade activity, they will require global money transmission services. The simplest example is the provision of foreign exchange facilities across national frontiers is now well developed. In parts of Europe, it is possible to use a debit card from one state (for example, the UK) to obtain local currency in another state (for example, Spain).
