What Are the Risks of International Banking?

What Are the Risks of International Banking?
Foreign banking is not a risk-free enterprise.

Currency Risk

Conducting business internationally forces companies to become familiar with the currency exchange rates. Companies choosing to operate business locations on foreign soil typically use foreign currency when purchasing materials and hiring workers at the local facility. Start-up capital may come from the company’s domestic operations prior to the company exchanges it for foreign currency. If the U.S. dollar is stronger than the value of the foreign currency, it will require more foreign currency to equal the value in U.S. dollars. Conversely, if the U.S. dollar is weaker than the foreign currency, gaining an equal-value currency exchange will require more dollars.

Exchange rates may affect profits made in a foreign country when companies transfer foreign currency to their U.S. headquarters.

Political Risk

U.S. companies might hesitate when conducting business internationally since foreign countries may be less stable politically and economically. Situations such as political unrest, military coups, dictatorships and anti-business groups can create difficult banking environments in foreign countries. These political issues can make forecasting difficult because U.S. companies tend to lack familiarity with violent political upheaval. Business-friendly countries might create unfavorable banking conditions or institute tougher banking regulations to restrict foreign companies from dominating their local business market.

Accounting Risk

U.S. companies are required to follow Generally Accepted Accounting Principle (GAAP) when recording and reporting financial information from business activities located outside the United States. Publicly held companies face close scrutiny by regulators because companies may use foreign business operations to hide profits or losses. While these abuses might improve a company's domestic financial statements, external audits will uncover these discrepancies and report the improprieties to outside stakeholders. International banks may also be required to disclose which U.S. companies use their banking and investing services.

Foreign countries usually require the reporting of financial information according to international financial accounting standards. These requirements mean U.S. companies must convert their GAAP-prepared statements to international standards or keep a separate international accounting ledger for their foreign operations. Either situation creates a lengthy and expensive process for the company’s accounting process.