Risk Management within Multinational Banking - Dissertation Example

Risk Management within Multinational Banking Introduction As international bankers increased lending to less creditworthy countries, they learned (the hard way) that more attention has to be paid to the possibility of loss. The potential for loss arises not only from microfactors like credit risk of the borrower but also from exogenous factors like political, social, and economic environments, which are beyond the control of any individual borrower--hence the concept of country risk and the associated practice of country risk assessment. 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. LITERATURE REVIEW Defining country risk 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). Types of Country Risk 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, 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, 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, degree of intervention by the state in fixing prices for inputs and outputs, and frequency of intervention of the government in the money market and the ceilings on interest rates Natural disasters --frequency of droughts, floods, earthquakes, and epidemics and the possibility of famines or wide-scale reduction in the productive capacity of the country as a result; the attitude and the most likely policies of the government in such situations (Angelini, Maresca, Russo, 2004:865). Some of these are exogenous factors over which a government has no control. If the government is able to mitigate or ameliorate the effects of an event, the happening of which is beyond its control, the weight of that item is discounted in assessing the overall country risk. For example, while a developing-country government cannot control a worldwide cyclical recession, it can implement adjustment policies that ensure its continued ability to repay the loan. Impairment to service or repay the loan as per the agreement can take various forms, but not all are equally serious in terms of risk. Country risk assessment involves the weighting of likely events in order of seriousness. Repudiation of the debt, that is, a decision by the borrower not to service or repay, is the most serious element. Default on periodic debt-service obligations or repayments of the principal when they become due is the second most serious. However, not all cases of default have the same degree of country risk attached. In case a default does occur, a number of alternatives are available to the two counterparties as long as they are negotiable. (Flannery, James, 2004:436) Renegotiations imply easier terms of repayment such as longer maturities, smaller periodic payments, and lower or fixed interest rates; rescheduling of the repayments, but with the terms remaining the same; moratorium on repayment; and temporary restrictions on remittance earnings. These risks are the focus of country risk assessment--determining the probability that an event or condition will arise during the terms of the loan that will result in one of the aforementioned situations. Another type of risk in international lending should also be noted. Rather than directly affecting the ability of the borrower to repay, it affects the ability of the lender to assess and predict the likelihood of risk adequately. This type of risk includes the absence of data on key indicators, such as the actual extent of a country's external debt or debt-service obligation, government manipulation of data or information, and the inherent difficulty of predicting the potential for certain events, such as a coup or the extent and duration of a cyclical economic trough. Furthermore, the data may be obsolete and, therefore, can be useless or even misleading. (Staub, 2003) Country risk is often confused with other categories of risk that are usually a subset of country risk. To clarify the distinction, it is worth reviewing the components of country risk: Sovereign risk applies specifically to the creditworthiness of governments as borrowers. As such, it is similar to commercial risk, except that the nature of a government is such that it involves more factors than just commercial risk factors. At the same time, it is narrower than country risk in that it does not include many of the social, political, and nature-related factors. Political risk specifically refers to political factors that might impair a borrower's ability to repay. Credit risk refers to the ability (or in some cases the willingness) of the borrower to repay the tender. The term is virtually synonymous with country risk but is more relevant to "business" risk, that is, the expected profitability of the investment in the form of loans. Indigenous risk refers to transactions solely involving local loans and funds in local currencies. Sectoral risk refers to a change in economic policy that might affect an activity in one sector in such a way as to impair the borrower's ability to repay. Transfer risk, a common term today, refers specifically to the possibility of nonpayment by a commercial borrower because the host country restricts the transfer of foreign exchange out of the country. Other risks are exchange rate risks, interest rate risks, commodity price risks, liability risks, foreign direct investment risks, and the like. All are specific risks that also fall under the broader country risk. The Nature of Country Risk Before discussing how country risk is determined, a few critical points are noted. First, country risk is neither static nor absolute. It is dynamic and changes constantly in response to changing domestic and international conditions. It is relative; that is, it is a risk only to the extent that it impairs repayment--a possibility that, in turn, depends on the nature of a particular country, the time frame, the purpose and nature of the loan, and the borrower. For example, the possibility of a coup and the associated risk element will be discounted if the coup leader who was leading an inappropriate development strategy is deposed. Country risk is also relative across countries. To illustrate, two countries that have very similar balance-of-payment deficits may have very different country risk profiles, depending on factors such as diversification of the economy, breadth and depth of the export base, earning or productive capacity, soundness of industrial policies, historical trend of growth, and extent of structural problems (Canoy et al., 2001). THE EVOLUTION OF COUNTRY RISK ASSESSMENT What led to the emergence of the concept of country risk and its assessment? As in many areas, it was born of necessity. Establishment of the Eurocurrency market in 1950s provided a circumvention from the capital-transfer controls. The result was a rapid and extensive expansion in international lending. Initially, the borrowers were creditworthy institutional customers from reliable, stable industrial countries. In other words, the risks involved were the traditional commercial risks with which bankers were familiar. However, in the second half of the 1960s, a new trend emerged: There was massive borrowing by the developing sovereign nations. (Staub, 2003) This borrowing raised all sorts of new issues. First, the borrowers were not traditional commercial clients; and their creditworthiness could not be evaluated on traditional commercial terms. These borrowers could themselves alter the very conditions affecting the likelihood of repayment. Moreover, banks operating in Eurocurrency markets were operating in an environment far more complicated and intertwined than the traditional environment. The ability of a government to repay loans obtained from the Euromarket depended not only on the performance of the domestic economy but also on its own ability to earn and transfer foreign exchange. The Emergence of Sovereign Risk Assessment The peculiar nature of governments as borrowers gave birth to the concept of sovereign risk. It was soon evident that risk assessment had to be very broad, covering political, social, and economic factors--that is, the entire environment of a country. By the early 1970s, the international banking community was familiar with the term country risk. Terminology and jargon notwithstanding, few international bankers had a thorough idea on how to assess and use the concept of country risk. There were no clear-cut answers, and too often bankers found themselves resorting to "headline banking" (Canoy et al., 2001). In making decisions, they automatically responded negatively to lurid headlines of disorder and political upheaval or positively to news of the discovery of the greatestknown reserve of a rare but vital mineral. There was a tendency to focus on past performance in assessing potential risk in the future rather than the use of a time frame for the period of the loan or investment and to consider the probability of events occurring within that period. Even if such events were identified, an assessment of their impact on the productive capacity was still more rare. While civil war might seem inherently risky, its impact could be minimal if it were short term and did not affect the area and facilities involved in the investment. In fact, if the dismemberment of a country were to bring about an end to civil and ethnic strife, dismemberment might even be positive from the perspective of the tender. The division of Czechoslovakia into the Czech Republic and the Slovak Republic is a successful example. As the concept of country risk assessment developed, another issue came to the forefront: Country risks of borrowers varied even within a country. Today it may not seem as surprising, but it was a revelation in those early days when country risk depended on factors like the purpose and maturity of the loan and the type of borrower. Risk assessments needed to be carried out not only for each of those categories but also for the overall risk by clubbing the two together. In a country with an unstable leadership, a company providing a vital export might be a more secure investment than the government. For example, if there were a coup, the new leadership might be tempted to repudiate the obligations of the predecessors; but it might not tamper with a key source of foreign exchange. Within the private sector, a bank might be a better risk than a company--the former could count on assistance from the central bank. Lending for a project that increased the country's productive capacity is less risky than financing current government consumption. (Staub, 2003) With little experience in this type of lending, banks initially looked to multinational corporations for guidance and information on how to handle sovereign risk. While the analysis of multinational corporations was helpful in some respects, the issues that banks faced were significantly different, which required a much more thorough analysis. Consequently, banks had to develop their own approaches. At first, they relied on standard, short fact sheets prepared by their economics departments which were primarily historical with brief evaluations of debt-servicing ability. There was a heavy emphasis on numbers and quantitative analysis. Moreover, each factor was considered independently of the others. Subsequently, banks realized that each factor interacted with others and a more wholesome picture was necessary to make informed decisions. Initially, banks used the assessments primarily to evaluate individual loans and set exposure limits for different countries. The tendency was to loan only to low-risk countries, a practice that produced very lopsided portfolios. Eventually, more forward-thinking banks saw merit in applying country risk assessment to such tasks as balancing their portfolios and achieving greater diversity in terms of geography, purpose of the loans, and liquidity. On the other hand, country risk analysis still seemed to serve as a brake on lending rather than as a means of identifying marketing opportunities. The Concept of Country Risk Management The move toward more sophisticated methodologies and uses of country risk assessment received a boost as a result of the failures and near failures of banks in 1974 and 1975, which occurred largely because of their international operations. It directed attention to the quality of the international loan portfolio as a whole and its relation to the solvency of banks. Soon thereafter, bank supervisory agencies used country risk assessments to monitor and advise. For example, it was not until the beginning of the 1980s that the important link between country risk and a country's institutional and regulatory framework was recognized, as well as the necessity to factor in the time frame of a loan (Canoy et al., 2001). Whereas the typical approach to assessment has been quantitative, many institutions are now favoring mixed approaches, even accepting the subjective opinions of experts as a critical input. Country risk assessment is increasingly seen as a management tool and not just as the basis for deciding individual transactions. There is still no standard way to carry out the analysis nor any set pattern for its application. Implementation is hindered by serious gaps in the data base, and there will always be factors that defy prediction. RESEARCH QUESTION As noted, there is no standard procedure for assessing country risk. Nevertheless, there are certain general approaches that are common and certain indicators that are typically looked at. In addition, there are certain principles to be followed, whatever the approach. The Principles The focus of country risk assessment is on trends rather than past performance and immediate conditions. Similarly, it is based on structural and institutional factors and underlying forces rather than temporary conditions. Of interest are those events that might have a significant impact on the ability or willingness of the borrower to repay the loan; and the critical issue is to determine the probability of occurrence of that event or condition, the probable timing of occurrence, and the expected impact in terms of debt service (De Nicolo, Kwast, 2002:871). The context of country risk assessment is broad and comprehensive; it addresses not only political, economic, and social factors but also a time frame that covers both past performance and up to five years in the future. The historical situation and future prospects of a country have to be assessed in the backdrop of worldwide events and prospects. As noted, country risk assessment is a dynamic process, the frequency and scope of which is dictated by the nature of the country and the loan. Newly independent countries or those beset by ethnic tension and an unstable power structure require more frequent monitoring than traditionally democratic and internally cohesive countries. The importance of efficient, reliable, and timely quantitative as well quantitative information in providing an efficient analysis cannot be overstated. (Certain key sources of information are listed in a subsequent section.) Besides, it is important to use skilled sets of experts who are most informed about a country's situation and prospects and who also intimately understand the bank's objectives, needs, and operations. (Humphrey, 2005:100) Derived assessments should be continuously subjected to reality checks; that is, they must be gauged against reality in the backdrop of the worldwide environment. The key is the specific features of a country, such as its potential resource base, and the ability of the borrower to service debt of different levels and terms. Other relative factors involve the nature of the debt (soft or hard), maturity, grace periods, interest rates, and the like. Because country risk assessment entails making a comparative index, it is important to develop a consistent approach that permits comparisons. The Factors for Review Two broad categories of factors that are typically analyzed in assessing country risk are economic and noneconomic. The latter is broken down into political, social, and environmental factors. Given the close interaction between economic and noneconomic variables, the latter are frequently embedded in economic indexes; therefore, all factors need to be exhaustively analyzed in relation to one another to obtain a better perspective. Economic Factors. To reiterate, the focus is on identifying the factors that bear on a country or borrower's ability to service loans according to a predetermined timetable. As such, lenders look at certain determinants of a country's economic strength and the ability to make repayments (such as the resource base, government policies, quality of economic management, and financial restrictions) and at certain economic indicators that relate to current performance: economic growth, foreign exchange balance, exports, and nature and size of external debt. A key economic factor is a country's resource base, which includes raw materials; human resources; infrastructure; industry; finances, especially savings; agricultural output; and other factors that impinge on the country's productive capacity and ability to earn foreign exchange. Particularly important are the diversity and exploitability of those resources. A diversified industrial or agricultural base or a strong export commodity such as oil obtains more ready approvals by international bankers. Manufactured exports are preferred to primary commodities because they are somewhat less subject to the vagaries of the market. Also important is the extent to which the resource base can satisfy domestic demand, particularly for foodstuffs and industrial inputs, as they are the two key imports that influence the outflow of hard currency. In terms of risk assessment, the issues relate to the existing and potential resources and the government's policies toward their exploitation. (Elsinger, Lehar, Summer, 2002). Government policies, both short term and long term, are an obvious influence. Among the issues here are the degree to which trade is free and the economy allowed to operate without distortions, particularly with respect to pricing and exchange controls; agricultural versus industrial policy; the appropriateness of the development strategy; the government's attitude to foreign business; taxation; degree of commitment to provide the infrastructure or other support for economic development; and willingness and ability to make correct, even though unpopular, adjustments in times of economic downturns. Again, it is not just existing policy but projections about the future policy that must also be assessed. Moreover, it is not just economic policies per se that are important. Equally decisive for stable economic growth are social policies insofar as they affect such factors as a sense of nationhood; social calm; education; training; work permits for foreigners; transportation; and labor relations, not only in terms of pay but also in terms of fringe benefits, retirement, insurance, and the like. Many countries face financial restrictions that, in turn, impinge on their creditworthiness. A country which has an unfavorable debt-service burden will have a lower credit rating if those conditions are structural problems than if they are merely a product of a cyclical downturn. The debt burden refers to the percentage of foreign exchange required to pay the principal and interest on the total external debt. The current account depends on the growth rate of domestic demand, the competitiveness of the exchange rate, the prices for exports, and the diversity of exports. One factor that should be included in financial analysis but that is very difficult to determine is private nonguaranteed external debt. Another important element in a country's external financial position is its ability to tap commercial credit and draw on IMF funds. Within these broad categories, there are specific economic indicators that international bankers typically look at. One is the ratio of the current account on the balance-of-payments accounts to the GNP (or GDP [gross domestic product]). It is a truism that most developing countries are net borrowers. The question has always been how large a current account deficit a country can run relative to GNP and still be able to meet all its debt obligations. The level depends on the degree of diversification of the economic base, the present earning capacity, and future prospects. Another key indicator is the ratio of national savings to the GNP (or GDP). Domestic savings are an important source of investment funds; and to the extent that they fall short, the country and its investors must resort to external borrowing. Thus, this ratio is an important indicator of both the country's potential for continued economic growth and its likely external financial needs and debt burden. A number of indicators relate specifically to the country's external financial position. Important measures include the likelihood of sustained economic growth with reasonable price stability, the degree to which productive capacity can be expanded to boost exports, earning capacity and availability of foreign exchange, receipts from exports of goods and services, net transfer receipts, and imports of capital. Ratios of certain macroeconomic indicators are used to assess long-term economic growth, with the focus on investment and savings. Ratios involving the balance of payments show the likelihood of a trade deficit, which impinges on the ability of the country to repay loans. It is important to evaluate whether the deficit is likely to increase or decrease over the period of the loan. Analysis of external debt; its nature, size, and trends; and various other ratios involving external debt, trends of the GNP and the balance of payments, and the availability of foreign exchange are, therefore, critical ingredients in the overall decision making. It is important to note some of the limitations of the key economic ratios. Although an exhaustive analysis of economic factors is essential, it is insufficient to arrive at a comprehensive country risk judgment in the absence of qualitative inputs like the nature of economic management, quality of debt management, political stability, and so on. Noneconomic Factors. These factors encompass the legal and social environment of a host country, with the main consideration being political risk, especially political stability. The issue is the possibility of changes that shift the rules of the game that underlie the decision to invest and affect the ability to repay. It deserves mention that political risks are not inherently negative; their impact may vary with different time frames. For example, the age and continued illness of Marshall Tito caused considerable uncertainty and politicking in Yugoslavia; his death contributed to the heightening of uncertainty and political instability. Naturally, the political risk and the country risk of Yugoslavia climbed much higher than what it was just a couple of years prior to this fluid situation. Social factors include variables such as culture, habits, and environmental characteristics. They are extremely pertinent to areas of the world that fall in the moderate- to high-risk categories, such as Africa and the Middle East. Traditional values are an important aspect of a country. It is pertinent to analyze what they are, the extent to which they are influential, and the tension between them and modern values. Religion is an extremely potent and dominant value; it is a critical factor in many developing regions. Finally, there is the question of natural environmental factors--again, a prominent issue in many of the low- and moderate-risk countries, which are less able to deal with disasters. While drought may be a worldwide problem, its impact in the industrial world is far less because of the diversified economic base and better external financial position that allows the import of critical inputs. In countries closer to the margin of economic survival, a drought can result in a famine, dramatically reduce foreign exchange earnings, and drain foreign exchange reserves as foodstuffs have to be imported. In countries afflicted by prolonged drought where large segments of the population, especially young people, are facing chronic malnutrition, there is concern about the different regions and countries together? What type of relations exist with neighboring countries? Are there territorial disputes or affinities of social groups split by artificial boundaries established by colonial powers? (Flannery, James, 2004:436) CARRYING OUT COUNTRY RISK ASSESSMENTS As noted, several general approaches to country risk assessment have evolved over the last three decades. The initial one was largely selective and qualitative--the gut feelings of those familiar with a certain location. However, institutions soon moved to a far more quantitative and objective approach, assisted by advances in technology and econometric techniques. More recently, there has been a trend back toward more qualitative input, but this time on a more formal and systematic basis and in combination with quantitative analysis. One reason for the shift has been the obvious difficulty of reducing the human factor to meaningful numbers. Moreover, it is difficult to devise valid universal scales for the soft factors; besides, numbers can be misleading. Resource Requirements One encumbrance of country risk assessment is its cost in terms of time and human and financial resources. Even the largest banks cannot afford to carry out full assessments for each country in which they do business. Therefore, banks employ assessments of different scope and are selective in terms of the countries reviewed. In general, the approach is to categorize countries broadly into high, moderate, and low risk. The last group, which includes the industrial world, is subject to very little review, while the first category does not figure prominently in private bank lending. Most of the attention is, therefore, on the middle group, which includes mainly developing countries. Even this category includes too many countries for complete assessment of each one, and banks typically focus the most intensive scrutiny of those areas where their exposure is greatest or where there is a particular risk that needs tracking. (Dornbusch, Park, Claessenes, 2000:177) METHODOLOGIES As noted, for a long time banks and companies were secretive about the methodologies employed. Even today, although techniques are publicized, there still seems to be a reluctance to piggyback on one another's assessments, despite the cost and time involved. However, there is substantial information on the more common approaches and techniques that banks now use. Two aspects of the assessment have to be decided in advance. One is the methodology to be used, and the other is the variables to be the focused in the review. To some extent, the choices will be a function of economics and time. The basis of most country risk assessments is the country study. At one extreme is the lengthy, in-depth, comprehensive review that covers all of the key topics and issues that might affect loan repayment. It involves substantial primary research, with a time frame of three to five years--the maximum term of most loans. In general, it includes numerical as well as qualitative analysis. At the other extreme are quick, rough reviews that rely entirely on secondary sources of information, contain little number crunching, and focus on the near term. In between are assessments of varying scopes and complexities. Many banks employ checklists as a framework for their assessments, with a numerical rating for each factor. The end product is a set of ratings for each risk. If used consistently for all countries, the checklist will also yield a set of comparative risk ratings. Another approach is to develop and apply a simple, relevant paradigm as the basis for the analysis. One starting point is an analysis of the resource base for production, including natural, human, and financial resources. The next step is to look at the economic policies directed at exploiting that base, with the focus on how the country manages its resources. Finally, the external financial position is investigated. Another approach, popular because of its relative simplicity, is based on the monetarist theory: If domestic money creation exceeds domestic demand, there will be excess borrowing abroad; and the balance of payments will deteriorate, with the reverse also true. The focus is on the total credit provided to the economy by banks as a measure of the domestic supply of money, and changes in the supply as a result of government actions, which will, in turn, affect the total credit to the economy, the amount of external borrowing, and so on. This approach, because it requires just a few variables, seems easy to apply. However, it relies on assumptions about the relationship of the supply and demand for money that, in turn, are based on conditions that do not pertain in many developing countries, which are usually the target of most country risk assessments.Whatever the techniques employed, the end result should produce a good understanding of the key indicators; their trends and prospects, particularly in terms of structural characteristics; and a set of ratings for each country for various risks. It should give indication of the relative risks within the country as a whole by breaking out certain sectors or areas by type of borrower, loan, and time frame. Simulation and sensitivity analysis of the country position to various risks are critical tools for understanding a variety of alternative future scenarios. The country risk assessment report itself must be clear, concise, and geared toward pragmatic decision making. Following are some guidelines on a country risk assessment report used by bankers: Comprehensive, timely information on key issues and topics and avoidance of irrelevant material (the assumption is that the reader has familiarity with the subject and country) ; Consistency among reports with regard to basic assumptions about key indicators and trends to facilitate comparisons ; Conciseness, with attention to the summary and conclusions; Highlighted key trends, issues, and conclusions in tables and boxes (e.g., political outlook, economic policy, trends and prospects, balance of payments, external debt position, and outlook for debt service) ; Rationale behind issue and trends with a focus on causal factors ; Provision of clear answers or information on which to base decisions ; Integrated economic and political analysis; Support for facts and evidence for projections, conclusions, and recommendations ; Small, concise tables, with text references ; SUMMARY AND CONCLUSION International lending has increased dramatically in the last twenty-five years. The problems experienced by banks recently have brought to the fore what was increasingly evident anyway--that international lending can be a risky business, particularly to developing countries. One tool that banks are increasingly resorting to is country risk assessment, that is, an evaluation of the risks posed over time in a country that might affect the ability of the borrower to repay, as well as the likelihood of the risks occurring. It also looks at what the probable impact of an inability to repay is, that is, the ultimate risk, which ranges from delayed payment to default. Country risk assessment addresses the political, economic, social, and natural characteristics of a country. Ideally, the analysis should cover the period of the loan or transaction, as all risks are dynamic. In addition, risk assessment involves a relative perspective, in the sense that a possible event may pose a threat to one sector but not another or may be long term or short term. Similarly, what constitutes a risk in one country might not be so in another. There are no standard risk-assessment methodologies, but certain techniques and approaches are commonly used. The assessments focus on trends, starting with the past and running into the future. They tend to be as comprehensive as possible, covering economic, political, social, and environmental factors. They look at the country and project in a global context, since what happens elsewhere in the world will affect the project. Ideally, an assessment will include both quantitative (number crunching) and qualitative (expert opinion) analysis. Finally, the assessment must be ongoing over the life of the transaction. Country risk assessment requires substantial resources in terms of staff, information, travel, and time. Clearly, it is not possible to carry out full-scale assessments for each loan. Therefore, a bank has to decide on the scope and frequency of the assessment to be carried out. In general, complete assessments need to be carried out for loans to high-risk countries, particularly where the size of the transaction is large. The frequency of ongoing assessments will again vary depending on the riskiness of the loan, its size, and events at a particular time. For example, if there is social unrest in a country, it may require closer monitoring. Whereas country risk assessment was initially used solely in conjunction with decisions on international loan making, banks are now coming to view it as a broader management tool. It is, for example, increasingly being applied to overall strategic planning of investment and loans, evaluation of the bank's global investment portfolio, and operations such as marketing. As for the future, given that the risk involved in international banking is, if anything, increasing, banks will continue to apply country risk assessment to a number of operations and management tasks. 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