Jan 8, 1998
FINANCE: BIS BANKS KEPT SHOVELLING FUNDS TO ASIA, DESPITE WARNINGS
Geneva, 6 Jan (Chakravarthi Raghavan) -- 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 of International Settlements notes in a report on international bank lending covering period upto 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 (upto 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 higher-yielding local money market and other debt securities. There was also an increase in lending to the private non-bank borrowers, with this share rising to 45% 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 early in 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 last 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, with racial overtones, the crisis as a "regional crisis" (due to crony-capitalism, unwise government actions etc) 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?
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 etc) have to assume and repay.
As of end June 1997, of the total exposure of $ 1054862 millions, the BIS area reporting banks to the non-BIS borrowers, German banks accounted for $178,160 million, Japanese $172,694 millions, the US with $131,020 millions, France with $ 100,191 millions and UK way behind with $77812 million.
Of the loans of $744,552 million to the developing countries, $275,267 million was to the banks, $115,591 to public sector borrowers and $352,894 to non-bank private borrowers.
Excluding Hong Kong and Singapore (offshore centres), of the total of $389,441 million in Asia, $171296 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 borrowing of $222,289 million (143974 million to banks, $1215 to public sector and 75291 million to non-bank private) and $211192 million ($ 174874 million to banks, 1031m to public sector and 35085m to non-bank private sector)
The South Korea debt is shown as $103432 millions of which $67290 million was to the South Korean banks, $4390 million to the government and $31680 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 of the total of $69382 million , $26069 million was to the banking sector, $1968 million to the government sector and $41262 million to the non-banking sector.
For Indonesia, of a total of $58726 million, $12393 million was to the banking sector, $6506 to the government and $39742 million to the non-banking sector.
China accounts for $57922 millions of which $24700 million is of the banks, $7656 million that of the government sector and $25562 million of the non-bank private sector.
Taiwan has a total of $25163 millions, of which $15497 million is of the banks, $398 million of the public sector and $9251 of the non-bank private sector.
For Latin America, of the total of $251086 million, $59554 million was to the banking sector, $64354 million to the public sector and $126784 million to the non-bank sector.
Among the individual countries, Argentina has a total debt of $44445 million of which $8756 is of the banks, $10071 of the government and $25628 million of the non-bank private sector.
Of total of $71118 million loans to Brazil, $21902 million is to banks, $16300 million to the government and $32865 million to the non-banks.
Mexico accounts for a total of $62072 million, of which $11679 million is of the banks, $22113 million of the government and $28266 million of the non-bank private parties Chile accounts for $17573 million, of which $ 2960 million is of the
banks, $ 1730 million of the governments and $ 12883 million of non-bank private parties.
In terms of maturity, in South Korea the short-term debt increased from $67506 million in December 1996 to $70182 million in June 1997.
The respective figures for some of the other Asean countries are: Thailand from $ 45702 million to $ 45567 million; Indonesia $ 34248 million to $ 34661 million; Malaysia $ 11178 million to $ 16269 million.