Chapter

I Overview of Developments

Author(s):
John Lipsky, Peter Keller, Donald Mathieson, and Richard Williams
Published Date:
July 1983
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This paper provides a description and analysis of recent developments in international capital (banking and bond) markets and an assessment of market conditions and prospects for financing flows, in particular to the developing countries, over the near term. Developments and prospects are evaluated in the context of changes in risk perceptions as they affect the scale, terms, and distribution of financial flows, prudential issues facing the banks, and official actions—particularly in the area of bank supervision—that may affect the market response. Attention also is given to trends in certain key macroeconomic variables that underlie market demand and supply relationships and determine the general economic environment in which lending decisions are made.

A brief overview of recent developments in such macroeconomic factors and in international lending through the banking and bond markets is given in Section I. Section II discusses a number of issues that have been facing banks in their international lending and their reaction to them. Special attention is given to some areas—viz., the operation of the interbank markets and trends in international bank supervision. A more detailed description and analysis of developments in international bank lending and of developments in international bond markets are provided in Sections III and IV, respectively. Section V discusses the short-term outlook for international lending through these markets and gives some broad, judgmental forecasts. The final section concludes with a brief, qualitative discussion of some of the factors that help determine the scope and shape of market financing flows in a somewhat longer-term context. Some background materials, technical notes, and statistical tables are included in the appendices.

Because the scope of the paper is limited to the analysis of financing flows through the markets, it does not deal with questions related to concessional assistance, the flow of resources through the multilateral development institutions, or the role of the Fund in providing financial assistance in support of adjustment programs of member countries. Nor does it discuss problems that might arise in a medium-term context. A summary view of the principal findings that have emerged from studies in the Fund, setting out broad scenarios of how the world economy could evolve over the period through 1986—under alternative assumptions regarding policies and developments—is contained in the 1983 World Economic Outlook.1 The paper only touches on the subject of bank debt rescheduling. A review of recent experience with the resolution of debt servicing difficulties involving both banks and other debt will be published in this series in the near future.2

Lending Environment

During 1982 real gross national product (GNP) in industrial countries declined, as did the value of world trade. With inflation subsiding in many countries, real interest rates (calculated on an ex post basis) remained high, even though nominal interest rates declined in international markets. While this decline in nominal interest rates produced a sharp increase in the funds raised through the bond markets during 1982, this was primarily of relevance to borrowers from industrial countries, as the access of non-oil developing countries to international bond markets remained extremely limited in 1982.

By mid-1982, the continuation of relatively high real interest rates, coupled with adverse developments in export markets, had contributed to the emergence of severe balance of payments difficulties for the largest market borrowing countries. An additional exogenous factor in the emergence of debt servicing problems was the strength of the U.S. dollar, in which a large proportion of their external debt is denominated. Even in the absence of world recession, the change in relative currency values reduced the global demand for their exports in dollar terms, while debt service payments were fixed contractually in dollars. Some of these countries had become vulnerable to disruptions in normal bank lending, not only because of their large dependence on banking flows in financing their current account imbalances but also because of the significant increase in the proportion of bank debt that needed to be refinanced every year. Following fairly bouyant lending to non-oil developing countries during the first half of the year,3 the emergence of large-scale debt servicing problems apparently brought new bank lending to these countries to a virtual standstill in the third quarter of 1982. Although some lending resumed in the fourth quarter as the crisis atmosphere subsided, the BIS quarterly reports indicate that the 1982 total of net new bank lending to the non-oil developing countries amounted to less than one half of the 1981 total (Table 1). However, as noted below, the quarterly data, on which this report is based, probably overstate the decline in bank lending to these countries, particularly in the second half of the year.4

Table 1.External Lending and Deposit Taking1 of Banks in the BIS Reporting Area,2 1978–82(In billions of U.S. dollars)
1982
197819791980198119821st qtr.2nd qtr.3rd qtr.4th qtr.
Destination of lending3901251601659520302520
Industrial countries386996995715101913
Oil exporting developing countries1576281331
Non-oil developing countries26414951255146
Centrally planned economies45555–4–2–1–1
International organizations and unallocated63489144
Sources of funds3901251601659520302520
Industrial countries686610314110222302624
Oil exporting developing countries337415–19–1–6–3–9
Non-oil developing countries1413895–24–14
Centrally planned economies42512–3113
International organizations and unallocated347105412–2
Change in net claims5
On industrial countries–303–7–42–45–7–20–7–11
On oil exporting developing countries12–30–35–32729610
On non-oil developing countries122841422071012
On centrally planned economies4545–61–2–2–3
International organizations and unallocated3–1–3–24–3322
Sources: Bank for International Settlements (BIS); and Fund staff estimates.

The data on lending and deposit taking are derived from stock data on banks’ claims and liabilities (net of redepositing among banks in the BIS reporting area) including an adjustment for valuation changes due to exchange rate movements. Data on adjusted flows are provided by the BIS, but the distribution of those adjusted flows among the major groups of countries according to Fund classifications is a staff estimate.

The BIS reporting area includes all banks in the Group of Ten countries, Austria, Denmark, Ireland, and Switzerland, and the branches of U.S. banks in the Bahamas, the Cayman Islands, Hong Kong, Panama, and Singapore.

The classification by major groups of borrowers (depositors) was derived from BIS data in the following manner. For industrial countries, gross claims (liabilities) were reduced by redepositing among banks in the reporting area but increased by claims on (liabilities to) offshore centers. The latter thus were assumed, in the absence of the availability of a country classification of the on-lending from (deposit taking by) offshore centers, to represent lending to (deposit taking from) industrial countries. For the other groups of borrowers and depositors, net claims (liabilities) were taken to be equivalent to gross claims (liabilities).

Excluding Fund member countries.

Lending minus sources of funds.

Sources: Bank for International Settlements (BIS); and Fund staff estimates.

The data on lending and deposit taking are derived from stock data on banks’ claims and liabilities (net of redepositing among banks in the BIS reporting area) including an adjustment for valuation changes due to exchange rate movements. Data on adjusted flows are provided by the BIS, but the distribution of those adjusted flows among the major groups of countries according to Fund classifications is a staff estimate.

The BIS reporting area includes all banks in the Group of Ten countries, Austria, Denmark, Ireland, and Switzerland, and the branches of U.S. banks in the Bahamas, the Cayman Islands, Hong Kong, Panama, and Singapore.

The classification by major groups of borrowers (depositors) was derived from BIS data in the following manner. For industrial countries, gross claims (liabilities) were reduced by redepositing among banks in the reporting area but increased by claims on (liabilities to) offshore centers. The latter thus were assumed, in the absence of the availability of a country classification of the on-lending from (deposit taking by) offshore centers, to represent lending to (deposit taking from) industrial countries. For the other groups of borrowers and depositors, net claims (liabilities) were taken to be equivalent to gross claims (liabilities).

Excluding Fund member countries.

Lending minus sources of funds.

During 1982, the total of identified current account deficits declined in absolute terms for the first time since 1976 (Table 2). For some countries, particularly the group of non-oil developing countries, the reduction in their current account deficits was at least due in part to financing constraints. These developments were reflected in a decline in total net new international lending through banks and bond markets.

Table 2.Growth in International Lending and Selected Economic Indicators, 1973–82(In billions of U.S. dollars; and in percent)
1973197419751976197719781979198019811982
International lending
Net new international lending through banks and bond markets4059589695114149179195143
Bank lending133504070689012516016595
Growth in the stock of bank claims (in percent)24291827202023252110
Bond markets2791826272424193048
Share of net external claims in total bank claims in 14 industrial countries (in percent)38.79.910.912.012.712.714.315. 817.718.3
International payments
Total of identified current account deficits4–22–75–70–67–75–86–93–156–165–147
Seven largest industrial countries–4–23–8–9–15–16–12–31–15–17
Other countries–18–52–62–58–60–70–81–125–150–130
Oil exporting countries’ current account balance76835403026911465–2
Non-oil developing countries’ current account balance–11–37–46–33–29–41–61–89–108–87
Change in bank deposits of oil exporting developing countries1
Gross30141211337415–19
Net of new borrowing6322–1230353–27
Reserve accumulation ofnon-oil developing countries5 (accumulation +)103–21313171352–7
Growth in value of world trade (in percent)38.346.35.712.713.916.126.222.4–0.1–6.4
Production and investment in industrial countries
Percentage growth of real GNP6.10.5–0.65.04.04.13.41.31.2–0.3
Percentage growth in real gross fixed investment6.35.74.0–1.2–0.1–3.3
Percentage change in GNP deflators7.511.511.17.67.57.68.09.08.67.2
Monetary developments
Monetary expansion in seven major industrial countries (in percent)611.99.312.512.710.710.29.68.37.810.6
Interest rates (six-month Eurodollar deposit rate, in percent)9.311.27.66.16.49.412.014.416.513.1
Sources: Bank for International Settlements; Organization for Economic Cooperation and Development; International Monetary Fund, World Economic Outlook, Occasional Paper No. 21 (May 1983); and Fund staff estimates.

Data on bank lending and deposit taking are net of redepositing among banks within the BIS reporting area and, for the years after 1976, adjusted for the valuation effects of exchange rate movements on end–of–period stocks.

Net of double counting due to bank purchases of bonds.

Group of Ten countries plus Austria, Denmark, Ireland, and Switzerland.

Goods, services, and private transfers.

These reserve accumulation figures are based on balance of payments definitions.

Weighted average (1979 GNP weights) of rate of growth of money plus quasi-money.

Sources: Bank for International Settlements; Organization for Economic Cooperation and Development; International Monetary Fund, World Economic Outlook, Occasional Paper No. 21 (May 1983); and Fund staff estimates.

Data on bank lending and deposit taking are net of redepositing among banks within the BIS reporting area and, for the years after 1976, adjusted for the valuation effects of exchange rate movements on end–of–period stocks.

Net of double counting due to bank purchases of bonds.

Group of Ten countries plus Austria, Denmark, Ireland, and Switzerland.

Goods, services, and private transfers.

These reserve accumulation figures are based on balance of payments definitions.

Weighted average (1979 GNP weights) of rate of growth of money plus quasi-money.

While the current account deficit for the group of non-oil developing countries declined to $87 billion in 1982, compared with $108 billion in 1981, their net borrowing from international capital markets was equivalent to only 31 percent of their current account deficit plus accumulation of reserves. This compares with 46 percent in 1981 and 52 percent during 1980. Relative to long-term borrowing from official sources, use of Fund credit, and short-term borrowing by monetary authorities from other monetary institutions, bank borrowing assumed a smaller role in providing external finance to these countries than had previously been the case. Moreover, for this group of countries as a whole there was a substantial drawdown of foreign exchange reserves by some $7 billion in 1982.

Weakness in global economic activity during 1982 resulted in both a relative and an absolute decline in oil prices, and a progressive deterioration in the current account position of the oil exporting developing countries. In the second half of 1981, these countries, as a group, began to withdraw funds from international banks to finance their growing current deficits. By the third quarter of 1982, these countries had become the largest net user of funds from international banks (Table 1), whereas as recently as 1980 the oil exporting developing countries had been the largest net suppliers of funds to the banks.

International Banking

The rate of growth in international bank claims5 declined sharply to 10 percent in 1982, compared with a rate of growth of 21 percent in 1981, and an average rate of 23 percent a year recorded during 1976-80. In absolute amounts the 1982 net bank lending totaled $95 billion, compared with $165 billion in 1981 (Table 3 and Chart 1). This slowdown in lending was also accompanied by an important shift in the composition of the borrowing countries. Most seriously affected were the centrally planned economies,6 as the absolute level of bank claims on these countries actually declined by $6 billion during 1982 (Table 1).7 This decline was concentrated in the first half of the year, as the debt payments difficulties that had emerged during 1981, principally involving Poland, appeared to have diminished the market’s willingness to undertake significant new lending to countries in Eastern Europe. There was net new lending to all other country categories. While claims on industrial countries accounted for about 60 percent of the increase in total claims in both 1981 and 1982, the relative share of claims on non-oil developing countries declined slightly in 1982 (Chart 2).

Chart 1.Net Lending Through International Capital Markets, 1973–82

1 Measured in U.S. dollars; for the years after 1976, adjusted for valuation effects of exchange rate changes.

2 Net of repayments; excludes double counting due to banks’ issuing and holding bonds.

3 Net of interbank transactions.

Chart 2.Concentration of International Bank Claims, 1973–82 1

1 Excludes interbank transactions within the BIS reporting area.

2 Excludes Fund member countries.

Table 3.International Capital Market Financing, 1976–82(In billions of U.S. dollars)
1976197719781979198019811982
International bank lending (net)70689012516016595
International bond issues (net)30313033283758
New international bond issues34363741384872
Less redemptions–4–5–7–8–10–11–14
Less double counting owing to bank purchases of bonds–4–4–6–9–9–1–10
Total

96


95


114


149


179


195


143
Sources: Bank for International Settlements; World Bank; Orion Royal Bank, Ltd. (London); and Fund staff estimates.
Sources: Bank for International Settlements; World Bank; Orion Royal Bank, Ltd. (London); and Fund staff estimates.

Net lending to the non-oil developing countries, which had continued at a fairly rapid pace through the first half of 1982, came to an abrupt halt during the third quarter as the market was severely affected by the sudden emergence of debt servicing difficulties in Mexico, Argentina, and Brazil. The BIS quarterly data indicate that only in the fourth quarter of 1982 did some lending to non-oil developing countries resume (Chart 3), and then only on a moderate scale and primarily to countries such as those in Asia and Europe that had not been directly affected by the perceived regionalization of risk in Eastern Europe and Latin America. However, as noted above, data recently available from the Bank for International Settlements (BIS)8 suggest that the decline in bank lending to Latin America in the second half of the year probably was less marked than thought earlier, and that banking flows to Asia picked up significantly in the second half of the year.

Chart 3.Growth Rate in International Bank Claims1 by Country Groups, 1976–82

(In percent per annum)

Sources: Bank for International Settlements; and Fund staff esti-mates.

1 Net of interbank transactions within BIS reporting area. Data are not adjusted for exchange rate changes.

Reflecting the slowdown in the growth of banks’ international assets, the flow of net new deposits from almost all country groupings declined during 1982 (Table 1). Most striking was the turnaround in the position of the oil exporting developing countries. In 1979 and 1980 these countries’ deposits increased by about $40 billion in each year, with a high proportion of their external assets being placed with banks in the BIS reporting area. The subsequent weakening in the current account position of oil exporting countries resulted in a slowdown in new deposits of the entire group to only $5 billion in 1981 and in a $19 billion decline in their deposits in 1982. Nearly half of the 1982 decline occurred in the fourth quarter of the year, as both the volume and price of oil exports fell. Thus, in relative terms the industrial countries became increasingly important as a source of funds during 1982, even though in absolute terms net new deposits of the industrial countries fell to $102 billion in 1982, compared with $141 billion in 1981.

As a result of these developments in lending and deposit taking, the net flow of funds from the industrial countries to the rest of the world through the international banks increased marginally to $45 billion in 1982, compared with $42 billion in 1981 and only $7 billion in 1980 (Table 1). In addition, the $6 billion decline in bank claims on the centrally planned economies meant that these countries as a group were also net providers of funds to the banks during 1982. The oil exporting developing countries, which in recent years had been important net providers of funds to the international banking system, became the largest net borrowers during 1982. The net flow of funds to the non-oil developing countries remained high through the first half of 1982, totaling $17 billion. However, with the emergence of payments difficulties for the largest borrowers in the group during the second half of the year, the net flow of funds to these countries slowed significantly during these six months.

Data on medium-term publicized international bank credit commitments indicated a decline to $99 billion in 1982, compared with $146 billion in 1981 (Table 4). However, the 1981 figure included an estimated $50 billion in extraordinary commitments to U.S. corporations in connection with takeover bids. When the data were adjusted for this anomaly, total commitments were virtually unchanged during the two years, while at the same time there was a sharp decline in actual lending, i.e., as measured by the BIS data on changes in the stock of claims. Adequate data for the analysis of this divergence are not yet available. The average terms of new commitments during 1982 showed only a moderate increase in lending spreads and a small decline in the average maturity compared with 1981, despite a wide-spread perception of increased risk in international lending during 1982 (Table 4 and Chart 4). This may be explained by the reduction in syndications for many of the countries experiencing the most severe debt servicing problems. However, lending spreads on commitments to developing countries increased significantly during 1982. Data on spreads must be interpreted with caution as they do not reflect fees and charges; reliable and complete information on the latter are not readily available.

Chart 4.Terms on International Bank Lending, 1973–82

1 Medium-term publicized international bank credit commitments.

Table 4.Medium-Term International Bank Credit Commitments, 1978–First Quarter 1983(In billions of U.S. dollars; and in percent)
19821983
197819791980198119821st qtr.2nd qtr.3rd qtr.4th qtr.1st qtr.
Industrial countries29.024.139.394.752.511.214.315.411.65.4
Oil exporting developing countries9.57.75.45.48.72.62.11.32.72.0
Non-oil developing countries24.643.232.945.037.07.714.47.47.511.91
Net oil exporters7.212.59.013.511.51.9.6.52.30.85.3
Major exporters of manufactures10.316.015.419.417.73.15.93.55.25.8
Low-income countries0.33.80.82.00.80.10.30.30.10.1
Other net oil importers16.810.97.710.17.02.61.71.31.40.7
Centrally planned economies21.93.61.70.70.20.2
International organizations and unallocated0.80.40.70.10.50.40.1
Total——

65.8
——

79.0
——

80.0
——

145.9
——

98.9
——

22.1
——

30.9
——

24.1
——

21.8
——

19.3
Terms on medium-term loan commitments
Average six-month Eurodollar interbank rate (in percent)9.412.014.216.513.215.215.112.69.99.53
Average maturity (in years)8.58.67.97.87.57.96.87.87.37.43
Average spread (in percent)0.980.740.700.700.790.680.810.810.84
OECD countries0.750.600.560.470.550.560.540.570.55
Developing countries1.160.810.870.941.090.851.101.191.26
Memorandum items:
Share of non-oil developing countries in new commitments35.854.741.130.837.434.846.430.734.761.7
Ratio of new commitments to net bank lending82.463.250.088.4104.1110.5102.796.4109.5
Sources: Organization for Economic Cooperation and Development; the Morgan Guaranty Trust Company, World Financial Markets (for Eurodollar rate).

Includes $4.4 billion to Brazil and $5.0 billion to Mexico as a result of rescheduling agreements.

Excluding Fund member countries.

January and February only.

Sources: Organization for Economic Cooperation and Development; the Morgan Guaranty Trust Company, World Financial Markets (for Eurodollar rate).

Includes $4.4 billion to Brazil and $5.0 billion to Mexico as a result of rescheduling agreements.

Excluding Fund member countries.

January and February only.

Data on new commitments now available for the first quarter of 1983 indicate only a slight reduction in total commitments to $19.3 billion, compared with $22.1 billion during the same period of 1982. However, nearly half of the commitments during the first quarter of 1983 were extended to Mexico ($5 billion) and Brazil ($4.4 billion) as part of debt restructuring arrangements with commercial banks in conjunction with Fund-supported programs. Moreover, commitments to these two countries accounted for about 80 percent of new comitments to non-oil developing countries in the first quarter of 1983. Excluding new commitments to Brazil and Mexico, there was a substantial decline in the pace of total new lending commitments, particularly to non-oil developing countries. This result would be consistent with the expressed preference of the international banks to substantially curtail their participation in medium-term syndicated sovereign lending operations in favor of project- and trade-related finance and loans organized through private placements. While it appears that the average maturity of new commitments did not change substantially during the first quarter of 1983, there are indications that lending spreads increased in the first quarter of 1983 and are widening even for many industrial countries.

During recent years outstanding debt to banks has grown rapidly for some of the larger developing countries which have relied heavily on market finance to cover their current account imbalances. Over the same period, there was also a general increase in the share of bank debt maturing within one year (Table 5).9 While this was an important trend for some of the large non-oil developing countries (e.g., Mexico), it was even more pronounced for the group of oil exporting countries. The residual maturity of outstanding bank debt of smaller industrial countries (i.e., those outside the BIS reporting area) also shortened somewhat. The BIS data on the residual maturity of bank debt indicate that there was a significant decline in the share of short-term maturities for centrally planned economies in 1982.

Table 5.Short-Term Claims1 in Percent of Outstanding Bank Claims, 1978–82(In percent)
December 1978December 1979December 1980December 1981December 1982
Industrial countries (other than Group of Ten, Austria, Denmark, Ireland, and Switzerland)41.541.443.044.043.7
Oil exporting countries47.650.853.156.955.4
Nigeria34.828.631.133.336.5
Venezuela54.361.158.861.557.5
Other45.847.152.057.658.0
Non-oil developing countries44.743.245.546.146.5
Six largest borrowers234.637.544.444.545.7
Argentina51.451.552.346.854.1
Brazil28.329.335.434.734.9
Korea57.355.862.357.859.9
Mexico31.834.644.248.747.5
Philippines50.052.758.156.959.5
Yugoslavia19.423.227.928.026.5
Other54.249.246.948.247.6
Centrally planned economies341.941.038.443.139.2
All countries44.443.845.647.146.8
Source: Bank for International Settlements, The Maturity Distribution of International Bank Lending.

Remaining maturity of one year or less.

As of end of December 1980.

Excluding Fund member countries.

Source: Bank for International Settlements, The Maturity Distribution of International Bank Lending.

Remaining maturity of one year or less.

As of end of December 1980.

Excluding Fund member countries.

Regarding the effects of recent developments on the capital position of the international banks, an examination of the aggregate capital-asset ratios (and other observation ratios) of banks in major capital market countries reveals no uniform trend (Table 6). Moreover, differences in the national definitions of bank capital, the treatment of prudential reserves, and valuation of bank assets preclude inter-country comparisons of developments. More specifically, greater emphasis has been placed recently on write-offs and provisioning for nonperforming loans in some countries. To the extent that retained earnings or capital are redesignated as specific provisions, the capital-asset ratio will be reduced, reflecting that the deterioration in the quality of bank assets has weakened the banks. However, the creation of write-offs and provisions once such deterioration has occurred does not imply that banks are in a weaker position than if they still carried their nonperforming loans at full value.

Table 6.Capital-Asset Ratios of Banks in Major Capital Market Countries, 1977–821(In percent)
197719781979198019811982
Canada23.403.273.162.983.4633.65
France42.362.082.432.221.991.87
Germany, Federal Republic of53.413.323.313.273.263.31
Japan65.285.125.135.285.255.03
Netherlands74.413.864.294.204.334.60
Switzerland8
Largest 5 banks6.096.206.116.185.785.52
All banks5.595.685.635.665.365.19
United Kingdom
Largest 4 banks95.906.306.105.805.204.80
All banks105.205.205.105.004.474.14
United States
Largest 10 banks114.174.063.934.014.194.93
Largest 25 banks114.524.414.294.364.535.09
Large banks with foreign offices124.584.474.494.544.62
Source: Fund staff calculations based on data from official sources, as indicated in footnotes.

Given the problems of consistency across banks and over time in the accounting of bank assets and capital, aggregate figures such as the ones in this table must be interpreted with caution.

Ratio of equity plus accumulated appropriations for losses (beginning with 1981, appropriations for contingencies) to total assets (Bank of Canada Review).

The changeover to consolidated reporting from November 1, 1981 had the statistical effect of increasing the aggregate capital-asset ratio by about 7 percent.

Ratio of reserves plus capital to total assets excludes cooperative and mutual banks (Commission de Controle des Banques, Rapport).

Ratio of capital including published reserves, to total assets (Deutsche Bundesbank, Monthly Report).

Ratio of reserves for possible loan losses, specified reserves, share capital, legal reserves plus surplus and profits and losses for the term to total assets (Bank of Japan, Economic Statistics Monthly).

Ratio of capital, disclosed free reserves and subordinated loans to total assets. Eligible liabilities of business members of the agricultural credit institutions are not included (De Nederlandsche Bank N.V., Annual Report).

Ratio of capital plus reserves to total assets (Swiss National Bank, Monthly Report).

Ratio of share capital and reserves, plus minority interests, to total assets (Bank of England). Subordinated loan stock is excluded.

Ratio of capital and other funds (sterling and other currency liabilities) to total assets (Bank of England). Note that these figures include U.K. branches of foreign banks, which normally have little capital in the United Kingdom. Subordinated loan stock is included.

Ratio of primary capital to total assets (Comptroller of the Currency).

Banks with assets of $100 million or over—in 1981 there were 190 such banks (Board of Governors of Federal Reserve System, Federal Reserve Bulletin).

Source: Fund staff calculations based on data from official sources, as indicated in footnotes.

Given the problems of consistency across banks and over time in the accounting of bank assets and capital, aggregate figures such as the ones in this table must be interpreted with caution.

Ratio of equity plus accumulated appropriations for losses (beginning with 1981, appropriations for contingencies) to total assets (Bank of Canada Review).

The changeover to consolidated reporting from November 1, 1981 had the statistical effect of increasing the aggregate capital-asset ratio by about 7 percent.

Ratio of reserves plus capital to total assets excludes cooperative and mutual banks (Commission de Controle des Banques, Rapport).

Ratio of capital including published reserves, to total assets (Deutsche Bundesbank, Monthly Report).

Ratio of reserves for possible loan losses, specified reserves, share capital, legal reserves plus surplus and profits and losses for the term to total assets (Bank of Japan, Economic Statistics Monthly).

Ratio of capital, disclosed free reserves and subordinated loans to total assets. Eligible liabilities of business members of the agricultural credit institutions are not included (De Nederlandsche Bank N.V., Annual Report).

Ratio of capital plus reserves to total assets (Swiss National Bank, Monthly Report).

Ratio of share capital and reserves, plus minority interests, to total assets (Bank of England). Subordinated loan stock is excluded.

Ratio of capital and other funds (sterling and other currency liabilities) to total assets (Bank of England). Note that these figures include U.K. branches of foreign banks, which normally have little capital in the United Kingdom. Subordinated loan stock is included.

Ratio of primary capital to total assets (Comptroller of the Currency).

Banks with assets of $100 million or over—in 1981 there were 190 such banks (Board of Governors of Federal Reserve System, Federal Reserve Bulletin).

While the data presented here suggest that problems of capital adequacy were not a generalized constraint to international lending during 1982, uncertainties in evaluating the riskiness of many external assets has heightened the market’s awareness of potential problems of capital adequacy and has contributed to a more cautious lending posture of banks. The relevant capital ratio for banks in such countries as Canada, the Federal Republic of Germany, the Netherlands, and the United States increased during 1982, while for France, Japan, Switzerland, and the United Kingdom the ratio decreased.10 It appears that banks domiciled in countries whose currency depreciated against the dollar during 1982 tended to suffer deterioration in their capital-asset ratios, as the domestic currency value of their international portfolio was inflated by exchange rate movements but was not offset by similar valuation effects on bank capital. It is possible that valuation effects could have caused banks to exceed their internal country exposure limits in some specific cases, thus precluding new loans to certain borrowers.

Bond Markets

During 1982, international bond markets continued to expand at the rapid rate first evident in the fourth quarter of 1981. While foreign bond issues grew from $21.3 billion to $25.1 billion between 1981 and 1982, Eurobond issues expanded even more rapidly, rising from $26.5 billion to $46.4 billion (a 75 percent increase). This surge of bond issues reflected a number of factors. From the point of view of investors, the most important ones were the prospect of substantial capital gains as nominal interest rates declined (especially for longer-term issues), the emergence of a positively sloped yield curve in most of the major financial markets, and a continuance of high real yields on bonds. During some recent periods, issues denominated in certain currencies also proved attractive to bond purchasers when there was the prospect that the currency would appreciate relative to other major currencies. The growing supply of new issues was generated by the financing needs of the fiscal authorities in many of the industrial countries, the desire of private corporations to secure longer-term sources of finance, and the borrowing programs of the various multilateral institutions. Many bond issuers made their bonds callable to allow them to take advantage of any significant future declines in interest rates.

Industrial country borrowers dominated both the foreign and Eurobond markets (see Table 17). The largest foreign bond market issuers in 1982 were the industrial country borrowers ($17.0 billion) and international organizations ($7.4 billion). Taken together, these two groups accounted for 97 percent of all foreign bonds offered (versus 94 percent in 1981). Developing countries saw their share of foreign bond issues fall from 6 percent in 1981 to only 3 percent in 1982. With an increased perception of risk, issuance of developing country bonds has fallen particularly sharply since the second quarter of 1982. During the July 1982-February 1983 period, developing countries issued only $169 million of foreign bonds out of total issuance of $18 billion.

In the Eurobond markets, industrial country entities increased their borrowing from $21.7 billion in 1981 to $40.2 billion in 1982. As a result of this high level of issuance, industrial country Eurobonds rose to 87 percent of total Eurobonds in 1982 from 82 percent in 1981. Even though total Eurobond issuance by international organizations grew from $2.5 billion in 1981 to $3.3 billion in 1982, their share of total Eurobond issues actually declined from 9 percent to 7 percent. Eurobonds issued by developing countries rose from $2.2 billion in 1981 to $3.0 billion in 1982. During the second half of 1982, the position of developing countries was somewhat stronger in the Eurobond markets than in foreign bond markets. In the Eurobond markets, developing countries were able to issue a little over $1 billion during the July-December 1982 period. During January and February 1983, however, there was a sharp fall-off in Eurobond issues by developing countries, with only $42 million being marketed. In light of the financial market disturbances experienced in 1982, lenders showed a strong preference for low-risk investments. In the bond markets, these portfolio preferences led investors to concentrate on instruments issued by entities in the industrial countries and by international organizations.

Although a variety of new instruments were introduced in international bond markets during 1982, there was also a resurgence of interest in the use of the traditional straight debt issues, since these offered prospects for significant capital gains based on expectations of declining interest rates. On the other hand, borrowers sought to replace some short-term debt by issuing longer-term bonds. In the Eurodollar bond market, for example, straight debt issues rose from 57 percent to 68 percent of total issues between 1981 and 1982. At the same time, convertible bond issues fell from 10 percent to 3 percent of the total market, and floating rate notes continued to account for approximately 30 percent of the issues in the Eurodollar bond market. One major new instrument introduced during 1982 was the “partially paid” bond, which allowed purchasers to defer payments on bond purchases. These bonds attracted investors who anticipated declining interest rates. In addition, there was extensive use of interest rate swaps that involved the exchange of fixed rate debt for floating rate debt.

Despite the sharp upturn in the level of bond issuance, there was no major lengthening of maturities in the international bond market, owing to an apparent lack of investor demand for longer maturity issues. In many financial markets, there was a shift of funds out of both shorter-term (less than 5-year maturities) and longer-term instruments toward medium-term (6–10 year maturities) instruments. The average maturities of the instruments used in the Eurobond markets remained in roughly the range of 7–9 years that has prevailed during the last few years.

International Monetary Fund, World Economic Outlook, Occasional Paper No. 21 (May 1983).

The experience in the mid-1970s through 1980 was reviewed in International Monetary Fund, External Indebtedness of Developing Countries, Occasional Paper No. 3 (May 1981).

It should be noted, however, that there were already some signs of impending difficulties in this period—e.g., difficulties in selling down syndicated loans to a few major borrowers, particularly in Latin America.

See also Appendix I, section entitled BIS Semiannual Press Release on Maturity Distribution of International Lending, p. 60.

As measured by the Bank for International Settlements (BIS) in its quarterly report for banks in the BIS reporting area, which is composed of the Group of Ten countries, Austria, Denmark, Ireland, and Switzerland, and the branches of U.S. banks in the Bahamas, the Cayman Islands, Hong Kong, Panama, and Singapore. The figures here are net of interbank redepositing and have been adjusted to remove valuation effects associated with exchange rate changes.

Probably some part of this decline respects the fact that for those countries that have rescheduled (e.g., Poland), certain claims have simply been transferred to creditor governments as guarantees have been called.

Hungary, which became a Fund member in May 1982, is classified as a non-oil developing country.

Bank for International Settlements, The Maturity Distribution of International Bank Lending (Basle, July 1983).

This refers to debt of a residual maturity of less than one year owed to banks.

In the case of the United Kingdom, it should be emphasized that the data for the largest five banks do not take into account subordi nated loan stock and that the data for “all banks” include such debt as capital and include U.K. branches of foreign banks.

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