Back-to-back loan
Encyclopedia
A Back-to-back loan is a loan agreement between entities in two countries in which the currencies remain separate but the maturity dates remain fixed. The gross interest rate
s of the loan are separate as well and are set on the basis of the commercial rates in place when the agreement is signed.
Most back-to-back loans come due within 10 years, due to their inherent risks. Initiated as a way of avoiding currency regulations, the practice had, by the mid-1990s, largely been replaced by currency swap
s.
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. 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.
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s of the loan are separate as well and are set on the basis of the commercial rates in place when the agreement is signed.
Most back-to-back loans come due within 10 years, due to their inherent risks. Initiated as a way of avoiding currency regulations, the practice had, by the mid-1990s, largely been replaced by currency swap
Currency swap
A currency swap is a foreign-exchange agreement between two parties to exchange aspects of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency; see foreign exchange derivative. Currency swaps are motivated by comparative advantage...
s.
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. 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
Capitalization
Capitalization is writing a word with its first letter as a majuscule and the remaining letters in minuscules . This of course only applies to those writing systems which have a case distinction...
requirements, while currency swaps were, during the 2000s, widely exempted from this requirement.