Is IMF’s Asian Rescue a ‘Bailout’ of U.S. Banks?

Should America’s big, wealthy banks be required to take a “haircut” on their shaky loans in South Korea and other countries caught up in the Asian financial crisis?

That is the crucial question Congress is grappling with as it prepares to debate a bill to increase the U.S. contribution to the International Monetary Fund, the 181-country organization overseeing the Asian rescue effort.

Critics say the $120 billion the IMF has assembled to bolster the Asian countries amounts to using U.S. tax dollars to “bail out” well-heeled banks that ought to be taking losses on their reckless loans.

Rep. John J. LaFalce of New York, ranking Democrat on the House Banking Committee, said Congress simply will not approve the IMF money “unless the banks are required to take some form of financial hit.”

Anything less, he said, will simply encourage them to resume making dubious loans to other countries once the Asian crisis has been defused. Many other lawmakers agree.

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So far the big money-center banks, almost alone among the major investors in Asia, have avoided taking a major hit. Robert A. Litan, a Brookings Institution banking expert, pointed out that others who have put money in Asia--by buying stocks or bonds or by building new factories--have suffered substantial setbacks in the fray.

Stock prices in Asia have plunged as much as 75% in some countries since the turmoil began last summer. Currency values have plummeted. Local economies have collapsed. Many private investors have lost their shirts in the Asian debacle.

“They’ve all taken a haircut,” Litan observed.

But the banks, which critics say were as lax as everyone else in providing money to Asian borrowers without demanding stringent terms and accounting standards, so far have gotten off virtually scot-free.

Although three of America’s largest banks reported earnings declines Tuesday for the final quarter of last year, most of the dip stemmed from trading and investments in Asia, not from write-downs on shaky loans. The value of the big banks’ own stocks has gone down, but not by much.

U.S. regulators have yet to force the banks to write down their noncollectible loans, nor is there any indication that they will any time soon.

And several of the big U.S. money-center banks are negotiating with South Korea to win government guarantees for many of their soured loans--a move that not only would enable them to avert having to take losses, but would garner them higher interest premiums as well.

“It’s unclear how much of a haircut the banks are going to take,” Litan said.

But it also is not clear that the banks have behaved quite so recklessly as some members of Congress seem to believe.

To begin with, the banks have provided only about one-quarter of the capital that has poured into Asia in recent years. Most of the inflow has come from portfolio investors--who have bought Asian stocks and bonds--and from companies that have built plants there.

The banks got on the merry-go-round late in the game, though they quickly made up for lost time. Bank lending to Southeast Asian countries soared between 1994 and 1996. It fell off sharply in 1997, the year that the financial turmoil began.

Moreover, U.S. banks are not all that dangerously exposed in Asia. At the end of 1996, American banks had only $46 billion in outstanding loans to 10 East Asian countries. By far the bulk of the bank lending--$579 billion--came from Japanese and European banks.

Recent figures show that the Asian loans made by the nine biggest U.S. multinational banks amounted to 20% of their available lending capital--far below the 150% reached for loans to Latin American countries during the last debt crisis in the early 1980s.

Indeed, much of the banks’ activities in Asia has centered on trading and short-term underwriting--in bonds and other instruments--that do not remain on their books for long. They have already swallowed losses for these.

And unlike the prelude to the debt crisis of the 1980s, the bank loans have not gone to Third World governments, which used them at that time to cover their trade and budget deficits. Today’s loans are more justifiable--to private banks and companies.

Perhaps the banks’ greatest shortcoming has been that they did not charge as much interest as they should have on Asian loans to cover the risks they were incurring by lending to potentially shaky clients.

An analysis by William Cline, economist for the Institute of International Finance, shows that the risk premiums charged on loans to emerging market countries declined more sharply than justified between 1995 and 1997.

“I wouldn’t say the banks were reckless,” Charles Dallara, the IIF’s managing director, said, “but risk management wasn’t always what it should have been, and they [the banks] clearly were part of the problem.”

Alan K. Stoga, head of Zemi Investments Inc., agreed. Until last summer’s collapse, almost everyone--even rating companies such as Moody’s--was bullish on Asia, Stoga pointed out. “This is much more about misjudgment than about greed,” he asserted.

Perversely, perhaps, many analysts believe that the fact that the banks’ exposure is so modest argues more forcefully that they should be forced to take a hit--because doing so would pose no risk to the U.S. financial system.

During the 1980s debt crisis, many of the big money-center banks were so far out on a limb in their loans to Latin America that they could have gone belly-up if the borrowing countries had defaulted--possibly bringing down the entire world financial system.

It was not until 1987--five years after the Latin American debt crisis began--that banks finally were forced to write down their loans.

This time, however, the banks are far less vulnerable and better able to absorb their Asian losses, analysts say. If the borrowers defaulted, Litan asserts, the big U.S. banks would survive without any serious problem.

Finally, there is the question of whether a large chunk of the money the IMF is lending to Asia is actually going to pay off bank loans, as congressional critics contend.

IMF officials insist that it is not. Money from IMF loans goes to each nation’s central bank, which uses the cash to bolster its reserves, stem the slide in its currency and enable the government to finance the restructuring of the country’s financial system.

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Officials concede that countries also may use some of the money to help prop up their own shaky domestic banks, as the United States did during the savings-and-loan crisis of the early 1990s. Some eventually goes to provide dollars needed to repay foreign loans.

But Stanley Fischer, the American who holds the No. 2 spot in the IMF’s hierarchy, is unapologetic about allowing commercial banks to escape with only minimal damage.

“In effect, we face a trade-off,” Fischer said Thursday. “Faced with a crisis, we could allow it to deepen and possibly teach international lenders a lesson,” but that “would surely cause more bankruptcies, larger layoffs [and] deeper recessions.

“The result would not be more prosperity, more open markets and faster adjustment, but rather . . . a more significant downturn in world trade and slower world growth,” he said. “That is not in the interest of the United States, nor of any other IMF member.”

This week, the Clinton administration began moving to counter the anti-bank sentiment in Congress by acknowledging the point made by critics, but pleading for support in the short-run on grounds that cracking down might intensify the Asian crisis.

President Clinton, in an interview with the Public Broadcasting System, said that it “bothers me a lot” when bankers who “made a foolish loan that they should not have made” can recover all their money, thanks in part to the IMF rescue program.

And Treasury Secretary Robert E. Rubin, in a speech designed to preview his expected testimony before Congress, conceded that the banks should take a bigger hit, but warned that to force them to do so now might prompt them to pull out of Asia, only making matters worse.

He pledged to address the issue later this spring when finance ministers meet to discuss ways to handle future financial crises. Rubin said the agenda then will include “developing the role of the private sector in bearing an appropriate share of the burden.”

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Not everyone agrees that forcing banks to absorb more losses would choke off the flow of capital to the Asian countries. “These markets are extremely dynamic,” Stoga asserted. “If some private companies in Asia go bankrupt, there still will be others that have access.”

Just the same, the demand that banks take a haircut before lawmakers approve any increase in U.S. funding for the IMF is certain to remain a major sticking-point for the administration.

Said a Republican congressional strategist who has been in on key policy discussions in recent days: “This is an issue that won’t go away.”

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Banking on Asia

Critics are demanding that foreign banks absorb more of the losses suffered in Asia’s financial collapse rather than be bailed out by the world’s taxpayers. Outstanding international bank loans to Asia at the end of 1996, in billions of U.S. dollars:

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Country U.S. banks Japanese banks European banks Total China $2.7 $17.8 $26.0 $55.0* Hong Kong 8.7 87.5 86.2 207.2 Indonesia 5.3 22.0 21.0 55.5 South Korea 9.4 24.3 33.8 100.0 Malaysia 2.3 8.2 9.2 22.2 Philippines 3.9 1.6 6.3 13.3 Singapore 5.7 58.8 102.9 189.3 Taiwan 3.2 2.7 12.7 22.4 Thailand 5.0 37.5 19.2 70.2 Vietnam 0.2 0.2 1.0 1.5 Total 46.4 260.6 318.3 736.6

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*Totals include loans from banks outside U.S., Japan and Europe.

Source: Bank for International Settlements