The risks of international lending

For one thing, lending funds in the international arena is risky-probably more risky, on average, than domestic lending. Political risk-the risk that government laws and regulations will change to the detriment of business interests- is particularly significant in international operations. Governments are frequently overthrown and confiscation of private property is a common occurrence in many parts of the world. There is also currency risk- the risk associated with changing relative prices of foreign currencies. the value of property pledged behind an international loan will fall if the currency of the home country is devalued, thus eroding the lender‘s collateral. Geography, too, works against the international lender of funds. The larger distances which frequently separate lender borrower make it more difficult for the bank loan officer to see that the terms of the loan are being adhered to.
Beginning in the late 70s the Federal Reserve Board, Comptroller of the Currency, and Federal Deposit Insurance Corporation inaugurated semiannual surveys of foreign lending by approximately 140 U.S. Banking organizations. The principal concern of these regulatory agencies was that U.S. multinational banks were overly committed to loans in certain countries where political and economic risks were unusually high. if this were the case, it might threaten the confidence of the public in the stability and soundness of this nation‘s largest banks. By June 1980, the federal banking agencies discovered, nonlocal loan credits extended by the most-active multinational banks totaled $266 billion, while loans to local borrowers in the markets where the banks‘foreign offices were located totaled only about $70 billion. However, most loans extended by U.S. multinational banks were made to industrially developed nations and to OPEC Oil-producing countries. Only $66 billion- about one quarter-of the total of all foreign loans were directed at less-developed, non-oil-producing nations.
Nearly 60 percent of the loans extended by U.S.-based international banks flowed to residents of Switzerland and other developed nations in the group of ten and to offshore banking centers where these large banks regularly conduct their business. In addition, nearly three quarters of the loans to distant nations were short term (maturity of one year or less), with other banks representing the largest borrowing group. It seems clear that, on the whole, multinational banks are relatively conservative lenders, directing their credits mainly to large bank, corporate, and governmental borrowers situated mainly in Europe and among the major oil-producing countries of the Middle East. The combination of regulatory pressure and the inherent risks of international risks of international lending have encouraged U.S. multinational bankers to issue mainly short-term loans to established borrowers with strong credit ratings.