-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

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the “non-spontaneous" lendiag

VI. CONCLUSIONS

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


-3-

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.

such understatement,

U.S. bank claims on non-OPEC developing countries appear to have risen abour

ue

-6 percent in the two years 1983-84 instead of the 2-1/2 percent indicated by
changes in the stock of bank claims. However, while these adjustments are
relatively large compared with the estimates of bank flows from stock data,

they do not signi.

cantly 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 8-1] 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.


-8-

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

Total Non-Spontaneous Other
Claims Lending Claims
U.S. Bankst/

Five Latin American

countries“! 4.8 9.2 44
Other non-OPEC developing

countries 1.2 _ 71.2
All non-OPEC developing ‘

countries 3.6 9.2 5.6

Non-U.S. Banks3/

Five Latin fperican

countries”) 7.9 13.5 75.6
Other non-OPEC developing

countries 9.3 _- 9.3

countries 17.2 13.5 3.7

BIS Benks4/
Five Latin American

countries=! 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

1/ 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 compar-
ability 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 vr 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.



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-4-
banks 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 stead

year-end 1977

to these countries combined with

capital,

has resulted in a sharp decline in the ratio of

their

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

hat toox place

ct

two-thirds of the increase in the ratio of exposure to ca

between year-end 1977 and year-end 1982.

fil. 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.


-7-

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-noney component of financial packages erranged
in connection with IMF progrems; such packeges also typically included debt
reschedulings and pledges by the banks to maintain the level of outstendin,
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, Argentina and Peru.

2/ For example, the government of Chile has assumed some of the debts
of private Chilean banks. In Argentina, the government has issued dollar-
denominated 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.


International Finance Discussion Papers

Number 255

July 1985

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

by

Henry S. Terrell and Rodney H. Milis

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.


- 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 dillion 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 1984.5/ 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

billion in claims on Latin Americe, and $1-3/4 bil

ion in claims on all

non-O?PEC developing countries. A sna

proportion of these charge-offs that

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

¢ Supervision Acc

Some charge-offs nay have also
resulted from banks, particularly smaller banks, employing conservative

accounting practices that used payments designated for interest to raduce their

outstanding principal on some cred

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.



blige

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 thet went to
the U.S. banks alone. Our best estimates are that U.S. banks' c

reduced by about $1.1 billion of repayments of short-ter

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Argentina, and by payments of pre-1983 i

ia

the range of $0.4 to $0.8 billion, for a

an estimated $2-1/2 billion in declines in U.S. banks' pre-existing clains 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.


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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 thac
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.

TI. 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.


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



-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.

The Exercise of Official Guarantees

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

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

non-OPEC developing countries in 1983 and 1984.

D. Exchange Rate Ajustments

When the dollar appreciates, the dollar value of non-dollar-
denominated 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-dollar-
denominated 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