shifting substantial amounts of Latin American exposure from their home offices to affiliates in the region, international finance specialists say.
The shift is evident in statistics from the Federal Financial Institutions Examination Council: Claims at offices of U.S. banks in Latin America rose 6%, to $52 billion, during the first quarter. At the same time, direct cross-border lending to Latin America fell to $75.2 billion, from $75.6 billion.
Factoring in all direct and affiliate lending, Brown Brothers Harriman & Co. said exposure of all U.S. banks to Latin America rose $1.7 billion during the quarter, to $118.9 billion.
Big multinational banks are shifting their activities to local subsidiaries so they don't fall under the proposed new Basel capital standards, said Gary Kleiman, an international banking consultant and head of Kleiman International in Washington.
Those rules would apply only to direct cross-border lending to sovereigns, corporates, and banks, he said, which may serve as an incentive to change where some loans are booked. On the other hand, U.S. banks are apparently pursuing bona fide growth opportunities. Several Latin American countries have relaxed restrictions on foreign bank expansion, among them Brazil and Mexico. Other areas of the world were affected by the proposed new rules laid down by the Basel-based Bank for International Settlements. But outside Latin America, the impact was negligible. Local bookings rose slightly in Asia, the Middle East, and Africa, but declined slightly in Eastern Europe.
A Citigroup spokesman in New York said its shift was part of a longstanding stated strategy to expand locally-based business in emerging nations.
In a statement released Tuesday, Citigroup vice chairman William R. Rhodes noted that a number of banks not only maintained but also increased their trade and interbank lines to Brazil in recent months.
A spokesman for Chase Manhattan Corp. in New York stressed that Chase fully discloses both net cross-border and gross local-country exposure, as required by the Federal Financial Institutions Examination Council. The increase in credits extended to Latin America came amid growing confidence that Latin American financial markets have stabilized since a severe financial crisis and devaluation in Brazil last January.Under the Basel rules, currently in the midst of a public comment period, bank capital requirements would depend on the riskiness of the borrowing country, as determined by rating services.
Loans to financially and politically stable countries, such as the United Kingdom, would have far lower capital requirements than, say, Argentina and Brazil. But if loans, securities, or other types of transactions are booked locally, those capital requirements would not apply.
Banks are more than prepared to find an alternative route, Mr. Kleiman said.
U.S. regulators declined to comment on the trend but said they were confident that major U.S. institutions have adequate credit risk management systems in place. Still, the increase has again raised concerns among some analysts that the extent of U.S. banks' risk exposures in emerging markets may become less measurable.
Banks have shown a tendency to lock the barn door after the horses have gone, said Raphael Soifer, a banking analyst at Brown Brothers Harriman. From a recent survey of overseas exposure among U.S. banks, Mr. Soifer noted that the six biggest U.S. banks -- Bank of America Corp., Bank One Corp., the former Bankers Trust Corp., Chase Manhattan, Citigroup, and J.P. Morgan & Co. -- reported 44% of their total cross-border and local-country exposure, leaving $85.5 billion unaccounted for.
We hope it will not happen again this time, he said, but if bank exposure to Latin America continues to grow, history suggests you might want to fasten your seat belt. ?