When Credit Crosses Borders

International banking is the setting in which the domestic credit-supply mechanism stops fitting neatly on one national balance sheet. The focus here is the relationship among lender location, borrower location, and currency: those three facts determine whether a loan is ordinary cross-border business, a local claim by a foreign bank, or an offshore transaction. Understanding the distinctions helps readers see how financial liberalization can expand the reach of credit booms while changing where the exposure is recorded and who must refinance it.

Three meanings of crossing a border

“International banking” sounds as if it means a bank in one country lending to a borrower in another. That is only part of the definition used by the BIS. It includes cross-border business in any currency and local business conducted in a foreign currency. The location of the transaction and the currency of the claim must be considered together.

Take a US-dollar loan. If a bank in New York lends dollars to a borrower in London, the bank is inside the dollar currency area while the borrower is outside it. From the borrower’s perspective, the dollar is a foreign currency. If a bank in London lends dollars to a borrower in New York, the transaction is still cross-border, but the borrower is borrowing in the currency of their own currency area. The lender is outside that area, so the claim is a different segment of international banking.

The offshore segment is the third case. A bank in Tokyo can lend US dollars to a bank in London, which can then lend those dollars to another borrower in London. For the first transaction, the lender and borrower are both outside the United States and the dollar is foreign to both. For the second, the business is local in the sense that the parties are in the same country, but the currency remains foreign to them. Both are offshore claims under the BIS definition.

Offshore therefore does not mean illicit, unregulated, or merely remote. It describes a relationship between the parties and the currency they use. The market historically called “eurocurrency” developed first in Europe, but the same logic applies to dollar transactions outside the United States, euro transactions outside the euro area, or yen transactions outside Japan. A currency can be globally important while the bank booking a claim and the borrower receiving it are both outside the currency’s home jurisdiction.

These segments are not sealed compartments. Banks inside a currency area with surplus funding can send it into offshore markets, and offshore institutions can channel funds back toward domestic borrowers. A major bank may hold domestic, cross-border, and offshore claims at the same time. That is why a reform that changes the location or currency of lending can alter the system’s exposure without changing the borrower’s experience of taking out an ordinary loan.

The scale of this network is substantial. According to the BIS account, international claims of banks in reporting countries amounted to less than 2 percent of world GDP in 1963. They rose above 60 percent of world GDP in 2007, before retreating to near 40 percent in early 2021.