In general, risk contributes to the domestic spread exceeding the
external spread. In domestic markets government agencies help ensure
the sound performance of domestic financial institutions, whereas the
Eurocurrency markets are largely unregulated, with no central bank ready
to come to the rescue. There is an additional risk in international transactions in that investment funds are subject to control by the country of
currency denomination (when it is time for repayment) as well as the
country of the deposit bank. For instance, suppose a U.S. firm has a U.S.
dollar bank deposit in Hong Kong. When the firm wants to withdrawthose dollars—say, to pay a debt in Taiwan—not only is the transaction
subject to control in Hong Kong (the government may not let foreign
exchange leave the country freely), but the United States may control
outflows of dollars from the United States, so that the Hong Kong bank
may have difficulty paying back the dollars. It should be recognized that
even though domestic and external deposit and loan rates differ, primarily
because of risk, all interest rates tend to move together. When the domestic dollar interest rate is rising, the external rate will also tend to rise.