Definition
A parallel loan is two loans taken out by two pairs of companies in different countries from local lenders with the aim of swapping the resulting loans in different currencies. It was an early form of currency swap.
Parallel Loan
What is ‘Parallel Loan’
A type of foreign exchange loan agreement that was a precursor to currency swaps. A parallel loan involves two parent companies taking loans from their respective national financial institutions and then lending the resulting funds to the other company’s subsidiary.
Explaining ‘Parallel Loan’
For example, ABC, a Canadian company, would borrow Canadian dollars from a Canadian bank and XYZ, a French company, would borrow euros from a French bank. Then ABC would lend the Canadian funds to XYZ’s Canadian subsidiary and XYZ would lend the euros to ABC’s French subsidiary.
The first parallel loans were implemented in the 1970s in the United Kingdom in order to bypass taxes that were imposed to make foreign investments more expensive.
Further Reading
- Innovation in the international financial markets – link.springer.com [PDF]
- The AURORA financial management system: Model and parallel implementation design – link.springer.com [PDF]
- The parallel banking system – books.google.com [PDF]
- Living parallel lives: Italy and Greece in an age of austerity – www.tandfonline.com [PDF]
- Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control – papers.ssrn.com [PDF]
- The birth of the swap – www.tandfonline.com [PDF]
- Macro-financial linkages in Egypt: A panel analysis of economic shocks and loan portfolio quality – www.sciencedirect.com [PDF]
- An economic theory of a credit union – www.jstor.org [PDF]
- Large debt financing: syndicated loans versus corporate bonds – www.tandfonline.com [PDF]
- Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects – www.sciencedirect.com [PDF]