Country-Risk Assessment System in Banks: Patterns and Performance

The country-risk assessment function in U.S. banks has risen in importance with the recent growth in international lending. This paper, which is based on a field study of 50 U.S. banks, identifies 4 common organizational types of country-risk assessment, probes their strengths and weakness, examines their determinants, and analyzes the importance of organizational and technical development to various dimensions of system performance. The findings of the study suggest that banks move to more organizationally sophisticated country-risk assessment systems 1) with time as they accumulate experience in the assessment function, 2) with the increasing absolute size of their foreign loan portfolio, and 3) with the growth in relative importance of their international activities to the activities of the firm as a whole. Systems with an independent staff pre-investment audit were found to have a better performance than those where only the line country-manager made the assessment. It is important, however, that the independent staff assessment unit be integrated with the organization.