Legal risk refers to the risk of loss arising from contracts which cannot be enforced legally. The laws and legal systems differ from country to country. Multinational banks with operations in different countries are more vulnerable to this risk as different countries have different legal terms.
Suppose a bank has signed a contract with a borrower in a Country A which is valid as per the legal terms of the country. If the bank signs the same contract with another borrower in Country B where the legal terms does not support the contract agreements, banks can incur loss on that investment. As the legal terms do not support the agreements, it becomes impossible for the bank to recover the amount from the borrower.