FX Lending

From Open Risk Manual

Definition

FX Lending (also Foreign Currency Lending) denotes a class of Lending products where obligations are denominated not in the primary currency used in the region where the obligor is domiciled and/or operating but in an alternative (foreign) currency.

The term is used primarily in relation with Consumer Finance. Large corporate and sovereign entities routinely issue liabilities in currencies other than their own.

Risk Factors

FX lending implies (other things being equal) a higher and more complex risk profile compared to standard lending products. This is due to the likelihood that a large change in exchange rate will signifcantly increase the repayment burden of the borrower, in particular for borrowers that do not have natural or contractual hedges of that Foreign Exchange Risk. Due to this specific profile, it is usually analysed under FX Lending Risk


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