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Managing Cross-Border Credit Risks: Considerations for Swiss Banks

Monday, 20 November 2023

Monde Economique by Achille Deodato, CEO Indigita SA



Swiss banks frequently extend credit facilities to clients domiciled abroad, encompassing a spectrum from conventional Swiss Lombard credits to mortgages secured by foreign collateral. These offerings pose distinct challenges necessitating meticulous consideration by both private bankers and clients.


When contemplating a loan for a client abroad, Swiss banks must execute several crucial steps. Firstly, the bank must ensure the client's Know Your Customer (KYC) file complies with applicable regulations. Secondly, a comprehensive assessment of the client's financial stability is imperative, scrutinizing collateral values, whether they involve financial assets for Lombard loans or real estate for mortgages.


The loan approval process undergoes scrutiny from pertinent bank authorities, potentially necessitating Board of Directors approval for high-value or intricate loans. However, Swiss banks, with significant exposure to foreign domiciled clients, encounter added complexities when dealing with loans granted abroad.

A significant challenge arises when collateral, particularly in mortgage scenarios, is located abroad. This complicates guarantee enforcement and real estate liquidation in case of client default, introducing an extra layer of risk for the bank. Banks often underestimate the intricacies involved in enforcing the sale of real estate situated abroad, as legal, procedural, and jurisdictional hurdles can significantly impede the timely and efficient resolution of defaulted assets. The complexities inherent in navigating foreign legal systems and coordinating the liquidation process further underscore the need for heightened caution when dealing with mortgages secured by international collateral.


Another less apparent challenge arises from regulatory complexities. Credit provision to individuals is heavily regulated in many countries, potentially leading Swiss banks to breach local credit regulations based on client qualification and domicile. While some banks assume credit contracts fall under Swiss law, the reality is nuanced.

For instance, if a client signs a loan agreement abroad, even if Swiss law governs it, the bank might still be exposed to local credit laws. The Lugano Convention compounds the situation in relation to clients domiciled in certain EU countries, particularly if the guarantee is situated in the client's home country. In addition, in certain countries, it is simply forbidden for foreign institutions to provide loans to locally domiciled individuals. In all such cases, the bank could be accused of providing credit services abroad without the requisite license, resulting in legal and financial repercussions.


To mitigate exposure to cross-border credit risks, Swiss banks must comprehend credit licensing regulations in the countries where clients are domiciled. Relying solely on Swiss law as the governing jurisdiction is insufficient. Collaborating with expert partners possessing specialized knowledge is crucial to navigate the intricate landscape of cross-border credit risks.


In conclusion, as Swiss banks extend financial services beyond borders, meticulous consideration is essential. Adhering to stringent compliance standards, conducting thorough collateral assessments, and navigating the complex web of international credit regulations are vital steps to ensure the stability and success of cross-border lending operations. Partnering with knowledgeable experts enables Swiss banks to confidently navigate the intricate terrain of cross-border credit risks and maintain their reputation for financial excellence globally.


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