World's big banks look better on debt in developing lands
Today the world's major commercial banks are in far better financial shape to deal with the developing-country debt crisis. When the crisis got going in August 1982, after Mexico announced it couldn't service its loans on time, the solvency of many banks was considered threatened.
Since then, banks have greatly enlarged their capital and their reserves against losses. They have restrained their loan exposure in developing countries while enlarging their domestic loan portfolios at a rapid rate.
``There probably isn't a bank in the country that isn't in a better position today,'' says William L. Brown, chairman of the $28.3 billion Bank of Boston.
This bank, the 14th largest in the country, has been more careful than many other major banks in its overseas lending. Nevertheless, the improvement in its developing-country exposure in the last few years illustrates Mr. Brown's comment.
At the end of 1983, the venerable bank, whose charter was signed by John Hancock in 1784, had loan exposures to Argentina, Brazil, Mexico, Venezuela, and Chile totaling around $1.082 trillion. This sum amounted to some 107 percent of the bank's capital of $1.007 trillion. Reserves against loan losses totaled $136 million.
At the end of last year, the bank's loan exposures to these same key Latin American debtor nations had grown somewhat, to $1.122 trillion.
In those intervening years, Bank of Boston increased its capital -- the portion of the bank's assets owned by its shareholders -- to $1.475 trillion. So the loan exposure in these five countries amounts to only 76 percent of capital today. And the bank's reserves have grown to $314 million.
In other words, if all these nations defaulted on all their loans to the Bank of Boston at the same time -- a highly unlikely event -- the bank would still be solvent.
Moreover, notes Brown, his bank is earning more than $200 million a year in profits that could be added entirely to capital in a crisis, and it could acquire more capital by selling stock.
Unfortunately, developing-country loan exposure for most of the nation's international banks still exceeds capital. They have, however, improved their financial balance sheets.
The American Banker, a trade publication, points out that the nation's top 10 banking companies last year increased their primary capital at a 16 percent rate, more than double their 7.5 percent growth in assets.
One reason for this growth in capital -- and thus the financial security of the banks -- is the higher capital adequacy requirements adopted by the Federal Reserve in May 1985 for multinational and regional banking organizations.
But the banks, concerned about developing-country debts and other problem loans, were already boosting capital. A Morgan Guaranty Trust study points out that in the three years ended last June, nine large US money-center banks boosted primary capital at a 13 percent annual rate, vs. a 3 percent growth rate on claims on the 10 major Latin American borrowers. As a result, these banks' exposure to these 10 nations is no higher than it was in 1977 -- about 125 percent of total capital, compared with about 175 percent at the peak in 1982.
``Banks in Japan, Canada, and Europe likewise have been moving to fortify their balance sheets: Their collective exposure to problem country borrowers is far greater than that of the US banks, notwithstanding popular misconceptions to the contrary,'' Morgan Guaranty notes.
As for the future, the commercial banks will be in no great hurry to step up their lending to the poorer countries if the attitude of the Bank of Boston's Mr. Brown is typical. Talking about the plan announced last October by Treasury Secretary James A. Baker III for an increase in commercial bank lending by about $20 billion over three years, Brown stressed the conditions for such lending.
These include economic reforms by the debtor countries and stepped-up lending by the World Bank and regional development banks.
And, Brown emphasized, new loans by the commercial banks should not be subordinated to new loans by the development banks. ``Why should they get paid when the commercial banks don't get paid!'' he said. ``Everybody is going to have to work together.''
The World Bank and the other multilateral institutions have resisted pressures from commercial banks to put their loans on equal footing with those of the commercial banks. If development bank loans are not given priority, their officials argue, the credit rating of the development banks would suffer and they would have to pay more for the money they borrow on world capital markets for relending to poor countries. Thus they would have to charge more on their loans, reducing the encouragement to development.
``We all have our problems,'' Brown commented. Though the Baker initiative has been welcomed by commercial bankers, there has been no measurable increase in their lending to debtor countries.
``In the debt situation, nothing ever happens rapidly,'' Brown says. ``It takes a lot of time.''
Because of an editing error, billions became trillions in a ``Global Markets'' column in Thursday's Monitor. The column dealt with the improvement in the financial position of commercial banks and their ability to manage the developing-country debt crisis. For example, the Bank of Boston's loan exposure to five Latin American countries amounted at the end of 1985 to $1.122 billion and its capital to $1.475 billion -- not trillion.