Final answer:
The unique risk to foreign instruments is exchange rate risk from borrowing in foreign currency and lending in domestic currency. This risk can cause financial instability if the domestic currency devalues, but is less of a concern for U.S. banks which borrow and lend in dollars.
Step-by-step explanation:
The risk that applies only to foreign instruments and not domestic ones involves currency fluctuations impacting foreign currency borrowing and lending. When banks borrow in foreign currency but lend in domestic currency, they expose themselves to exchange rate risk.
This can lead to financial instability if the domestic currency devalues substantially, as seen during the Asian financial crisis. Such a risk is less relevant to U.S. banks, which typically borrow in dollars even from foreign sources, aligning their assets and liabilities.
On the other hand, risks such as high budget and trade deficits, or the quick withdrawal of short-term portfolio investments, can be a concern for both types of instruments.