U.S. bank exposure to developing countries has been climbing in recent years, reaching a record $104.8 billion in 1996. And this trend has at least one analyst fretting that banks may be heading for a debt crisis.
"Bankers have short memories," remarked Raphael Soifer, a veteran Brown Brothers, Harriman & Co. analyst.
A recent report prepared by Mr. Soifer said that lending or other cross- border exposure, including derivatives contracts, had jumped 26% last year. Furthermore, the exposure to developing countries at six U.S. money-center banks equaled 97% of their combined common equity at March 31 and totaled 3.7 times their estimated 1997 pretax returns.
To put the level of exposure in perspective, Mr. Soifer wrote that a 35% writedown-banks wrote off a similar percentage of developing country debt earlier this decade-"would wipe out all of the six banks' estimated 1997 earnings," plus $6 billion.
"We're talking serious money here," the report noted.
The report, which included data obtained from U.S. regulators, said U.S. banks' exposure in Latin America rose 23% last year, to $66.2 billion. It rose 29% in developing Asian countries, to $15.6 billion, and 76%, to $10.6 billion, in Eastern and southern Europe.
Mr. Soifer also contended that U.S. banks aren't reporting the extent of their exposure to emerging markets.
He recalled that banks had scoffed at concerns about similar levels of exposure to developing countries just before an international banking crisis broke in August 1982 and before Mexico experienced a new round of financial turmoil in December 1994.
"When capital markets have a change in sentiment, we have problems," he said.
Spokesmen at several U.S. banking companies mentioned in the report, including Bankers Trust, BankAmerica, and Citicorp, declined to comment.
Other analysts agreed with Mr. Soifer's complaints about lack of adequate reporting on emerging market exposure but differed with his conclusion that risks today are comparable to what they were in the 1970s and early 1980s.
"Markets are a lot more transparent today and much quicker to punish people who misbehave," observed Lawrence Vitale, a banking analyst at Bear, Stearns & Co.
Others, like David Berry, an analyst at Keefe, Bruyette & Woods Inc., expressed mixed concerns over the extent of risk.
"Those are big numbers," he said, "but what the actual risk is is not really clear."
Charles Dallara, managing director of the Institute for International Finance, a Washington-based association that monitors capital flows into emerging markets, came to the defense of the industry.
Mr. Dallara noted that most lending by banks today is to corporations rather than governments and that many developing countries are in a far stronger position financially than they were two decades ago. He also noted that, according to institute forecasts, loans by North American, European, and Japanese banks would account for less than one-fifth of the roughly $261 billion of capital flows to emerging markets this year.
"That's not to suggest that banks don't need to be careful and ensure that the return is adequate to the risk," Mr. Dallara said. "But their caution should be focused on particular situations and particular countries."
Brown Brothers noted that, even if reporting on emerging-market exposure has improved considerably in recent years, data compiled by the federal agency that tracks U.S. banks' international operations show a $20.6 billion gap between what banks reported to the agency and what they reported to shareholders.
Most of that $20.6 billion, Brown Brothers said, is held by J.P. Morgan and Bankers Trust, "primarily in the form of trading account and other securities."
The lack of adequate reporting at many banks makes analysis difficult, especially during a crisis, Brown Brothers stated. Pointing to the current financial crisis in Southeast Asia, Mr. Soifer said that tallying the extent of U.S. banks' exposure to these countries is impossible because "only one bank, BankAmerica, currently provides enough information to enable us to answer such a question."
"Given this situation, how are investors supposed to make informed decisions?" the report asked.
