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International debt: the behavior of banks in a politicized environment

Published online by Cambridge University Press:  22 May 2009

Philip A. Wellons
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The debt crisis riveted attention on political issues at the international level. Groups of states clash, and the North-South divisions are very noticeable. As conflict and cooperation among governments, banks, and multilateral agencies make headlines, three blocs appear to contend: the banks, the debtor governments, and the creditor governments. These are the obvious players in the workouts, and it is important to understand the conventions that bind them.

Type
The Political Economy of Debt
Information
International Organization , Volume 39 , Issue 3 , Summer 1985 , pp. 441 - 471
Copyright
Copyright © The IO Foundation 1985

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References

1. Cross-border lending by banks occurs when the bank is located in one country and the borrower resides in another. International credit markets are highly concentrated. According to one study, “about 25 large banks based in OECD countries” make up the inner circle, accounting for some 60 percent of lead managements and over 50 percent of all bank lending. See Mentre, Paul, The Fund, Commercial Banks, and Member Countries, IMF Occasional Paper 26 (Washington, D.C., 04 1984), pp. 5–6CrossRefGoogle Scholar.

2. Gilpin, Robert, U.S. Power and the Multinational Corporation (New York: Basic, 1976), p. 232Google Scholar.

3. On the political dimension see Keohane, Robert O. and Nye, Joseph S., Power and Interdependence (Boston: Little, Brown, 1977)Google Scholar.

4. See Cohen, Benjamin J., Banks and the Balance of Payments (Montclair, N.J.: Allanheld, Osmun, 1981), p. 22Google Scholar; Dale, Richard S. and Mattione, Richard P., Managing Global Debt (Washington, D.C.: Brookings, 1983)Google Scholar; Cline, William R., International Debt (Cambridge: MIT Press, 1984)Google Scholar; Delamaide, Darrell, Debt Shock (Garden City, N.Y.: Doubleday, 1984), p. 27Google Scholar; Friedman, Irving S., The World Debt Dilemma: Managing Country Risk (Philadelphia: Robert Morris Associates, 1983), p. 53Google Scholar; and the “Church Committee Report”–Staff Report, “International Debt, the Banks, and U.S. Foreign Policy,” Subcommittee on Foreign Economic Policy, Committee on Foreign Relations, U.S. Senate, 95th Cong. 1st sess. (Washington, D.C., 1977), p. 31. Since “deficits in developing countries require loans,” whether deficits or loans come first “can be a chicken and egg question,” according to Gisselquist, David, The Political Economy of International Bank Lending (New York: Praeger, 1981), p. 155Google Scholar.

5. On inflation see Fleming, Alexander, “Private Captial Flows to Developing Countries and Their Determination: Historical Perspectives, Recent Experience, and Future Prospects,” World Bank Staff Working Paper no. 484 (Washington, D.C., 08 1981), p. 13Google Scholar. The quotation is from Noellert, William A., “The International Debt of Developing Countries and Global Economic Adjustment,” in Franko, Lawrence G. and Seiber, Marilyn J., eds., Developing Country Debt (New York: Pergamon, 1979), p. 270Google Scholar.

6. Aliber, Robert Z., “International Banking: A Survey,” Journal of Money, Credit, and Banking 16 (11 1984, pt 2), p. 661CrossRefGoogle Scholar. See also Diaz-Alejandro, Carlos F., “Latin American Debt: I Don't Think We Are in Kansas Anymore,” Brookings Papers on Economic Activity 2 (1984), p. 337Google Scholar.

7. Dimancescu, Dan, Deferred Future (Cambridge, Mass.: Ballinger, 1983), pp. 58–59Google Scholar.

8. On returns see Phelan, George E., “Discussion,” in Key Issues in International Banking (Boston: Federal Reserve Bank of Boston, 1977), p. 42Google Scholar. A survey by the Group of 30 later confirmed that bankers found stronger growth and better returns in developing countries: Group of 30, “How Bankers See the World Financial Market” (New York, 1982), p. 8. On growth see Frieden, Jeff, “Third World Indebted Industrialization: International Finance and State Capitalism in Mexico, Brazil, Algeria, and South Korea,” International Organization 35 (Summer 1981), pp. 407, 409CrossRefGoogle Scholar. On exports, Noellert, , “International Debt,” p. 273Google Scholar.

9. O'Brien, Richard, “Private Bank Lending to Developing Countries,” World Bank Staff Working Paper no. 482 (Washington, D.C., 08 1981), p. 15Google Scholar.

10. Pecchioli, R. M., The Internationalization of Banking: The Policy Issues (Paris: OECD, 1983), p. 52Google Scholar; see Grubel, Herbert, “A Theory of Multinational Banking,” Banco Nazionale del Lavoro Quarterly Review, 12 1977, p. 349Google Scholar. Fieleke, Norman S., “The Growth of U.S. Banking Abroad,” in Key Issues in International Banking (Boston: Federal Reserve Bank of Boston, 1977), pp. 9, 30Google Scholar, found, for example, that U.S. foreign direct investment was associated with the level of U.S. branch assets in various countries.

11. Moffitt, Michael, The World's Money (New York: Simon & Schuster, 1983), p. 93Google Scholar; Frieden, , “Third World Indebted Industrialization,” pp. 407, 430Google Scholar.

12. Pecchioli, , Internationalization, p. 53Google Scholar.

13. Lipson, Charles, “The International Organization of Third World Debt,” International Organization 35 (Autumn 1981)CrossRefGoogle Scholar.

14. Dale and Mattione, Managing Global Debt.

15. Mendelsohn, M. S., Money on the Move (New York: McGraw-Hill, 1980), p. 88Google Scholar.

16. Moffitt, , World's Money, p. 94Google Scholar.

17. Mendelsohn, , Money on the Move, p. 83Google Scholar; Aliber, , “International Banking,” p. 678Google Scholar.

18. Sachs, Jeffery, “LDC Debt in the 1980s: Risk and Reform,” in Wachtel, Paul, ed., Crisis in the Economic and Financial Structure (Lexington, Mass.: Lexington, 1982), p. 200Google Scholar.

19. Pecchioli, Internationalization; Fieleke, “Growth of U.S. Banking Abroad.”

20. Kindleberger, Charles P., Manias, Panics, and Crises (New York: Basic, 1978)CrossRefGoogle Scholar.

21. Aliber, , “International Banking,” and Park, Yoon S. and Zwick, Jack, International Banking in Theory and Practice (Reading, Mass.: Addison-Wesley, 1985)Google Scholar.

22. See Giddy, Ian H., “The Theory and Industrial Organization of International Banking,” in Hawkins, Robert G. et al. , eds., The Internationalization of Financial Markets and National Economic Policy, Research in International Business and Finance vol. 3 (Greenwich, Conn.: JAI, 1983), p. 195Google Scholar, cited in Park, and Zwick, , International Banking, p. 25Google Scholar. See Grubel, “A Theory,” on multinational wholesale banking.

23. Aliber, , “International Banking,” p. 661Google Scholar.

24. Gilpin, , U.S. Power, p. 232Google Scholar.

25. Katzenstein, Peter J., ed., Between Power and Plenty (Madison: University of Wisconsin Press, 1978), p. 22Google Scholar.

26. On low demand see the Annual Reports of the Bank for International Settlements in the early 1970s; Richard Russell, “Three Windows on LDC Debt,” in Franko and Seiber, Developing Country Debt.

27. Gisselquist, , Political Economy of Lending, p. 156Google Scholar.

28. Spindler, J. Andrew, The Politics of International Credit (Washington, D.C.: Brookings, 1984), p. 175Google Scholar.

29. Pecchioli, , Internationalization, pp. 53 and 56Google Scholar.

30. Church Committee Report, pp. 67–68.

31. For a typology of relevant political issues see Wooley, John T., “Political Factors in Monetary Policy,” in Hodgman, Donald R., ed., The Political Economy of Monetary Policy: National and International Aspects, Conference Series no. 26 (Boston: Federal Reserve Bank of Boston, 1983), p. 177Google Scholar.

32. Salomon Brothers, Inc., A Review of Bank Performance (New York, 1984)Google Scholar. Given the vagaries of booking, the quoted ranges are rough approximations.

33. This allocation by Citicorp shows, at best, orders of magnitude. It is extremely difficult to allocate income and costs geographically. Since it reports bookings in U.S. and other offices, it probably underestimates the U.S. component. It discloses, however, more than do non-U.S. banks.

34. I have classified capital expenses as costs for convenience in this example. One could legitimately treat dividends and retained earnings separately as profits.

35. See, for example, Reich, Cary, “Spreads: The Search for Solutions,” Institutional Investor, 06 1978, p. 33Google Scholar.

36. I make this argument in detail in “Competitiveness in the World Economy: The Role of the U.S. Financial System” (paper for the Harvard Business School 75th Anniversary Colloquium on United States Competitiveness in the World Economy, 1984).

37. Bronte, Stephen, Japanese Finance: Markets and Institutions (London: Euromoney, 1982), p. 13Google Scholar. In France, prior to nationalization, the private banks appear to have helped the private sector evade restrictions that were essential for the system to remain self-contained.

38. The extent to which relations between banks and their home customers remain tight abroad varies among the G-5 countries, as I discuss below.

39. Privileged relations with home customers also benefit the banks on the pricing side. If they choose, they can accept lower prices than in an arm's-length loan to foreign borrowers yet keep the same margins. A bank that holds equity in the borrowing firm may take a longer view, accepting lower interest rates in return for eventual appreciation in the value of the firm's stock. The alternative is to use their power as equity holders to force higher margins on these customers. In either case the base allows more competitive pricing elsewhere.

40. Interviews, Europe and Japan.

41. Interviews with foreign bankers in Tokyo. Data for the 1970s have not been published, although they have been shown to individual foreign bankers there.

42. Interviews in all G-5 countries.

43. Interviews, West Germany, 1980 and 1983.

44. Lever, Lord and Edwards, George, “Banking on Britain,” Sunday Times pamphlet (London, 1980)Google Scholar. The Labour party argued thus during the 1970s. See also Vittas, D. and Brown, R., “Bank Lending and Industrial Investment: A Response to Recent Criticisms” (London: Banking Information Service, 03 1982)Google Scholar.

45. Other responses are joint ventures by government and the banks that are supposed to finance the credit-poor sectors. The Deutsche Wagnis Finanzierungs Gesellschaft in Germany, Sofinnova in France, and the Industrial and Commercial Finance Corporation in the United Kingdom are examples.

46. To the extent that the banks do succeed in escaping regulation, their response to a politicized environment could be called avoidance through alternate markets.

47. See, for example, James W. Dean and Ian H. Giddy, Averting International Banking Crises, New York University, Graduate School of Business Administration Monograph Series in Finance and Economics no. 1981–1.

48. “I can call spirits from the vasty deep,” says Owen Glendower in Henry IV Part I (2.1). “Why, so can I…. But will they come when you do call for them?” is Hotspur's reply.

49. Some people interviewed in 1982–83 in New York assert that the big banks and the government of Brazil wanted the U.S. government to remain aloof from the rescheduling process to keep it in the market. Even if this were true, the U.S. government acquiesced in this approach. Would the United States have allowed the Mexican government to founder for nine months?

50. Interviews, New York, 1984.

51. Euromoney, June 1983, pp. S6–S12. Due to accounting differences, the comparison of debt/equity ratios is very rough. Other comparisons find the same ranking. See “The Top 500,” Banker, June 1982, p. 177. A more systematic approach that is not sufficiently disaggregated for this analysis is Revell, R., Costs and Margins in Banking: An International Survey (Paris: OECD, 1980)Google Scholar. In Japan, where no bank has failed since World War II, a complex web of official policy and industry structure reduces risk and permits higher leverage. In France, where the state as dominant shareholder does not require market returns on its equity investment and the government offers subsidized rediscounting for favored credit, structure has an even more direct impact on the cost of capital for the banks.

52. Bronte, , Japanese Finance, pp. 67ffGoogle Scholar.

53. Department of the Treasury, “Report to Congress on Foreign Government Treatment of U.S. Commercial Banking Organizations” (Washington, D.C., 17 09 1979), p. 77Google Scholar. Only in the last few years have restrictions on foreign banks in Japan been reduced. Many survive. Many foreign branches “were required to submit pledges… not to solicit local deposits,” making them subject to Bank of Japan quotas on currency swaps (p. 75). They have had to obtain advance approval for yen loans to non-Japanese, unlike the big banks with foreignexchange licenses. They have been limited in their ability to expand their branch network. Foreign banks are not part of the syndicate that can trade in government securities. They can issue certificates of deposit for up to 30% of their yen assets while domestic banks' CD issues may reach 75% of capital.

54. Because of the long-term decline in the exchange rate of the French franc, foreign banks are reluctant to increase their capital, the only way to raise one's market share within this corset. Some negotiation with the authorities is possible, but a dramatic increase in share is not.

55. See, for example, Zysman, John, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change (Ithaca: Cornell University Press, 1983)Google Scholar. Chase Manhattan Bank's failed effort to establish a retail base in Germany is an example.

56. See, for example, Hall, William, “Bank of England Seeks Stronger Financial Sector Merger Controls,” Financial Times, 23 09 1981, p. 1Google Scholar. More recently the Bank of England has instructed foreign banks not to break into the sterling market by underpricing in the acceptance credit market, which is where the Bank “conducts its daily money market operations” (“The Bank Squeezes the Bankers,” Banker, June 1983, p. 13).

57. Principle I limits a bank's total credit to eighteen times equity. Section 19 of the banking law limits credits to a single borrower or related group to 75 percent of equity. Schneider, Hellwig, & Kingsman, , The German Banking System (Frankfurt/Main: Knapp, 1978), pp. 141–43Google Scholar.

58. See Davies, John, “Bonn Wrangles over Bank Laws,” Financial Times, 23 12 1983, p. 2Google Scholar, and Norman, Peter, “Germany Drafts Tougher Rules for Its Bankers,” Wall Street Journal, 3 02 1984, p. 27Google Scholar.

59. The city banks did oppose rigorous application of the 20 percent limit to overseas lending. In an interview published one month before the Finance Ministry's action, the president of Fuji Bank said “Suggestions are being made by the Ministry of Finance for guidance but I believe decisions should be to the individual banks' management. Of course, whether 20% of capital or 25% is a good limit is open to discussion, but the decision should be made by the individual bank. There are some banks that are going into international lending, and others that are not. So a universal application of the 20 percent limit is unrealistic.” Quoted in “Bank's Leader Pushes for Reform,” Euromoney, March 1983, pp. 125, 128.

60. For the six months starting in April 1983, for example, the banks received Y700 billion ($2.9 billion) for yen loans and $8 billion for dollar loans. Shibata, Yoko, “Limits Raised on Offshore Loans by Japanese Banks,” Financial Times, 19 04 1983, p. 18Google Scholar.

61. It might be argued that the Japanese banks violated the spirit of the limits on mediumand long-term lending when they dramatically increased their short-term loans in 1981 and 1982.1 believe they acted within the spirit of the rule, which was intended to leave them free on the assumption that short-term lending finances trade.

62. The effort by the Italian authorities to escape the terms of the Basle Concordat at least suggests that governments outside the G-5 may not subscribe to it wholeheartedly.