An Analysis of the Impact of International Activity on the Domestic Balance Sheet of U.S. Banks
Haslem, John A., Scheraga, Carl A., Bedingfield, James P., Management International Review
The primary purpose of this study is to compare the domestic balance sheet strategy ("profiles") of international U.S. banks with those of domestic U.S. banks. The analysis was performed in the context of the banking events of the 1984 to 1989 period that included the "crisis in lending" to less-developed countries ("LDCs") and was motivated primarily by two related questions:
(1) Did the domestic office balance sheet profiles and performance of international banks in the period of the "LDC loan crisis" differ from those of domestic banks?
(2) Did these international banks generally alter their domestic office balance sheet profiles over this same crisis period?
These two questions arose from the need to understand better the balance sheet profiles and performance of international U.S. banks in light of the events of the difficult, dynamic, and more global banking environment that included the "LDC loan crisis." This crisis had its roots in the early 1970s when the increase in LDC loans began and culminated at its peak in 1983. As reported in Bennett and Zimmerman (1988), Todd (1988), and elsewhere, this crisis has been characterized by loan defaults, rollovers and reschedulings of maturing loans, nonpayments of loan interest, and new loans to cover contractual interest pay-merits. This ongoing crisis led banks to reduce their international banking activities, especially their loans to LDCs. Faced with the resulting decline in market value of these loans, banks raised additional capital through increased profit retention, sale of assets, and new issues of equity capital and subordinated debt. The banks also reduced pressure on their declining capital ratios by slowing the growth rates of their assets. Nonetheless, as reported in The Economist (1990), bank net loan chargeoffs relative to their declining net interest margins tripled during the 1980s, with total and LDC loan-loss reserves reaching alltime peaks in 1987.
It is important from the standpoints of both bank regulators and managers to understand specifically the impact of the period that included the "LDC loan crisis" on the domestic (but also foreign) balance sheet profiles and performance of international banks, given their degree of foreign office activity. By understanding the implications of this experience, they should be better prepared to avoid or at least to minimize any adverse impacts of future crises of an international nature.
Expectations in this regard might well be influenced by the extent to which international banks explicitly or implicitly practiced normative (systems oriented) asset/liability management (ALM). If they did it would be expected that their domestic office balance sheet profiles and performance would differ from those of domestic banks. This is because ALM would be expected to integrate domestic and foreign office balance sheet profiles.(1)
Empirically, the presumed difference in domestic office balance sheet profiles and performance due to foreign office activities is less certain. Haslem, Scheraga and Bedingfield (1992) studied the nature and implications of foreign and domestic strategy relationships reflected on both sides of U.S. bank balance sheets. They analyzed the 1987 data of 132 "large" banks (total assets less than $8 billion) and 44 "very large" banks (total assets $8 billion or more) with both foreign and domestic offices. First, a consistent dichotomy in balance sheet strategies was found. This dichotomy reflected either an intense matching of domestic assets/liabilities or a similar pattern with respect to foreign assets/liabilities. This apparent lack of integration of foreign and domestic balance sheet strategies would appear inconsistent with ALM. Second, foreign asset/liability relationships were generally found to have relatively less interest-rate and liquidity risks than domestic asset/liability relationships. Third, "very large" banks that focused on strictly matching foreign assets/liabilities were more profitable than those that focused on mixed-matching foreign and domestic assets/liabilities and, especially, those that focused on strictly matching domestic assets/liabilities. …