Banks Seen as No Longer Imperiled by Foreign Debt
U.S. banks have sharply reduced their exposure in debt-ridden Third World nations and are no longer seriously threatened by possible failure of their loans to developing countries, optimistic federal regulators said Thursday.
“The vulnerability of the U.S. banking system . . . has lessened significantly,” Robert L. Clarke, comptroller of the currency, told the House Banking Committee.
Banks have steadily improved their financial standing since the debt crisis began in 1982 and will survive even if many of their loans to foreign nations are never repaid, the regulators indicated in unusually upbeat testimony.
The U.S. banks with greatest exposure in the Third World have taken steps to cut their risk by reducing foreign lending in recent years even as they have built up the capital they have available to cover loans that go sour.
L. William Seidman, chairman of the Federal Deposit Insurance Corp., said the nine biggest bank lenders would remain solvent even if they had to write off all their loans to the six largest borrower nations. The debt situation, he said, “poses no immediate discernible threat” to the federal insurance fund, which protects bank deposits up to $100,000.
The debt crisis developed in the early 1980s when worldwide inflation eased, ending the rapid escalation in the price of oil and other commodities. The developing nations had depended on rapidly rising commodity prices to generate the income they needed to make interest and principal payments on the billions of dollars in loans they received from American banks.
The crisis could have threatened the stability of the U.S. banking system because so many major institutions provided huge volumes of funds to nations unable to make repayment. Donald T. Regan, then Treasury secretary, warned in early 1983 that failure to solve the debt crisis could mean that “we could have a worldwide depression through defaults of many nations.”
Now, however the threat is under control, the regulators say. “The potential effect on the U.S. banking system . . . has been managed with some degree of success,” Manuel Johnson, vice chairman of the Federal Reserve Board, told the committee Thursday.
Several committee members, expressing surprise at the optimistic report, said U.S. banks should now be able to ease requirements that Third World nations, hard-pressed to meet domestic needs, repay their loans. They said more flexible repayment terms might also benefit the American economy by allowing Third World countries to buy more U.S. exports.
Shows Surprise at Testimony
“I’m amazed at the testimony,” said Walter E. Fauntroy (D-D. C.), a committee member who is Washington’s non-voting delegate to the House of Representatives. Reduced or forgiven loan repayments, he said, would free local money for badly needed economic development. Drug traffic, he added, “is related to the inability of our neighbors to the south to provide economic opportunity to their people.”
Rep. Joseph Kennedy (D-Mass.) urged the regulators to use their influence so that U.S. banks, which he said are enjoying record profits, “do not further squeeze those countries. We have to find ways to get that burden down.”
But the regulators responded cautiously.
“We certainly have the goal of improving the growth of these countries,” Johnson said, but he refused to endorse major loan forgiveness. The best approach, he said, is “maintaining a cooperative process” under which banks can extend further credit to the debtor nations and readjust the terms of some existing loans.
Johnson admitted, however, that U.S. banks “are in a better position to absorb the impact of any suspension of debt servicing by borrowers, foreign or domestic.”
Altogether, according to the comptroller of the currency, U.S. banks are owed $81 billion by “troubled” Third World countries. This represents a $21-billion reduction since 1982, Clarke said.
At the same time, U.S. banks doubled their capital--or net worth--from $58 billion to $116 billion.
Thus when the debt crisis began in 1982, the loans were equal to 176% of the banks’ capital, more than enough to push them into insolvency if the loans all turned bad. Now the ultimate exposure is 70% of capital, and the banks would survive even if all the loans remained unpaid.
A similar improvement has occurred among the nine major banks that do most of the foreign lending. These banks, the FDIC said, had outstanding loans of $55 billion to the six biggest borrower nations in June, down from $61 billion in 1983. At the same time, their capital doubled from $32 billion to $65 billion, more than enough to handle all potential losses from those foreign loans.
The nine major banks are Bank of America, Manufacturers Hanover, Continental Illinois, Bankers Trust, J. P. Morgan, First Chicago, Chase Manhattan, Chemical and Citicorp. The largest borrowers are Mexico, Argentina, Brazil, Chile, the Philippines and Venezuela.
Regional banks and smaller banks have almost entirely withdrawn in recent years from making relatively risky loans to Third World countries.
In addition, they are selling their potentially troublesome foreign loans, even when it means taking a loss. Regional banks are “aggressively disposing of their debt on the secondary market,” Seidman told the committee.
As the crisis deepened in the early 1980s, economic development slowed throughout the Third World, as a growing share of export earnings were needed for debt repayment and could not be used for development of the local economy.
Some Were Rolled Over
Some loans were renegotiated, with bankers agreeing to accept lower interest rates or repayment over longer periods of time. Some debt was exchanged for equity interests in local enterprises. And some loans were rolled over, with banks providing new money so that nations could make interest payments on old loans.
Despite the improving position of U.S. banks, international debt continues to mount, to a global total of $1.3 trillion by the latest count of the World Bank. Of that total, $280 billion is owed to U.S. banks.
The debt burden on the Third World remains a major problem there, inhibiting economic growth and causing political problems, especially in new Latin American democracies where the demands of the banks for repayment clash with the demands of populations eager for higher standards of living.
The latest example of the problem came Saturday, when Venezuela announced that it would temporarily stop making payments on the principal of its $30.3-billion debt.
