What Are Country Limits?
In banking, country limit refers to the limit placed by a bank on the number of loans that can be given to borrowers in a particular country. Bank limits are similar to the industry limits used by some stock investors to manage their exposure to specific industry sectors.
- Country limits are the restrictions placed by banks on the amount of loans which can be made to borrowers within a given country.
- They are used to control the banks' risk exposure to particular regions.
- Although country risks apply to the nation as a whole, the bank will perform additional credit checks and risk-control measures when assessing individual loans.
Understanding Country Limits
Country limits typically apply to all borrowers, regardless of whether they are public or private, individual or institutional. They also apply to all kinds of loans, including mortgages, business loans and lines of credit (LOCs), personal loans, and any other forms of borrowing. Although factors such as the creditworthiness of borrowers are of course considered when assessing individual loan applications, they are not relevant for the purposes of the country limit restriction.
The intention behind a country limit is to help banks ensure that their risks are well diversified geographically. If a significant share of a bank's loan portfolio is concentrated in just a few foreign countries, the bank may be unduly exposed to political, economic, and currency risks associated with those countries. Therefore, banks use country limits to diversify their loan portfolios just as investors seek to diversify their stock portfolios.
Many factors are used to determine a given country's country limit. The nation's political stability is of the utmost concern, because political unrest in a foreign country may result in a loan default, regardless of a personal or institutional borrower's stability. In fact, even in politically stable countries, the political climate should be considered when setting a country limit, because a nation's political climate has a strong influence over its financial stability and economic policies.
Aside from perceived political risks, another major factor is the economic strength of the nations in question. Nations with strong and diversified economies may be given a higher country limit, since the borrowers in those countries will be more likely to repay their debts. Countries with weak economies, on the other hand, will receive lower country limits—particularly if they suffer from severe inflation and volatile currency values.
Banks also consider countries' regulatory environments when considering their country limits. Generally speaking, banks prefer operating in countries with fewer regulations in which banks are relatively free to conduct business. On the other hand, countries with excessively underdeveloped regulatory systems may be prone to increased fraud and corruption, which can undermine business confidence and decrease country limits.
Credit Risk Management
While country limits dictate how much money a bank is willing to lend to borrowers within a given country, they do not mean that borrowers within that country aren't subject to careful scrutiny before they are awarded a loan. Personal and institutional borrowers are subject to credit checks, and banks will generally try to choose low-risk borrowers, regardless of any country limits in place.
Real World Example of a Country Limit
For American banks, country limits are generally highest in relation to countries whose economies and political systems are perceived to be relatively predictable and robust. Examples include the members of the Group of Seven (G7), such as the United Kingdom (U.K.), Germany, and Canada. Some Asian countries, such as Japan or South Korea, are also likely to receive relatively high country limits due to their strong economies and stable political climates.
Banks may also raise country limits if they feel that a particular country or region is poised for significant economic growth. For instance, countries such as China and India may see increased country limits in the years ahead as their share of global gross domestic product (GDP) continues to climb.