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Abstract
In determining their strategy toward problem country loans, creditor banks have clearly been influenced by the regulatory, accounting, and tax regimes of the countries in which they are based. These regimes are important because they determine the impact of financial operations on a bank’s profit and loss account and on its capital position. Other things being equal, a bank would structure its operations to provide favorable signals to the market through its accounts and would seek to avoid sharp reductions in reported income. Moreover, a bank will seek to minimize needs for capital and provisions so as to limit the costs of funding its assets. So, for example, the incentive for a bank to agree to new money will tend to be inversely related to the provisioning required against the increase in exposure.
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