By: Phil Uhlmann, Ph.D.

Paul McGonagle, Head of Credit, International & Capital Markets, Bank One, NA, Chicago spoke to Fletcher students about international risk management.  In a luncheon session sponsored by The International Business Relations Program, Mr. McGonagle provided a commercial banking perspective on a.) country risk, b.) customer / counter party risk and c.) systemic risk.  

Mr. McGonagle framed his discussion about country risk, around four points: 

1.                  Sovereign Risk

2.                  Transfer Risk

3.                  Cross-border Risk

4.                  Banks – special role of banks in international financial intermediation compared with the roles of other governments and non-bank private enterprises.

When banks lend or invest in international markets they must pay close attention to host country rule of law issues, local economic conditions and foreign exchange risks, as well as, industry, sectoral and firm-specific risks.   International risk assessment is a dynamic process that requires ongoing monitoring of economic and political issues.  In many developing countries, economic and political conditions may deteriorate quickly, thereby causing dramatic changes in the local exchange rate.  Currency depreciation, in turn, may drastically change the debt service ability of obligors.  The most serious situations involve hard currency debts – say, in U.S. dollars, supported by local currency cash flows from – say, domestic telephone tolls.

Mr. McGonagle spoke about techniques for international risk mitigation.  He suggested that national Export Credit Agencies (ECA’s) such as the U.S. Export-Import Bank (EXIM) provide guarantees and insurance for loans made to foreign obligors.  He pointed out that these mitigation techniques may be expensive depending on the nature of the risk assumed by EXIM, the buyer country, the export product and the creditworthiness of the buyer.  He emphasized that careful selection of customers is very important.  When dealing in difficult markets, banks need to be assured that their customer and the local buyer can nimbly manage any unpleasant development.  By restricting its dealings to select customers, Banc One was able to minimize its Korean exposure during the 1997 Asian Crisis.  The bank continued to receive regular payments and did not incur any losses on its Korean business.

 Bank One has a systematic approach toward international credit risk.  Similar to evaluating corporate governance, Mr. McGonagle advises banks and investors to first look at the quality of the country’s management, and then evaluate its cash flow and liquidity.  A country’s governance can be assessed in terms of the quality of regulation and legal infrastructure, accounting standards, and the degree of transparency.  Furthermore, investors should be wary when business in a country is dominated by relationship concerns rather than rule of law tenants.  In relationship-based countries, characterized by strong loyalty between government and business, transactions done within an arm’s length, typically have higher default risks.  Credit adjudication models, including country ratings, must therefore, formally or informally score a large array of risk factors

Mr. McGonagle also talked about the hierarchy of international risks and lessons learned from recent crises, including the debt-crisis of 1980’s.  He stated that short-term trade finance credits continue to be less risky than loans, particularly when the term of the trade finance transaction is less than one year.  Bonds can be more attractive than loans because they may have more liquidity in international financial markets.  Developing countries tend to view their multilateral debt as sacred.  They will also try to protect the local financial sector.  Asset-backed structures have become much more popular in the last ten years.  Derivatives have also been an important growth area, one that will continue to flourish as the legal infrastructure improves in individual developing countries.   In general, over the last fifteen years, banks have learned how to structure deals and manage risks better. 

International banking remains an exciting career choice.        

Mr. McGonagle has more than twenty years of experience in managing international credit functions, macroeconomic and industry analyses, underwriting and portfolio management.  Prior to his current appointment, Mr. McGonagle served as General Manager of Bank One’s Seoul Branch from August 1998 to May 2000.  During his tenure in Korea, Mr. McGonagle was Co-Chair of the AMCHAM Financial Services Committee and became the President of AMCHAM on January 1, 2000.

From November 1996 to July 1998, Mr. McGonagle was Branch Manager and Region Head of Southeast Asia for Bank One.  Prior to joining the Bank in 1984, he served sixteen years as a Foreign Service officer with the U.S. Department of State, ending his service as Director of the Office of Monetary Affairs.