BIS banks kept shovelling funds to Asia, despite warnings

According to a report by the Bank for International Settlements (BIS) on international bank lending for the period up to 30 June 1997, banks in the BIS reporting area have continued to lend money to borrowers in countries outside the area despite evidence of a growing strain in the world financial system.

by Chakravarthi Raghavan

GENEVA: Despite evidence of growing strains in several local financial systems, due to the spillover of the Czech and Thai currency turmoil, banks in the BIS reporting area kept shovelling money on to borrowers in countries outside the area, the Bank for International Settlements (BIS) notes in a report on international bank lending covering the period up to June 30, 1997.

The report gives a breakdown of the maturity, sectoral and nationality distribution of international bank lending, and points out that there was a rise in short-term lending (up to and including one year maturity) to Asian and East Europeans, but a reverse trend in Latin America.

The banks were also active in acquiring "non-traditional" assets such as in higher-yielding local money markets and other debt securities. There was also an increase in lending to the private non-bank borrowers, with this share rising to 45% at the end of June 1997.

Did the banks do such risky lending, and shovelling money on to the borrowers, unaware of the risks or in the certainty that they would not have to pay any adjustment or price?

It is difficult to argue that the BIS area banks were unaware of problems - given that in earlier reports in early 1997, the BIS itself had drawn attention to the way funds were being lent to emerging economy borrowers, with little or no premiums, and had raised questions about this.

And in a report in November 1997, the BIS noted that even before the October turmoil, there was evidence of growing strains in the world financial system during the third quarter of 1997.

This was the period when the IMF Managing Director and staff, and the World Bank, were make reassuring statements in public.

And while the BIS in November, viewed it as strains in the world financial system, since then, Western media reports and authorities in the United States and Europe have been trying to paint the crisis, with racial overtones, as a "regional crisis" (due to crony-capitalism, unwise government actions and so on) and playing down the "systemic implications"

The BIS does not pose or answer what the bank regulators in the BIS area countries were doing in the face of such lending.

Or is it a case that the industrial world while preaching laissez faire financial systems for the developing world (using the Bretton Woods Institutions and the WTO to bring it about) do not practice it themselves when it comes to the interests of their own banks and subjecting them to the market disciplines?

Did the private banks nevertheless go ahead and do it, convinced that in the "market system" as practised in the West, the banks would be bailed out by their governments who would use the IMF to force the borrowing country governments to ensure repayment of foreigners, even though the contracts were between the foreigners and the private parties in the non-banking sector?

Full extent of loans and debtors

As the Korean case has now brought out, even the BIS reporting system seems unable to capture the full extent of the loans and the debtors.

And as a price for rolling over the short-term debts of Korea, Japanese banks are insisting on the Korean government assuming responsibility and guaranteeing repayment, so that this chunk can be taken out of the Japanese Bank's obligation, under the BIS rules, to have an 8% capital adequacy ratio.

The IMF package appears to permit this "market indiscipline".

In the "globalized financial world", lending by BIS area banks to subsidiaries of firms of the non-BIS area operating in the BIS area, turn up neither in the accounts of the non- BIS area or of the BIS area.

But when the crunch came, the liabilities of these subsidiaries in the BIS area, and their borrowings from the banks within the BIS area, have become non-BIS liabilities, that the Koreans (and the Thais, Indonesians and so on) have to assume and repay.

As of end June 1997, of the total exposure of $1,054,862 million, the BIS area reporting banks to the non-BIS borrowers, German banks accounted for $178,160 million, Japanese banks, $172,694 million, the US with $131,020 million, France with $100,191 million and the UK, way behind with $77,812 million.

Of the loans of $744,552 million to the developing countries, $275,267 million was to the banks, $115,591 million to the public sector borrowers and $352,894 million to non- bank private borrowers.

Excluding Hong Kong and Singapore (offshore centres), of the total of $389,441 million in Asia, $171,296 million went to the banking sector, $28,981 million to the public sector, and $188,836 million to the non-bank private sector.

Hong Kong and Singapore accounted respectively, for total borrowings of $222,289 million ($143,974 million to banks, $1,215 million to the public sector and $75,291 million to non-bank private sector) and $211,192 million ($174,874 million to banks, $1,031 million to the public sector and $3,5085 million to non-bank private sector).

The South Korean debt is shown as $103,432 million of which $67,290 million was to the South Korean banks, $4,390 million to the government and $31,680 million to non-bank private sector.

However, the South Korean statements in December suggest that the borrowing by South Korean non-bank firms abroad, particularly by their subsidiaries, is not included in the data.

In the case of Thailand, the BIS data show that of the total of $69,382 million , $26,069 million was to the banking sector, $1,968 million to the government sector and $41,262 million to the non-banking sector.

For Indonesia, of a total of $58,726 million, $12,393 million was to the banking sector, $6,506 to the government and $39,742 million to the non-banking sector.

China accounts for $57,922 million, of which $24,700 million is of the banks, $7,656 million, that of the government sector and $25,562 million, of the non-bank private sector.

Taiwan has a total of $25,163 million, of which $15,497 million is of the banks, $398 million of the public sector and $9,251 million of the non-bank private sector.

For Latin America, of the total of $251,086 million, $59,554 million was to the banking sector, $64,354 million to the public sector and $126,784 million to the non-bank private sector.

Among the individual countries, Argentina has a total debt of $44,445 million of which $8,756 million is of the banks, $10,071 million of the government and $25,628 million of the non-bank private sector.

Of total of $71,118 million loans to Brazil, $21,902 million is to banks, $16,300 million to the government and $32,865 million to the non-bank private sector.

Mexico accounts for a total of $62,072 million, of which $11,679 million is of the banks, $22,113 million of the government and $28,266 million of the non-bank private parties. Chile accounts for $17,573 million, of which $2,960 million is of the banks, $1,730 million of the government and $12,883 million of non-bank private parties.

In terms of maturity, in South Korea, the short-term debt increased from $67,506 million in December 1996 to $70,182 million in June 1997.

The respective figures for some of the other ASEAN countries are: Thailand, from $45,702 million to $45,567 million; Indonesia, from $34,248 million to $34,661 million; Malaysia, from $11,178 million to $16,269 million. (Third World Economics No. 177, 16-31 January 1998)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS).