III Prudential and Regulatory Issues

International Monetary Fund
Published Date:
August 1981
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Variations in the pace of international intermediation by banks can be analyzed in terms of the demand for and supply of bank services. The demand for such intermediation (lending and deposit-taking) derives from developments in the world economy—ex ante payments imbalances, the general level of real interest rates, and other macroeconomic factors. On the supply side, the basic constraint on the volume of bank intermediation is prudential in nature—that is, the need to diversify exposure and to hold adequate capital against the various sorts of risk associated with international lending. Strong demand for banks’ intermediary services creates profitable opportunities for banks by enlarging the margin between the interest rates on loans and deposits. In the short run, such prudential requirements place limitations on the extent to which banks respond to those opportunities by expanding their balance sheets. In the longer run, however, these kinds of constraints are flexible. If the margin between lending and deposit rates provides a sufficient risk-adjusted return on capital, banks will be able to raise new capital or new banks will be created.

A crucial factor in the pace of expansion is the fact that the prudential constraints on bank lending are not constant. Variations in the riskiness of international intermediation, as perceived by banks, or in the cost of raising capital, can lead to sharp shifts in the spreads required by banks and in the degree of differentiation of spreads among different clients. Thus, in the early 1970s and again in the later years of the decade, the rapid increase in bank lending was the result not only of growing demand but of bank willingness to accept lower spreads. In 1975, on the other hand, prudential problems led to a sharp rise in spreads, and the volume of net lending fell by 20 per cent.

With the substantial increase in oil prices in 1979, by the beginning of 1980 the view was widespread that the riskiness of international intermediation had risen. It was believed that this might lead banks to adopt stricter prudential standards and, as in 1975, to cut back their international lending at a time when growing payments imbalances implied a need for an increased volume of bank intermediation. As the review of developments in 1980 indicated, the restraining effect of any toughening of standards does not yet seem to have had a significant effect on lending volume, but many of the same underlying concerns are still present. This section examines some of these concerns, from the viewpoints both of the banks and of their supervisors.

Bankers’ Perceptions of Risk in International Lending

Financial Positions of the Non-Oil Developing Countries

The major factor in bankers’ perceptions of increased risk in international intermediation has been the effect of the rise in oil prices on the financial position of the non-oil developing countries, as measured by current account deficits and the growth of external indebtedness. At the beginning of 1980 few bankers saw any prospect for early improvement in that position.

The rise in current account deficits would not have been so troublesome to banks if they felt that developing countries could easily service the resulting increase in indebtedness. In fact, however, external indebtedness and debt-service requirements for many of the non-oil developing countries were already posing problems for debt management.16 These problems were compounded by the fact that, in contrast to the decline in interest rates in 1974–75, interest rates had climbed sharply since 1978 and were now strongly positive in real terms.

Although the economic situation of the non-oil developing countries is still difficult, many bankers appear to be less worried than a year ago about the risk of lending to them. Bankers seem more inclined to focus on economic fundamentals—the potential strength of the economies of most of the major borrowers—rather than simply on the enormity of the financial magnitudes involved. This tendency has been encouraged by the fact that over the last year major borrowing countries have, on balance, seemed to manage their economic problems well, improving their prospects of being able to handle their growing debt service.

Debt Service and Other Crises

The ultimate risk in lending is that the borrower may not repay his debt. In international lending, the risk is compounded by the possibility that the servicing of all loans to borrowers in a particular country may be affected by the country’s balance of payments problems. While the danger of outright repudiation seems remote, in the latter half of the 1970s a number of countries experienced debt-service crises that led to a restructuring of their external debts to banks.17 A year ago negotiations were under way on some difficult restructuring operations, and for some of those that had been completed, it was not yet clear how successfully they would be implemented. With another year’s experience, a reasonably orderly pattern of procedures seems to have evolved, and the countries’ positions vis-à-vis banks have been regularized. While banks are never happy with the fact that their funds will be tied up in high credit risk countries for longer periods than they would normally want, the relatively high spreads they have received on the restructured debt have provided considerable compensation.

One particular case that has occupied banks’ attention over the last year or so is that of Poland, whose economic circumstances have continued to deteriorate. Once the inevitability of a debt restructuring became evident, the banks formed a geographically diversified steering committee to try to resolve the problem along the lines of several recent restructurings. In such a complex case, however, the possibility of an outcome acceptable to banks remains uncertain. Some European bankers report that the Polish situation and East-West tensions in general continue to have a depressing effect on their willingness to make new loans to countries in Eastern Europe. Some of the other countries in Eastern Europe continue to get sizable loans on favorable terms, however, providing further evidence that one borrower’s problems do not necessarily have a significant like effect on other borrowers.

The effects of another debt-related problem of concern to bankers at the beginning of 1980 have dissipated over the past year. The fact that in the aggregate Iran’s deposits with banks exceeded its debts meant that bankers had not been greatly worried about potential losses on those loans. The U.S. freeze on Iranian assets, however, and the consequent action of certain U.S. banks in declaring Iran’s loans therefore to be in default left bankers who had net creditor positions uneasy about their prospects for repayment. At the same time there was said to be a disruption of the confidence in interbank relations which is so crucial to the syndication and funding of international loans. The interbank confidence problem was not of lasting significance and, with the settlement of the United States-Iran dispute and the repayment of Iranian loans, bankers’ worries about their Iranian assets appear to have been laid to rest.

In general, banks seem to be somewhat less pessimistic about risks in international lending than they were a year ago. In part this simply reflects the fact that, unlike the situation at the same stage of the earlier oil price increases, another year has gone by without any major banking problems, and losses on international lending have remained lower than on domestic operations. Confidence in the ability of the system to handle risk has thus grown. That ability to a large extent depends on the prudential standards maintained by banks at their own initiative or on the advice of bank supervisors.

Prudential Standards and the Role of Bank Supervision

Risk is inherent in financial intermediation, and the return that banks require to engage in international financial intermediation depends not only on their operational expenses and the cost of capital but on the riskiness of lending. To safeguard their liquidity and, ultimately, their solvency, they maintain standards with respect to capital, concentration of exposure, and the matching of asset and liability positions with respect to maturities and currencies. Since banks’ prudential standards are influenced by bank supervisors, the discussion here of the standards also covers the effects of official supervision.

Capital Adequacy

A fundamental prudential standard is the maintenance of sufficient capital to protect the solvency of the bank in the event of serious loss. A higher ratio of capital to assets increases the loss that could be absorbed, but at the expense of lower return on capital. Bank supervisors, by the nature of their responsibilities, tend to put rather more emphasis on solvency relative to profitability than do the bankers themselves.

Table 3 provides some indication of developments with respect to capital-asset ratios over time. Because of conceptual questions and problems of data availability, such data need to be interpreted with caution; in particular, they cannot be used for cross-country comparisons. The data suggest that until recently capital ratios had been declining over the past few years in most of the major banking systems. To some extent this decline may have been a natural evolution, which does not imply any change in prudential standards; larger banks are more able to diversify their assets and thus have less risk of catastrophic loss, so that the increase in the average size of bank balance sheets over this period permits lower ratios. To the extent that banks have tightened their controls in other prudential areas, moreover, banks may have reduced the risks against which capital needs to be held.18 It is also worth noting that the erosion of capital positions was slowed or reversed in most countries in 1980 and that in some countries the resulting position was little different from that of 1974 or 1975.

Table 3.Capital-Asset Ratios of Banks in Major Capital Market Countries, 1974–801(In per cent)
Germany, Fed. Rep. of53.463.383.473.453.363.323.276
Largest 3 banks5.545.536.
All banks6.266.246.636.596.685.636.13
United Kingdom9
Largest 4 banks5.405.405.906.306.105.80
All banks6.
United States10
Largest 10 banks3.673.864.184.153.983.853.89
Largest 30 banks3.944.154.494.354.154.004.13
Sources: 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 to total assets (Bank of Canada).

Some new capital was raised in early 1981 under the new Bank Act, raising the ratio to 3.05 per cent at the end of April 1981.

Ratio of reserves plus capital to total assets, (Commission de Côntrole des Banques, Report, Table 1).

Ratio of capital including published reserves to total volume of business (Deutsche Bundesbank, Monthly Report, Table III).

Data provided by the Deutsche Bundesbank indicate a slight increase in the capital-asset ratio of the ten largest banks between 1979 and 1980.

Ratio of reserves for possible loan losses, specified reserves, share capital, legal reserves, plus surplus to total assets (Bank of Japan, Economics Statistics Monthly, Table 23).

Ratio of capital plus reserves to total assets (Swiss National Bank, Monthly Report: “Balance Sheet of Swiss Banks” and “Quarterly Balance Sheet of Large Banks”).

The definition of capital excludes bonds (Bank of England).

Ratio of equity capital to total assets (U.S. Comptroller of the Currency).

Sources: 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 to total assets (Bank of Canada).

Some new capital was raised in early 1981 under the new Bank Act, raising the ratio to 3.05 per cent at the end of April 1981.

Ratio of reserves plus capital to total assets, (Commission de Côntrole des Banques, Report, Table 1).

Ratio of capital including published reserves to total volume of business (Deutsche Bundesbank, Monthly Report, Table III).

Data provided by the Deutsche Bundesbank indicate a slight increase in the capital-asset ratio of the ten largest banks between 1979 and 1980.

Ratio of reserves for possible loan losses, specified reserves, share capital, legal reserves, plus surplus to total assets (Bank of Japan, Economics Statistics Monthly, Table 23).

Ratio of capital plus reserves to total assets (Swiss National Bank, Monthly Report: “Balance Sheet of Swiss Banks” and “Quarterly Balance Sheet of Large Banks”).

The definition of capital excludes bonds (Bank of England).

Ratio of equity capital to total assets (U.S. Comptroller of the Currency).

Nonetheless, in some countries the decline in capital ratios has been of concern to banks and their supervisors. As was noted earlier, capital is not a constraint on the ability of banks to respond to profitable opportunities, at least in the longer run, since the profits themselves will permit banks to increase their capital either through retaining earnings or by new issues in the capital market. It may take some time to raise new capital, however, so that capital positions could prove to be a constraint if banks, perhaps at the behest of supervisors, try to restore quickly an eroded capital position or to meet stricter requirements that are not phased in gradually.

By and large, however, supervisors are aware of the disruption that could be caused by too rapid a tightening of standards, and in those countries where standards are being adjusted, the adjustment is being carried out in a gradual way, with allowance for the particular circumstances of the country’s banks, although some braking effect is probably inevitable. The major changes are occurring in Switzerland, which is phasing in new requirements based on consolidated balance sheets, and in the Federal Republic of Germany, where new legislation is under consideration; the United Kingdom is adjusting requirements in a more informal way.

In another respect capital ratios are becoming less of a constraint, as banks are being given more flexibility in the raising of capital. The increase in capital-asset ratios in Canada in early 1981, for example, reflects the fact that Canada’s new Bank Act provides for a wide variety of capital instruments, whereas before rights issues were the only channel. In many countries banks are also able to count subordinated debentures as capital, at least on a temporary basis, which allows them to continue raising capital when conditions are not propitious to the issue of more permanent instruments.19

Exposure Concentration

Among the types of risk involved in international bank lending, the one which receives the most publicity is the risk of default by particular borrowers. Default is, of course, a risk in any lending, domestic or international, but in international lending the usual risk of default by particular borrowers is compounded by the risk that economic or political developments in a particular country may mean that no borrower in the country may be able to obtain the foreign exchange needed for debt service, even though the borrower himself is not in financial difficulty. The chief means by which banks cope with this risk is to diversify exposure, not only among individual borrowers but also among countries and, where countries may be adversely affected by similar sorts of economic or political developments, among groups of countries.

A year ago one of the concerns being expressed about the prospects for international bank lending was that some of the countries that relied heavily on international bank lending might not be able to meet their requirements, not so much because their prospects were worrisome to banks but more because they loomed so large in the balance sheets of banks. Statistically, the rapid growth of international lending had meant that the international claims of banks accounted for a growing proportion of their total assets (Chart 7). Within their international assets, however, there had been no notable change in the proportion accounted for by the non-oil developing countries. There had not, moreover, been any significant increase in the proportion of claims on the non-oil developing countries accounted for by the largest borrowers among them. Given the growth of the international component of bank balance sheets, however, and the decline in capital-asset ratios, loans to the largest developing country borrowers had risen considerably relative to capital.

Chart 7.Concentration of International Bank Claims, 1973–801

(In per cent)

1 Banks in the Group of Ten countries and Austria, Denmark, Ireland, and Switzerland; excludes interbank transactions within the reporting area.

2 Excludes Fund member countries.

3 Data for 1973–74 are not available.

Despite the 1980 expressions of concern, claims on the largest developing country borrowers grew at about the same rate in 1980 as in previous years. The substantial increase in short-term trade-related claims was not surprising, as banks’ limits on lending to individual countries are more flexible in this case than they are on longer-term lending. Longer-term credit also seems to have increased, despite the fact that many banks reported that they were approaching their lending limits vis-à-vis some of the largest borrowers. The increase seems to reflect the fact that, even for the largest borrowers, many banks were not heavily committed. It may also reflect the fact that limits are not rigidly fixed but can be adjusted to reflect changing circumstances, such as a change in lending spreads or in perceived credit-worthiness.

Supervisors have been paying increasing attention to the country exposures of their banks. The degree of attention varies greatly from country to country, but a few common features seem to be evolving. Supervisors generally require that banks report their actual exposure, and in at least one country they also ask them to report their internal limits. Supervisors check that the procedures adopted by banks for determining limits are adequate and are based on sufficient information but do not, however, generally express views on the appropriateness of either the actual exposures or the internal limits, regarding these to be the responsibility of the banks. Some supervisors stand ready to discuss country situations with banks, sometimes going so far as to include brief comments in examiners’ reports on countries to which the banks have large exposures; others consider that anything beyond referring banks to published data is an inappropriate dilution of banks’ own responsibilities.

Despite this generally neutral posture toward exposures to particular countries, the supervisory process in some ways tends to encourage banks to differentiate among borrowers. In the U.S. system, for example, the degree of exposure beyond which examiners are expected to comment varies according to which category of three categories of risk the country is classified in. In some other systems, where capital requirements are weighted according to the riskiness of loans, the weights attached to sovereign risk may differ from country to country, although some such systems give all sovereign loans a zero risk-weighting. These practices reinforce bank tendencies to be more flexible in their country limits for industrial countries than for developing countries. Such differentiation is not necessarily discouraging for the prospects for the larger developing country borrowers, however; as such borrowers develop increasingly diversified economies, they acquire more of the characteristics of industrial countries, and there are signs that banks and their supervisors are beginning to treat them more flexibly for that reason.

Exposure concentration per se does not appear likely to be the major obstacle to continued borrowing by any individual country. The variability and sheer size of the requirements of some large countries may on occasion lead to some resistance in the market that may not be experienced by smaller borrowers; but against that factor must be set their greater access to the whole community of international banks and the flexibility that lenders are likely to display toward large diversified economies.

Liability Management

A major function of bank intermediation is maturity transformation, with banks providing depositors with short-term assets and borrowers with long-term liabilities. To the extent that a bank carries out maturity transformation, it is exposed to two related types of risk when deposits or redeposits from other banks come up for renewal: (1) the risk that market interest rates will have risen, so that the bank can only renew the deposit at an interest rate higher than that which it receives on its assets; and (2) the risk that confidence problems will lead depositors to withdraw their funds, requiring the bank to pay a premium over market rates for such alternative funds as may be available.

In international lending, the development of floating rate loans, where the interest rate is adjusted at fixed intervals in relation to market interest rates, has greatly reduced the first type of risk. In periods of sharp fluctuations in interest rates, such as 1980, substantial losses can still occur, depending on how conservative banks are in matching deposit maturities with loan rollover dates. The network of interbank deposit relationships is important in this regard, since the process of maturity transformation between the primary deposit and the final loan can be carried out through a series of redeposits in a chain of banks, thereby reducing the risk to any one bank.

Potentially more serious is the second type of funding risk; the experience of the early 1970s is instructive in this regard. The increase in the apparent riskiness of international lending associated with the large increase in oil prices in 1973–74 did not produce an immediate slowdown in bank lending or hardening of terms. In the first half of 1974 syndicated lending activity was at record levels, and terms continued to be favorable to borrowers. Not until the failures of some significant banks in mid-1974 did a negative impact occur. While the failures did not themselves result from international intermediation, but mainly from foreign exchange speculation, they had the immediate effect of reducing confidence in the smaller banks that had played an important role in the previous rapid expansion of bank lending. Large primary depositors had tended to place their funds with the largest international banks, particularly those of the United States, so that smaller banks normally relied on redeposits from the large banks for funding their loans. The bank failures led primary depositors to be even more insistent on depositing with the biggest banks, while at the same time the large banks themselves became more cautious in redepositing with small banks, which were thus forced to cut back their lending drastically. In the crisis atmosphere, moreover, even large banks that were regarded as fundamentally creditworthy, but that were trying to build up rapidly their use of interbank credit, encountered “tiering,” with interbank funds available only at a substantial premium.20

While the withdrawal of many banks from international lending persisted for some time, so that it took a while for spreads to begin to decline again, the actual tiering of interest rates was a short-lived phenomenon. Nonetheless, that experience suggested the possibility of a more serious funding crisis either generally or for the banks of a particular country. Some bank supervisors (for example, in France and Japan) thus have increasingly urged their banks to fund a proportion of their long-term foreign currency assets with long-term foreign currency liabilities, on the basis that for their operations in foreign currencies, banks have no lender of last resort and hence must protect themselves against disruptions in those currencies.

Whether or not required to by their supervisors, many banks, particularly those which rely heavily on interbank credit lines, do fund some of their longer-term assets with longer-term liabilities, increasingly on a floating rate basis. This is significantly costly, with interest rates as much as ¼ per cent over the London interbank offered rate (LIBOR), as are confirmed stand-by credit lines with other banks. Banks thus try to establish a broad network of less formal interbank credit relationships. One of the subjects raised by the Fund staff team in its discussions with bankers and supervisors was whether networks of interbank funding have been strengthened in the last four years. Aside from the emphasis placed by banks on securing credit relationships, or in some cases long-term funding, a greater degree of security seems to result from the care that banks take in making their decisions on extending interbank credit. In contrast to former practice, banks now tend to review carefully the financial situations of banks to which they extend credit, basing the credit limit on such factors as the customer bank’s capital base. Given a better understanding of their customers’ situations, the arbitrary cutbacks of 1974, when some major banks reportedly cut off as many as two thirds of their bank customers from further credit, seem less likely to occur. Procedures have also been adopted to reduce special risks in interbank relationships such as so-called daylight exposure—meeting bank payment orders before actual receipt of funds. Financial difficulties for one or a few significant banks thus seem less likely than before to lead to more generalized problems.

Another aspect of liability management—open foreign exchange positions—was at the root of the 1974 bank failures.21 Prudential practices in this area have been strengthened, and open positions are now better scrutinized both by bank managements and by bank supervisors; in many countries formal or informal supervisory guidelines limit open positions.

International Coordination of Bank Supervision

The need for closer contact and coordination among the responsible bank supervisory authorities of the major financial market countries was highlighted by the events of 1973–74, when a number of banks in various countries failed or experienced severe losses. In response to those events, the Governors of the Central Banks of the Group of Ten and Switzerland in September 1974, through the Bank for International Settlements, issued a communique indicating that temporary official support for banks experiencing liquidity difficulties was available, as necessary, while recognizing that it was not possible to set forth in advance the conditions and procedures under which such support would be provided. Shortly thereafter, in February 1975, they established a new standing Committee on Banking Regulations and Supervisory Practices to improve the coordination of surveillance by national authorities over the international banking system. The Committee is commonly referred to as the Cooke Committee, named for its current chairman, Peter Cooke, Head of Banking Supervision of the Bank of England.22

An early result of the work of the Committee was the 1975 Concordat,23 aimed initially at ensuring that all the branches and subsidiaries abroad of banks headquartered in countries represented in the Committee were adequately supervised. To that end, the Concordat established broad guidelines on the division of responsibility for supervision of the solvency and liquidity of banks’ foreign establishments between host and parent country authorities. The Concordat provided that the supervision of the solvency of foreign branches was essentially the responsibility of the parent authority and that, while primary responsibility in the case of subsidiaries lay with the host authority, the parent authority needed to be aware of their situation. The reaction to the recent request of the U.S. authorities that foreign bank branches and subsidiaries in the United States report some consolidated data on a regular basis, on the grounds that some information on their global positions was needed for proper supervision of their U.S. activities by U.S. supervisors, points up some continuing questions in interpreting the Concordat. (Following U.S. modification of the original request, other authorities have somewhat reluctantly accepted it.) On liquidity, the Concordat states that, while host countries are responsible for supervision of liquidity, some host countries accept a lower degree of responsibility for operations in foreign currencies. Thus, and not surprisingly, the definition of responsibilities set forth in the Concordat did not settle all of the jurisdictional questions about supervisory responsibility.

The second major element in the Committee’s approach to international banking supervision is the principle that banks’ international business should be monitored on a consolidated basis. Following the Committee’s reports on the merits of this approach, the recommendation was endorsed by the BIS Governors in late 1978. This gave considerable impetus to supervision on a consolidated basis by national authorities. Among the other questions on which the Committee has focused, early attention was given to adequate standards for foreign exchange trading by banks, reflecting the nature of the 1974 bank failures. Recently, it has asked its members to provide data on the maturity distribution of assets and liabilities in foreign currencies or vis-à-vis nonresidents, in order to further evaluate the question of liquidity management standards. The large differences at present in the types of data that banks can provide and in supervisory approaches suggest that a substantial degree of coordination of supervisory principles in the area of international maturity transformation lies some distance in the future.

The Committee has also continued to devote attention to country risk management. The predominant view has been that supervisors should be concerned that country risk, like other types of risk exposure, does not become excessive for a bank in relation to its capacity to incur losses, but the judgment and decision on the magnitude and direction of cross-border exposure must be the responsibility of the bank management. The emphasis, therefore, has been given to ways in which prudential monitoring of country exposure by the supervisory authorities might be improved and ways to better ensure that banks’ lending decisions are both based on adequate information on borrowers’ circumstances and prospects and safeguarded by effective internal assessment and control procedures. In recent years significant improvements have been made in the measurement and statistical reporting of country exposure by the national authorities, some of which is disseminated through the BIS, and supervisors in several countries have paid increased attention to assessment of their banks’ methods for measurement and control of country risk. The Committee recently requested the national authorities to survey the internal procedures employed by banks and to submit this information to the Committee, with a view to improving supervisors’ understanding of alternative systems and their effectiveness.

Recently there have been further efforts to broaden the scope of international understandings on supervision. In July 1979 the Bank of England, in cooperation with the Committee, hosted a conference of banking supervisors from a large number of countries, and in September 1981 a similar conference will be hosted by the U.S. supervisory authorities. A more narrowly defined joint meeting of members of the Cooke Committee and supervisors invited from a number of offshore centers was held in October 1980, at which the latter generally expressed agreement with the basic principles of the Concordat.

Another channel for the coordination of supervisory practices is the European Community. Besides efforts in such areas as common standards of accounting, in December 1977, a directive was issued calling for exchange of information between supervisory authorities. The Community’s counterpart of the Cooke Committee, the so-called Groupe de Contact, in effect involves all the members of the Community in the process of coordination of supervisory standards. As one step in that direction, data are currently being collected for the calculation of solvency (capital-asset) observation ratios.

Lending Spreads and the Direction of International Lending

A noteworthy development over the last year is the confirmation of the allocative effect of lending spreads. While it is clear that higher spreads can evoke more lending when no great question of risk or exposure concentration is involved,24 it has sometimes been argued that under more difficult circumstances bank lending to particular countries is not very elastic with respect to spreads. For loans to developing countries, for example, most banks report that they have strict internal country lending limits based on risk appraisal and exposure concentration. Even at the level of the individual bank, this need not imply a zero elasticity of lending volume with respect to spreads, since the extent to which the internal limit is utilized may be affected by the spread. But once that limit is reached, at least for medium-term lending,25 a rise in spreads is often said to be ineffective in calling forth further lending.

The experience of 1980 suggests that this view is unduly pessimistic. During the first three quarters of 1980, average spreads on publicized medium-term credits to the non-oil developing countries rose only marginally from the record low level of the fourth quarter of 1979; reflecting bank concerns about risk and exposure concentration, the volume of credits to such countries remained well below the level of the previous year. In the fourth quarter, however, the average spread for such borrowers rose sharply to 1.07 per cent, and at the same time new syndications attained an annual rate of $37 billion, 50 per cent above the annual rate in the first three quarters. These trends largely reflect the experience of one large borrower but are also confirmed by disaggregated data. Of the 17 largest borrowers among the non-oil developing countries, 5 of the 6 who experienced a clear upward trend in spreads obtained larger commitments as spreads increased.26 For the other borrowers, spreads remained stable or declined, presumably because the countries were not pressing up against bank exposure limits; of the five countries for which spreads actually declined, only one increased its borrowing and in that case to only a minor degree.

Discussions with bankers about their reactions to the greater dispersion of spreads among individual borrowing countries that developed in 1980 suggest that, for even the largest borrowers, some banks are not heavily committed and a marked increase in spreads can encourage some of them to consider major involvement in a country for the first time, adjusting their country lending limits accordingly. Some bankers, moreover, suggest that the growing positive experience with debt reschedulings has made them more prepared to take risks if the spread is attractive.

Besides the spread over LIBOR (or other reference rate) charged on loans, part of the return to bank intermediation is the spread below the reference rate on the actual cost of funds to the banks. Where large deposits are placed for recognized standard periods, depositors usually are able to command a return close to current interbank rates, although where depositors have special requirements, the differential may be greater, reflecting the banking system’s assumption of the administrative costs and risk involved in more complex maturity transformation. Recently, however, some banks report that they have been discouraging additional deposits from some customers by offering them below-market rates, either because of the sheer volume of the funds being offered or because of uneasiness about the stability of their relationship with the depositor. It is impossible to assess the quantitative significance of this development, but, like the reports that terms on unpublicized loans are harder than those on syndicated credits, it implies that the effective return on international lending may in fact have risen more than is suggested by the published data.

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