U.S. banks sharply cut their cross-border exposure to emerging markets in the third quarter but boosted exposure through their overseas offices, according to a study compiled by Brown Brothers, Harriman & Co.
The conflicting trends, said Brown Brothers banking analyst Raphael Soifer, could mean that banks are camouflaging the real extent of their exposure to volatile markets overseas.
"The numbers show that total bank exposure is coming down only slowly and the nature of exposure is shifting from cross-border to local-country exposure," Mr. Soifer said.
"There are no Federal Financial Institutions Examination Council requirements for disclosing local-country exposure, although a few banks do it voluntarily," he said.
Cross-border exposure refers to loans banks make from their home offices to borrowers in foreign countries. Local-country exposure refers to credit extended by a bank's overseas office to local borrowers.
Though at least some part of the increase in local-country exposure can be attributed to the recent addition of countries like Hong Kong to the list of emerging markets, Mr. Soifer said it was "arguable whether banks are in fact actually reducing their risks."
Emerging markets include any country considered riskier than Chile and South Korea.
According to the latest data available, U.S. banks slashed their cross- border exposure to Asia, Latin America, and Eastern Europe by nearly $20 billion, or 12%, in the third quarter.
Data compiled by Brown Brothers Harriman from information supplied by the Federal Financial Institutions Examinations Council show that cross- border exposure to those regions declined to nearly $140 billion from almost $160 billion at the end of June.
However, local-country liabilities rose $14.5 billion, or 13%, to $126.8 billion. As a result, total exposure to emerging markets as of Sept. 30 fell only 2% to $266.6 billion.
"There's been a continuing trend to increase local-country liabilities," Mr. Soifer said.
Nervousness about international exposure to emerging markets sent bank share prices crashing last year. The pressure has continued following a recent decision by Brazil to devalue its currency.
U.S. banks had over $20 billion in cross-border exposure to Brazil as of Sept. 30 and $14.8 billion in local-country claims.
Mr. Soifer speculated that at least part of the reason for a shift away from cross-border exposure to local-country exposure is that banks are not required to report local-country figures.
"As more and more pressure is put on cross-border exposure, one of banks' responses has been to increase local-country exposure," Mr. Soifer said.
"But dollar-denominated obligations in Indonesia have the same risk characteristics as cross-border exposure."
As in the past, by far the bulk of the exposure was held by money-center banks, which accounted for $213.7 billion, or 80%, of the total exposure.
Citigroup had the most exposure to emerging markets, $38.6 billion. BankAmerica had $28.2 billion, Bankers Trust $6.6 billion, Chase Manhattan $23.6 billion, and J.P. Morgan $14 billion.
BankBoston Corp., a big player in Latin America, had $17.5 billion and Republic New York $2.3 billion.
However, Mr. Soifer said there is a big discrepancy between what banks report to shareholders and what they report to federal regulators.
According to Mr. Soifer, there was a $102.6 billion discrepancy between what money-center banks reported in the third quarter and what the FFIEC data showed, and an $11.5 billion discrepancy for five other large U.S. banks.
"Since we don't have FFIEC data on individual banks, we can't find out how much individual banks really are or are not cutting their exposure," Mr. Soifer said.
