Back-to-back loan

A back-to-back loan is a Financial agreement between entities in two different countries in which loans are exchanged using different currencies while maintaining the same maturity date. Each party borrows in its local currency and lends an equivalent amount to the other party. helping both sides manage foreign currency needs without directly entering the foreign exchange market.

Most back-to-back loans come due within 10 years, due to their inherent risks.[1] Initiated as a way of avoiding currency regulations, the practice had, by the mid-1990s, largely been replaced by currency swaps.[2]

Limitations

One disadvantage of such agreements is asymmetrical liability - absent a specific agreement, when one party defaults on the loan, the other party may still be held responsible for repayment.[3] Another disadvantage in comparison with currency swaps is that back-to-back loan transactions are customarily recorded on banking institutions' records as liabilities and thereby increase their capitalization requirements, while currency swaps were, during the 2000s, widely exempted from this requirement.[3]

See also

References

  1. ^ Andrew J. Zamora (1990). Bank contingency financing: risks, rewards, and opportunities. John Wiley & Sons. pp. 74–75. ISBN 978-0-471-60894-3.{{cite book}}: CS1 maint: date and year (link)
  2. ^ Peter Moles, Nicholas Terry (1997). The handbook of international financial terms. Oxford University Press. p. 32. ISBN 978-0-19-828885-5.
  3. ^ a b Suk H. Kim, Seung Hee Kim (2006). Global corporate finance: text and cases. John Wiley & Sons. pp. 181–182. ISBN 978-1-4051-1990-0.


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