Risk and Risk Management within Multinational Banking - Essay Example

Originally, the purpose of country risk assessment was to identify risks that could affect a borrower's ability to repay according to the terms of the loan. The concept has since been extended; and banks have integrated country risk assessment into their daily operations and use it as a tool for tasks such as strategic planning, marketing, and evaluation of the performance of their international portfolios. Therefore, a more appropriate term would be country risk management, a practice of which country risk assessment is but one element.

Country risk, for the international banker, is the potential for a loss of the assets a bank has loaned across borders in a foreign currency. A loss could be caused by a multitude of factors that renders a borrower unable to service or repay the loan as per the agreement. (Also at risk may be physical assets such as branch offices of multinational banks, but that issue is not discussed here). The borrower may be a sovereign nation, a local firm, or a multinational corporation of another country. Whatever the case, the loan is papered according to the country of risk, that is, the country from which the repayments will flow (Angelini, Maresca, Russo, 2004:855).

Country risk assessment entails the identification; a qualitative and quantitative analysis and measurement of the political, economic, social, and natural conditions in the country in which the borrower operates; and the degree to which these exogenous factors can impinge on the borrower's capacity to conform to the terms of the loan agreement. The risks to be considered are those over which private companies or individual borrowers have no control. Examples of country risk by their broad categories are the following:
Political events - history and probability of confiscation or expropriation of the assets of the borrower, occupation by a foreign power, civil disorder, ideological conflicts (often closely linked with religious differences), changes in government (both planned and peremptory), regionalism, and tribalism in terms of the internal balance of power, inequitable distribution of income related to ethnic rivalries, the unwillingness of a government to honor its obligations, changes in policy that affect the borrower's cash flow, and terrorism.
Social event - history and probability of civil war, riots, labor union strife, religious conflict, and socioeconomic differences in living standards that result in tension or instability.
Economic conditions - possibilities of recession, the extent of diversification of the economy, attitude toward strikes, effects of increases in the cost of imported inputs and foodstuffs, degree of reliance on a few key exports, and the effects of a decline in the worldwide prices of those exports, background of policies and development strategies, taxes on local earnings, restrictions on the transfer of remittances out of the country, devaluation or depreciation of the exchange rate and other capital controls.