What is 'Eurocredit'

Eurocredit refers to a loan whose denominated currency is not the lending bank's national currency. The concept is closely linked to that of eurocurrency, which is any currency held or traded outside its country of issue. For example, a eurodollar is a dollar deposit held or traded outside the U.S., and conversely, a eurocredit loan made by a U.S. bank would be one that is not denominated in USD.

BREAKING DOWN 'Eurocredit'

The eurocurrency market is a major source of finance for international trade because of ease of convertibility and the absence of domestic restrictions on trading. The banks involved in the eurocredit and eurocurrency markets are the same, but the loans involved in the eurocredit market are typically larger and longer term than those of the eurocurrency market. As the global financial system has deregulated and integrated over the past few decades, with many countries first dismantling capital controls and then opening up participation to foreign banks in their banking sectors, the eurocredit market has been able to expand significantly.

Eurocredit helps the flow of capital between countries and the financing of investments at home and abroad. A major function of banks is matching surplus units (who deposit at the bank) with deficit units (who borrow from the bank). Being able to do this internationally, both across borders and across currencies, improves both liquidity and efficiency in the markets for financing. Banks may also engage in syndicated loans in the eurocredit market, where a loan is made by a group (syndicate) of banks. Syndicated loans reduce the risk of borrower default for each individual bank loaning funds, and are often found where the size of the loan is too big for one bank to do by itself. Often, the banks in a syndicate will be headquartered in different countries but lending in one currency — an example of how the eurocredit market can work to improve the flow of funds internationally.

The "euro-" prefix in the term arose because originally such currencies were held, and loans made, in Europe, but that is no longer solely the case and a eurocurrency can now be held or a eurocredit loan made anywhere in the world that local banking regulations permit.

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