Problems with overseas exposure are increasing at large U.S. banks, and Latin American exposure is a particular threat, according to Veribanc, a bank rating service.
It reported that 39 of the 74 U.S. banking companies that told federal regulators they had overseas exposure at June 30 have loans outstanding to foreign borrowers which exceed their equity.
The problem-debt portion of those banks' foreign lending totals $2.7 billion, the latest figures show, up 70.4% from $1.6 billion a year earlier, Veribanc said.
The Wakefield, Mass., company also noted that lending is only a portion of U.S. banks' foreign exposure.
"Additional exposure exists in the form of securitized assets and derivatives contracts with unreliable foreign counterparties, such as Russian banks," Veribanc stated.
Unlike the way regulators treat loans, Veribanc noted, "banks are not required to distinguish between foreign and domestic off- balance-sheet exposure in their quarterly call reports."
Although most derivatives contracts are with domestic counterparties, Veribanc said federal filings indicate that the amount of potential derivatives risk with overseas counterparties is about $14 billion.
The company cited several Asian economies, including Japan, Hong Kong, Indonesia, Korea, and Taiwan, along with Latin America and Russia, as the biggest direct threats to U.S. banking institutions. Latin America was singled out.
"Latin American debt, especially of nations such as Brazil that are subject to economic instability, loss of confidence in their currencies, and capital flight, (and) loan defaults by Latin borrowers and counterparties represent a risk to U.S. banks that exceeds $46 billion," Veribanc said.
In other regions, such as Europe, the Middle East, and Canada, U.S. banks face indirect risks in dealing with financial institutions and U.S. private investors who may be badly hit by excessive investments in Asian, Latin American, and Russian economies, Veribanc added.
"The key risk is that the resulting distress at such institutions could lead to their default on obligations to U.S. banks," Veribanc said.