Management of banks' international lending: country risk analysis and country exposure measurement and control

Introduction

Lending involves a number of risks. In addition to risks related to the creditworthiness of the borrower, there are others including funding risk, interest rate risk, clearing risk, and foreign exchange risk. International lending also involves country risk.

This paper deals solely with the country risk of international lending. It does not deal with the related risk to which banks may be exposed when they lend domestically in the knowledge that the borrower may be exposed to the risk of default by a foreign customer, or to other foreign impediments that might endanger repayment of the banks' loans. The presence of country risk in international lending, however, does not mean that international lending necessarily entails more aggregate risk than domestic lending.

Part I of the paper deals with banks' assessment of country risk; Part II with the measurement of country exposure; and Part III with the control of banks' country exposure. Part IV sets out the Committee's views about the role of supervisors in monitoring banks' country risk assessment systems and their country exposure. Finally, as misunderstandings can easily arise from the use of different terminology in relation to country risk, an Annex to the paper contains suggested definitions of certain terms that are in frequent use.