U.S. Banks' Lending to Developing Countries: A Longer-Term View

International Finance Discussion Papers

Number 255

July 1985

U.S. BANKS' LENDING TO DEVELOPING COUNTRIES: A LONGER-TERM VIEW

by

Zenry S. Terrell and Rodney H. Mills

NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to International Finance Discussion Papers (other than an acknowledgment by a writer that he has had access to unpublished materials) should be cleared with the author or authors.

Abstract

There was very little net new lending by U.S. banks to developing countries in 1983-84, following the heavy lending of preceding years. When

non-sporitaneous lending to Brazil, Mexico and some other Latin American

countries is deducted, there was an absolute decline in U.S. banks' claims on

these countries. However, estimates of net new lending based on changes in outstanding claims understate the amount of net new lending to these countries in 1983-84 by an amount on the order of $3-1/2 billion. This is

because outstanding claims were reduced by a number of factors other than

anat “Sa apeer =-.-~- 203 Teen = ~~. cl. = a= = mime + —_ TSDENTENTS; SUCN Tactors inclucec 1Can CNarge-CLos, Sales Cl Ciaimts To non . ot = 2s = 2h :

DEmA AMVESscors, Te Sxerclze Cl Clr iclt : CSSYENTSE5, GNC UNS STacLsticet atfanws s Asan rss FRoncos Other <= ~~ A= TI a Rank Tengiz ey SGlITSccs Cl SkCMience TazsS Chancss. wer aSDec ts Cx U.S. Zanx Lencinc =e+-n} 2 qretviane QUA = trnevresesner oe meen iA = ah ~ cevelcoing countries in 1983-84 were 42n increased concentration oF ihe Cut +a44- Tatme = awrac H=~} ana =~ accor eM ee eats = +h Svaencing CLains cne larcest Dderks, ama Gm IMcrssasec COMCcsn ura lion Co Ue

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June 12, 1985

U.S. BANKS' LENDING TO DEVELOPING COUNTRIES: A LONGER-TERM VIEW

by

Henry S. Terrell* and Rodney H. Mills**

I. INTRODUCTION

The current debt servicing difficulties of the developing countries have led to considerable analysis of various short-term problems. This paper will take a longer-term look at changes in lending behavior of U.S. banks that tcok place in the two-year period from December 1982 through December 1984. A careful look at net lending behavior by U.S. banks during this period is important because many of the adjustment programs negotiated with the International Monetary Fund have been conditioned upon continued new lending by banks. As part of the review of lending by U.S. banks we suggest several reasons why conventional measurement methods have underestimated the extent of new lending by these banks in 1983 and 1984. To the extent that some banks may be reluctant to participate in new loan packages because they believe that other banks are not lending their “fair share,” it is important

that estimates of new lending not be biased by the factors noted below.

II. LENDING OVERALL AND BY SIZE OF BANK Table 1 examines the activities of all U.S. banks in lending to several groups of countries, as well as such lending by different size-

categories of banks, in 1983 and 1984. The general conclusion is that during

*Chief and **Senior Economist, International Banking Section, Division of International Finance, Board of Governors of the Federal Reserve System. This article reflects the views of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or other members of its staff. We are indebted to Cynthia Hart for statistical assistance.

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these two years there was very little net new lending by U.S. banks to non-OPEC developing countries, OPEC, or Eastern Europe. A small reported increase “in U.S. bank claims on non-OPEC developing countries of $2.6 billion in these two years was offset by a decline in claims on OPEC countries of $1.1 billion and a decline of $1.5 billion in claims on Eastern Europe. When non-spontaneous lending to Brazil, Mexico and some other Latin American countries is deducted from the totals, there was an absolute decline in U.S. banks claims on non-OPEC developing countries.

The figures typically used to obtain estimates of net new lending are derived from changes in outstanding bank claims. For reasons described below in more detail, this procedure may have understated the flow of new lending by U.S. banks to non-OPEC developing countries on the order of $3-1/2

billion over that two-year period. After adjustments for such understatement,

4

JS. bank claims on non-OPEC developing countries appear to have risen ebdour 3-6 percerit in the two years 1983-84 instead of the 2-1/2 percent indicated by changes in the stock of bank clains. However, while these adjustments are relatively large compared with the estimates of bank flows from stock data, they do not significantly modify the broad conclusion of a major slowdown in lending by U.S. banks.

As shown in Table 1, the pattern of new lending activity differs considerably by size-category of banks. In the case of Latin America, the two larger groups of U.S. banks increased their reported claims (before adjustments) over these two years by 8-11 percent while in the same period the smaller banks reduced their reported total claims on that region. Again, despite the presence of large non-spontaneous lending packages to Brazil and Mexico, the gross claims of the smaller U.S. banks on these two countries

increased very little over the two-year period. During these two years, U.S.

-4banks as a whole reduced their claims on countries in Asia, OPEC, and Eastern Europe, but the smaller banks did so by proportionately more, i.e, by one-sixth to one-third.

The conclusions from Table 1 are quite clear: (1) very little net international lending by U.S. banks to these groups of countries is taking place, especially outside of Latin America; this is so even after the aforementioned adjustments for statistical issues are considered; and (2) there appears to be a trend towards a reduction in outstanding claims at smaller U.S. banks which, if not reversed in the future, will result in increasing the burden of new financing on the large banks.

Table 2 takes an even longer-run look at the relationship of U.S. bank claims on developing countries relative to bank capital. That ratio

tended to rise steadily for all size-categories

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= banks from year-end 1977

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through late 1982. Since late 1982, however, limited lendin

to these countries combined with continued strengthening of banks' capital, has resulted in a sharp decline in the ratio of their clains relative to their

total capital. In 1983 and 1984, the largest U.S. banks reversed about

between vear-end 1977 and vear-end 1982.

tif. SECTORAL COMPOSITION OF LENDING

Data on the sectoral composition of the foreign claims of U.S. banks, presented in Table 3, indicate a sharp decline in claims on private nonbank borrowers, a smaller decline in claims on banks (with the exception of Mexico, where the major banks were nationalized), and an offsetting increase

in claims on the public sector .L/ In view of the generally sluggish

i/ Publicly-owned banks performing a commercial banking business are considered banks for reporting on the Country Exposure Lending Survey.

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lending by U.S. banks in this period, the shift in the sectoral

composition of claims probably reflects the redirection of existing claims toward the public sector through public-sector guarantees and rescheduling agreements rather than a shift in the emphasis of new lending by

banks .2/ It is not possible with existing data to determine for certain whether private borrowers are using resources held outside the borrowing country to reduce their reported indebtedness, although there is some market

commentary that this is indeed happening .2/

IV. NON-SPONTANEOUS LENDING AND DECLINES IN REPORTED CLAIMS

In 1983-84, U.S. banks (and also non-U.S. banks) engaged in large amounts of non-spontaneous lending to five non—-OPEC Latin American countries. Such lending, which for U.S. banks came to over $9 billion over the two years combined, represented the new-money component of financial packeges erranged in connection with IMF programs; such packages also typically included debt reschedulings and pledges by the banks to maintain the level of outstanding trade credits and of interbank credits to foreign offices of banks headquartered in these countries. Brazil and Mexico received the largest

amounts of non-spontaneous lending, followed by Chile, Ar

2/ For example, the government of Chile has assumed some of the debts of private Chilean banks. In Argentina, the government has issued dollardenominated bonds (transferable outside Argentina) that have been used as guarantee or as payment of principal owed by private Argentine debtors to foreign creditors on exchange-guaranteed contracts. U.S. banks have probably acquired some amount of such bonds in exchange for claims on private Argentine debtors.

3/ On a related point, a survey by Robert Morris Associates estimated that in 1983 about $0.3 billion in U.S. bank claims on private Mexican borrowers were written off, which accounts for about one-seventh of the decline in U.S. bank claims on private Mexican entities in that two-year period.

-~ 8.

Table 4 Changes in Bank Claims on Selected Countries, 1983-84 (billions of dollars)

Total Non-Spontaneous Other Claims - Lending Claims U.S. Banks_/ Five Latin erican countries= 4.8 9.2 ~4.4 Other non-OPEC developing countries -1.2 ~— ~1.2 All non-OPEC developing ‘ countries 3.6 9.2 5.6 Non-U.S. Banks3/ Five Latin erican countries* 7.9 13.5 5.6 Other non-OP=C developing . countries 9.3 _— 9.3 All non-OPEC developing countries 17.2 13.5 3.7 402 31S Benks4/ Five Latin American countries2/ 12.7 22.8 -10.1 Other non-OPEC developing countries 8.1 - 8.1 All non-OPEC developing countries 20.8 22.8 2.0

i/ U.S. bank data are from the series published in the Federal Reserve Bulletin, to allow comparability with the data for all BIS banks. Such comparability is obtained by adjusting the published U.S. data to restore intrabank claims and to exclude claims held by foreign branches outside the BIS reporting area.

2/ Argentina, Brazil, Chile, Mexico and Peru.

3/ All non-U.S. banks in countries that are part of the BIS reporting | area. Data are adjusted for exchange rate changes. All of the adjustment for the impact of exchange rate changes in the BIS data for all banks has been allocated here to non-U.S. banks.

4/ Based on the BIS quarterly series adjusted for exchange rate changes.

Lge

One of the most salient aspects of U.S. banks' claims on these countries in 1983-84 is that their non-spontaneous lending to each country exceeded the increase in their total claims on that country--in other words, the non-spontaneous lending was partly offset by reductions in the dollar value of claims already existing at the beginning of 1983. As shown in Table 4, the reductions in these other claims totalled about $4-1/2 billion over the two years, or nearly one-half of the non-spontaneous lending.

Part of the $4-1/2 billion decline in the U.S. banks' pre-existing claims on the five Latin American recipients of non-spontaneoud lending can be explained by the fact that proceeds of these loans were slated inter alia to repay certain other debts to the banks, including interest arrears that have been added to the stock of claims. It is not possible to be precise in all cases with regard to the amount of such payments or the shares that went to the U.S. banks alone. Our best estimates are that U.S. banks' claims were

reduced by about $1.1 billion of repayments of short-term bridge l - Ps - o

fo} 199) iP] if) ot “4

Brazil, by $0.1 billion of repayments of short-term brid

“

Argentina, and by payments of pre-1983 interest arrears by Mexico probably in

i)

the rarge of $0.4 to $0.8 billion, for a total of close to $2 billion, leavin an eStimated $2-1/2 billion in declines in U.S. banks' pre-existing claims to

be explained by other factors.

V. REASONS WHY EXISTING DATA MAY UNDERESTIMATE NEW LENDING BY U.S. BANKS A. Loan Charge-Offs. When a bank charges off a loan, its outstanding stock of claims on a country will show a decline despite the fact that the bank has not received any net repayment. The decline in the stock of claims caused by charge-offs

will result in a reduction in estimates of net flows.

- 10 -

A survey by Robert Morris Associates covering 73 of the 100 largest U.S. banks indicated that in 1983 U.S. banks charged off about $0.9 billion of international debt, of which about $0.5 billion was on Latin American countries and about $0.7 billion was on all non-OPEC developing countries .4/ The Robert Morris survey data for 1984 are not yet available, but data compiled by Salomon Brothers indicate that total international charge-offs for a sample of 20 large banking organizations were $1.0 billion in each of the years 1983 and 1984 .2/ Applying the approximate country distributions of charge-offs in the Robert Morris Survey to the 1984 totals provided by Salomon Brothers, and adjusting upwards the numbers on charge-offs by 20 percent to account for incomplete sampling in both surveys, suggests that in the two-year period from December 1982 to December 1984 U.S. banks charged off about $1-1/4

a3 . : !

billion in claims on Latin America, and $1-3/4 billion in claims on all

ay

I

non-OPEC developing countries. A small proportion of these charge-offs that

occurred in 1984 resulted from bank responses to the requirement for an

ue L

Allocated Transfer Risk Reserve required by regulators in response to the International Lending Supervision Acct (ILSA). Some charge-offs resulted from banks, particularly smaller banks accounting practices that used payments designated for interest to raduce their

outstanding principal on some credits.

B. Sale of Claims by Banks to Nonbank Investors.

If, during a period of time, banks sell claims to nonbank

investors, the end-period estimate of the stock of bank claims will e

4/ Robert Morris Associates, Report on Domestic and International Loan Charge-Offs, p. 45.

5/ Salomon Brothers, A Review of Bank Performance: 1985 Edition, p. 77.

- ll -

reduced, as will the estimated flow of new credit over the period. In Brazil a facility was established whereby bank loans were converted to deposits at the central bank, and banks were permitted to sell these deposits. In 1984 banks sold about $1 billion of these deposits to non-bank investors, mainly multinational corporations, who had need for funds in Brazil. The U.S. banks' share of this may have been about $0.4 billion,

i.e., proportional to their 40 percent share of total outstanding bank

claims on Brazil.

C. The Exercise of Official Guarantees ee RE ee ECL ae uarantees” When official guarantees of bank claims are exercised, reported bank claims decline, and thus estimates of flows of new bank credits will be

correspondingly smaller. Conversations with CCC and Eximbank suggest th

rf)

these two agencies may have paid off about $1 billion in U.S. senk claims on

non-OPEC developing countries in 1983 and 1984.

CD. Exchange Rate Ajustnents

When the dollar appreciates, the doller value of non-dollardenominated claims declines. Since the bulk of the claims of U.S. banks on developing countries are denominated in U.S. doliars, this factor is probably not substantial for U.S. banks. The Bank for International Settlements (BIS) estimates that in 1983 and 1984 exchange rate adjustments resulted in an $8 billion decline in the value of the stock of non-dollardenominated claims on non-OPEC developing countries held by all BIS-reporting banks. Conversations with U.S. banks suggest that only a very small share of their claims on these countries was denominated in European currencies or Japanese yen, usually associated with financing of exports

from these countries with a guarantee of the home country export credit

- 12 -

agency. A median estimate based on these conversations with U.S. banks is that about 1.5 percent of total U.S. bank claims on non-developing countries was denominated in currencies other than the dollar. During the two-year period the weighted average value of the dollar exchange rate appreciated about 30 percent. Consequently, the reduction in the value of U.S. banks' non-dollar claims on non-OPEC developing countries would be on the order of $0.5 billion, or about 6 percent of the $8 billion total estimated by the

BIS.

E. Summary of Adjustments

The sum of the four adjustments to the data for U.S. banks, i.e.,

for charge-offs, asset sales, the exercise of official guarantees, and

(Db

xchange rete ad ustments, suggesc

ls ep) ct cr ivy ct of . Lee) ow i) ts % a e] fa 4 ww fo < @ a) (D ob ct wn 10%) t I>

billion more to non-OPEC developing countries 1983-84 than is indicates by conventional procedures. Thase data help explain the fact thar Tedorted

total U.S. bank claims on major Latin American borrowers increased by less

than estimates of new lending arranged through the "“non-spontaneous” lendia

VI. CONCLUSIONS

Lending by U.S. banks to developing countries wes indeed sluggish

fay

io

in 1983 and 1984, but appears to have expanded somewhat more rapidly than indicated by conventional procedures for measuring new lending. During these two years the stock of U.S. bank loans to these countries has become more heavily concentrated at the largest banks, also has become increasingly

concentrated towards the public sector of the borrowing countries.