Offshore banking involves the cross-border intermediation of funds and provision of services by banks located in offshore financial centres to non-residents.
According to an International Monetary Fund working paper, offshore banks typically transact wholesale business in currencies other than those of their host countries and predominantly deal with other financial institutions.
Offshore banking is conducted through offshore branches or subsidiaries. These offshore branches are legally the same as their parent banks onshore, allowing for the seamless transfer of assets and liabilities between them.
Some offshore branches, known as shell branches or booking offices, have minimal overhead and staff and primarily serve as registries for transactions managed elsewhere.
The rise of offshore banking can be traced back to the 1960s and 1970s, driven by restrictive financial regulations in industrial countries. Between 1964 and 1973, the number of foreign branches of US banks grew significantly, from 181 to 699, with many located in Caribbean and European offshore financial centres. During this period, the total overseas assets of US banks surged from $7 billion to $53 billion.
In Asia, the development of offshore interbank markets began after 1968, with Singapore launching the Asian Dollar Market and Japan establishing the Japan Offshore Market, similar to US International Banking Facilities.
Despite its growth, offshore banking faces challenges including tax regime frictions, stringent regulatory frameworks, capital flow restrictions, and concerns about dubious activities. These factors contribute to its continued prevalence across numerous offshore financial centres and high transaction volumes.
