- International Monetary Fund
- Published Date:
- August 1981
The primary data underlying the analysis in the paper come mainly from the Bank for International Settlements (international assets and liabilities of banks) and the World Bank(syndicated bank credits and international bond issues and placements). Data published by the Organization for Economic Cooperation and Development (OECD) and various central banks, as well as by Morgan Guaranty Trust Company and Orion Bank, have also been used. Data on capital-asset ratios have been provided by a number of country authorities. Balance of payments developments and prospects for the world economy have been taken from the World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); other macroeconomic data come from International Financial Statistics, a monthly publication of the Fund.
The Development Committee’s Task Force on Nonconcessional Flows is studying various means of providing a satisfactory medium-term pattern of capital flows to developing countries and will make its recommendations in the near future.
IMF, World Economic Outlook, Occasional Paper No. 4 (June 1981), pp. 13–17.
IMF, International Capital Markets: Recent Developments and Short-Term Prospects, Occasional Paper No. 1 (September 1980).
These issues are developed in greater detail in Section III.
The country classifications used by the Fund are listed on the inside back cover of International Financial Statistics, a monthly publication of the Fund.
It was partly in response to this possibility that the Development Committee (formally, the Joint World Bank-Fund Ministerial Committee on the Transfer of Real Resources to Developing Countries) established the Task Force on Non-concessional Flows to examine the nature and significance of such impediments and, in the light of their findings, to recommend official actions that might alleviate the problem.
Throughout this paper, unless otherwise indicated, the term “issues” includes private placements as well as public issues.
See page 26, footnote 31.
Recent developments in the markets are examined in detail in Appendices I and II.
As measured by the Bank for International Settlements (BIS) and net of interbank redepositing. The figures cited here have been adjusted by the Fund staff, on the basis of information contained in the quarterly press releases of the BIS, to remove valuation effects associated with exchange rate changes.
Developments in lending spreads are discussed further in Section III.
Multilateral development institutions, such as the World Bank, were exempted from these limitations. The virtual ban on new foreign private placements was in effect throughout 1980.
See External Indebtedness of Developing Countries, IMF Occasional Paper No. 3 (May 1981). Data presented in the World Economic Outlook, IMF Occasional Paper No. 4 (June 1981) indicate that, for the developing countries that are most dependent on bank credit, long-term external debt has increased relative to GDP and the ratio of debt service to exports of goods and services has risen.
The experience in six of these cases was summarized in Section VI of External Indebtedness of Developing Countries, pp. 30–33.
Despite the fundamental importance of bank capital in the event of catastrophic loss, it is perhaps more important that banks’ standards in other prudential areas are designed to avoid such loss in the first place. No amount of capital can protect bank solvency under all circumstances.
In the United States an official proposal made last year that subordinated debt not count as capital has now been modified to permit subordinated debt with residual maturity of more than seven years to be so counted within certain limits.
As a result of the disruption, publicized medium-term credit commitments dropped by more than 50 per cent in the second half of 1974, compared with the first half, and remained at that level until late in 1975. The net flow of bank lending in 1975, at $40 billion, was 20 per cent below that of 1974. By the end of 1975, average spreads doubled from their level in the first half of 1974 to exceed 1.5 per cent, and average maturities dropped from over eight years to little more than five years. For a detailed discussion of banking developments in the 1974–75 period of oil surplus recycling, see International Capital Markets: Recent Developments and Short-Term Prospects, IMF Occasional Paper No. 1 (September 1980).
Before the advent of floating exchange rates, the relative certainty about the direction of any possible change in exchange rates made the holding of open positions an almost risk-free position. Some bankers apparently were too slow to grasp that with floating rates the uncertainty about the direction of change had vastly increased.
A comprehensive description of “Developments in Cooperation Among Banking Supervisory Authorities” is contained in a paper by Mr. Cooke, which was presented to the Conference on the Internationalization of the Capital Markets, New York, March 19–21, 1981.
The text of the Concordat, recently released to the public, is reproduced in an Annex to this paper.
A recent example is the 1980 experience of many prime borrowers. With the slowdown in lending activity by European and Japanese banks, prime borrowers found it necessary to attract greater participation by U.S. banks, many of which had previously refused to participate because of low spreads. By basing spreads on the U.S. prime rate, rather than on LIBOR (which for U.S. banks, particularly the smaller ones, constitutes better terms), borrowers were able to call forth much greater U.S. participation in loan syndications.
Banks’ limits on short-term lending, particularly when related to trade, tend to be flexible in any case.
For some of these non-oil developing countries, the interruption of new commitments in the early part of the year was so severe that, even with a very large volume in the latter part of the year, the total for 1980 was somewhat below that of 1979. The 17 largest borrowers are listed in Table 34.
Part of the work of the Group is covered in its report to the Development Committee, summarized in the IMF Survey, December 6, 1976, pp. 354–57.
See the Development Committee’s Press Communiqué issued in Manila, October 3, 1976 (IMF Survey, October 18, 1976, pp. 310–11).
The share had peaked at 16 per cent in 1978 and declined to 10 per cent in 1979.
The actual stock of bank claims at any point in time can also be affected by short-run developments in exchange rates and interest rates, which result in temporary surges or declines in international bank lending to finance hedging or speculative positions. Exchange rate changes also have valuation effects that need to be allowed for in assessing developments.
Putting the data in Table 4 for “Other borrowing, net” of the non-oil developing countries on a basis comparable with the BIS data on net bank lending suggests that the requirement for 1981 would be met by a 24 per cent increase in bank claims on such countries, compared with 27 per cent in 1980.
This is a report to the Governors by the Group of Ten’s Committee on Banking Regulations and Supervisory Practices. The work of the Committee is briefly described in Section III. The document reproduced here is the 1975 Concordat, which was aimed at ensuring that banks’ foreign establishments were adequately supervised. In March 1981 the document was released to the public by Peter Cooke, Chairman of the Committee.
Unless otherwise indicated, figures used here refer to banks in the BIS (Bank for International Settlements) reporting area and are net of redeposits among those banks. The BIS reporting area comprises 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, Lebanon, Panama, and Singapore.
The volume of international bank lending is calculated as the difference between end-of-period stocks of claims, adjusted for valuation effects associated with exchange rate changes.
While the distinction between international and domestic demand is useful for this exposition, it is highly arbitrary. Working capital to finance imports, for example, could be provided as well through domestic credit as through cross-border lending.
The increase in deficits also reflects developments other than the increase in oil prices; major factors for some countries in 1980 were the sharp increase in the interest rates on their external debt and the increase in prices of their imports of manufactures. Another aspect of current account developments in 1980, which had the effect of increasing requirements for balance of payments finance, was the great divergence of current account developments among the major industrial countries, with some moving into strong surplus positions, whereas in 1979 there had been considerable convergence.
Such borrowing is, of course, only ascertainable ex post. A proxy for such borrowing is the increase in reserves adjusted for the sum of current account surpluses, thus effectively assuming that current account surpluses are reflected in reserve accumulation.
Changes in external claims and liabilities of banks in the BIS reporting area.
To derive banks’ net claims on industrial countries, total gross claims (for which a breakdown by country is available) were reduced by redepositing among banks in the BIS reporting area and all claims on offshore centers were added (see also footnote 4 of Table 6). The distribution by individual country of net international bank lending to all industrial countries derived in this manner cannot be established because of the absence of a breakdown by country of redepositing among banks and of onlending through offshore centers.
The BIS provides data on international claims on the non-bank sectors in individual countries of banks located in Europe, including the branches of foreign banks, and on foreign assets and liabilities of banks in individual capital market countries.
The termination of special programs under which the Japanese authorities had supplied foreign exchange for trade financing was a factor in this regard.
Under the Supplementary Special Deposit Scheme, known as the corset, banks had to place supplementary noninterest-bearing deposits with the Bank of England if the growth of their interest-bearing eligible liabilities exceeded certain guidelines.
The marginal reserve requirement on managed liabilities of banks in the United States (including Eurocurrency borrowing by banks in the United States and loans by foreign offices of banks in the United States to U.S. residents) in effect between October 1979 and July 1980 did not affect the cost of funding in the United States relative to funding abroad because it applied equally to domestic and foreign liabilities. The 3 per cent basic reserve requirement on net Eurocurrency liabilities and nonpersonal time deposits introduced in November 1980 did, however, affect relative costs insofar as it equalized the cost of domestic and Eurocurrency funds, but the impact on funding in 1980 was minimal because the new regulation is being phased in gradually. Eurocurrency liabilities were defined to include lending to U.S. residents by the offices outside the United States of banks operating in the United States.
Including deposits held in offshore centers, all of which are assumed here to be held by residents of industrial countries (see footnote 4 of Table 6).
These figures exclude funds that entered the market through trustee accounts in industrial countries, mainly Switzerland.
Not adjusted for valuation changes. Adjusted for valuation changes in stocks, the flow in the second quarter would be somewhat lower and the flow in the fourth quarter somewhat larger.
Excluding Fund member countries.
The evolution of banks’ prudential concerns about lending to non-oil developing countries is traced in Section III of this paper.
That is, in 1980 a significant part of the increase in bank claims of the BIS reporting area on offshore centers may have represented onlending to non-oil developing countries, rather than lending back to industrial countries (as is assumed in Table 6). Few data are available on the direction of lending from offshore centers.
Grouping used in the World Economic Outlook: major exporters of manufactures, net oil exporters, low-income countries, and other net oil importers.
World Bank data. OECD (Organization for Economic Cooperation and Development) data on international medium-term and long-term loans are somewhat different. For example, the World Bank includes only Eurocurrency loans, but the OECD includes loans where the participating banks all come from one country and the loan is in their own currency. The OECD figures are $65.8 billion for 1978, $78.3 billion for 1979, and $78.0 billion for 1980.
Publicized new medium-term commitments exhibit some seasonality, with traditionally low borrowing in the first quarter and high borrowing in the fourth quarter of each year.
Data on the maturity distribution of new medium-term publicized Eurocurrency credits are presented in Table 37.
These data have to be interpreted with caution because they are based on remaining rather than original maturity. Thus a medium-term loan with a remaining maturity of one year or less would be shown as a short-term claim.
With the slowdown in lending, the share of U.S. banks in gross foreign claims of banks in the BIS reporting area declined to 26 per cent in 1979 from a peak of 36 per cent in 1976.
These data are comparable to the data on gross claims of all banks in the BIS reporting area.
Excluding foreign subsidiaries of U.S. banks and including U.S. subsidiaries of foreign banks.
The financing of payments imbalances through private capital markets in the period 1974–78 is reviewed in detail in Appendix I of International Capital Markets: Recent Developments and Short-Term Prospects, IMF Occasional Paper No. 1 (September 1980).
One significant difference between the two periods was that in 1979, in contrast to 1974, the counterpart of the increase in oil producers’ surpluses was more a decline in large surpluses of some of the large oil importers, rather than an increase in deficits. The global sum of deficits thus grew little in 1979 but then recorded a very large increase in 1980.
Between 1973 and 1974 (or 1975) the global sum of deficits increased by $53 billion, one third more than the volume of net lending in 1973. Between 1978 and 1980 the increase in deficits was $66 billion, little more than half the volume of net lending in 1978.
The interest rate on such notes generally is fixed at a small margin over the six-month London interbank offered rate (LIBOR).
Eurobond issues continue to differ from the issue of foreign bonds in domestic markets, mainly because of technical and institutional aspects, such as the method of issue. Eurobonds are issued through syndicates of international banks, which place the issue through a geographically diversified selection of investors, while issues in domestic markets rely mostly on domestic issuing houses. Also, disclosure and publicity requirements are considerably more stringent in the national markets.
Eurobond issues differ from issues on the domestic market because their underwriting syndicate includes, together with a German bank lead manager, non-German banks as underwriters and also as co-lead managers, while in the case of domestic market issues the syndicate is composed only of German banks. All deutsche mark public issues are listed on a German stock exchange and therefore are subject to the same trading and issuing supervision. A single issue calendar covers both sectors; it is managed by a so-called Subcommittee on Capital Markets, formed by the leading issuing banks, with the Deutsche Bundesbank as observer.
Foreign issues in the Euro-French franc market had been relatively active in the early 1970s, but de facto had been closed by the authorities in 1976 when the French franc had weakened as a result of a deterioration in the balance of payments.
Long-term interest rates in 1980, after having risen between January and April from 9 to 12 per cent, fell in the second quarter to below 9 per cent; during the second half of the year they remained stable at that level, proving quite attractive to borrowers as the rate was at the lower end of the spectrum of interest rates in the major capital markets.
In 1979 private placements had accounted for approximately 45 per cent of total foreign issues and placements.
There were, however, special placements of the World Bank with the Bank of Japan.
The domestic French bond market recorded a sharp expansion in 1980 in total gross issue volume, which almost doubled from F 65 billion in 1979 to F 112 billion in 1980.
The withholding tax is equal to 10 per cent for an investor who chooses to report the interest income in his tax return, or 25 per cent without any further reporting obligation. Treasury bonds are not subject to withholding tax. Public institutions of members of the Organization of Petroleum Exporting Countries have been exempted some years ago from the withholding tax on all bond purchases. Investors of other countries can recuperate the withholding tax on the basis of bilateral tax agreements.
Borrowers who are interested in launching an issue but do not want to set a fixed date are placed on a waiting list. If a borrower relinquishes his assigned date, for instance, because he considers the market conditions unfavorable, the Bank of England will offer the place to the names on the waiting list.
A nonresident investor in traditional registered bonds has, however, the right to contact the tax authorities and establish his status as a nonresident, whereupon the tax authority would allow the registrar to pay him interest without any deduction.
The methods of issue are also different, as Eurobonds are underwritten by a group of banks, including foreign institutions, which places them directly with its own clients, mostly nonresidents. Issues in the domestic market are sold either through an offer of sale to the general public, which consists of an invitation in the form of a prospectus, together with an application form to be published in the press, or through a placing, which involves the placement of the bulk of the issue with institutional investors, with a portion, however, to be made available to stock exchange brokers through whom the public may have access to it.
The technical difference between registered and bearer bonds can be overcome by issuing bonds in registered forms with the option for the holder to convert them into bearer bonds, making them more advantageous to nonresident investors for tax purposes.
The yield on these issues ranged between 10 per cent and 10.5 per cent, compared with about 9.5 per cent for issues by similar borrowers in the fourth quarter of 1980.
Between 1977 and 1979 the corresponding share of developing country issues in the Swiss market ranged between 5 and 8 per cent and in the U.S. market between 8 and 11 per cent.
The present requirement for public issues is (1) two successful issues in the preceding 5 years, or (2) five successful issues in the preceding 20 years. One private placement in Japan may be counted as one of the past issues.
Almost all of the issues took the form of floating rate notes, and many were issued by well-known banks.
Presumably, a part of the issues with unknown maturities in 1980 belongs to this group, however.
This Appendix was prepared in collaboration with the Treasurer’s Department of the Fund.
There are, however, no detailed systematic data available on the volume and distribution of SDR-denominated deposits.
Gross external assets of deposit banks in Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. To get a consistent time series, the external assets of banks in Austria, Denmark, and Ireland and of the branches of U.S. banks in certain offshore centers (which were not included in the BIS data until the latter part of the 1970s) were excluded from the BIS totals. Thus the data for recent years are not strictly comparable with the BIS totals shown in the text tables of this paper and in Appendix I. Nevertheless, the annual growth rate of this narrower definition of banks’ international assets (claims) has been close to that for the broader aggregate reported by the BIS in recent years.
This Appendix draws heavily on Henri Ghesquiere and Eliakim Katz, “The Growth of International Banking—An Empirical Analysis” (unpublished paper, International Monetary Fund, November 3, 1980).
The growth rate is derived from a comparison of the dollar value of the outstanding assets at the beginning and end of the period, given the exchange rate relationships at both points in time. There are claims on nonresidents which are denominated in other currencies besides the dollar; exchange rate changes between the dollar and these currencies give rise to valuation changes. The appreciation of the dollar during 1980 reduced the dollar equivalent of outstanding claims denominated in those other currencies at the end of 1980 and thus reduced the growth rate of total external assets measured in terms of dollars. Although the data on gross external assets do not permit a precise currency valuation adjustment, it appears that such an adjustment would account for most of the recorded deceleration in the growth rate of external bank assets in 1980.
Calculations have been made of the impact of currency valuation adjustments on banks’ net external assets (excluding certain claims on other banks in the BIS reporting area as a result of redepositing among them). When those data were adjusted to eliminate the impact of the appreciation of the U.S. dollar vis-à-vis other currencies in which banks’ external assets are denominated, the rate of increase was about 4 percentage points higher.
These valuation effects are dealt with in the estimating equation through their similar effects on the value of world gross national product and trade.
During periods of speculation against the U.S. dollar, non-banks wish to sell dollars in the forward foreign exchange market, in which case the bank that purchases the forward contract may borrow dollars to cover the exchange risk. It is often assumed that this dollar borrowing exceeds effects tending to reduce borrowing in currencies that are expected to appreciate, thereby leaving a net positive impact on external interbank lending.
Technically, this is a reduced-form equation of a supply and demand model in which the interest rate of international bank assets themselves has been solved out. Interest rates on substitute assets could have been included, but it is unlikely that they would have improved the empirical results significantly.
Also included in the equation is a dummy variable for the fourth quarter, which takes a coefficient of 5.4 with a t-statistic of 5.5. This variable may reflect window dressing of end-of-year balance sheets by corporations. A dummy variable was also included for the third quarter of 1974, which took a coefficient of -3.6 with a t-statistic of –1.7, reflecting the crisis in the interbank market in the aftermath of the collapse of the Herstatt Bank.
It should be noted that the imbalance variable cannot always be reliably interpreted by focusing exclusively on broad country groupings, because movements between industrial countries can be important. If the trade surplus of the United Kingdom and the trade deficit of Italy increase by a similar amount, for example, the combined deficit of the industrial countries remains unchanged but the trade imbalance variable will increase. It is the underlying assumption of this Appendix that such a development would stimulate international bank lending, ceteris paribus, by increasing the supply of funds on the part of the United Kingdom and demand for international loans by Italy.
On the basis of a simpler annual model, a forecast of 14.1 per cent was obtained for 1981.
Occasional Papers of the International Monetary Fund
1. International Capital Markets: Recent Developments and Short-Term Prospects, by a Staff Team Headed by R. C. Williams, Exchange and Trade Relations Department. 1980.
2. Economic Stabilization and Growth in Portugal, by Hans O. Schmitt. 1981.
3. External Indebtedness of Developing Countries, by a Staff Team Headed by Bahram Nowzad and Richard C. Williams. 1981.
4. World Economic Outlook: A Survey by the Staff of the International Monetary Fund. 1981.
5. Trade Policy Developments in Industrial Countries, by S.J. Anjaria, Z. Iqbal, L.L. Perez, and W.S. Tseng. 1981.
6. The Multilateral System of Payments; Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, by Joseph Gold. 1981.
7. International Capital Markets: Recent Developments and Short-Term Prospects, 1981, by a Staff Team Headed by Richard C. Williams, with G.G. Johnson. 1981.
International Monetary Fund, Washington, D.C. 20431, U.S.A.
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