U.S. Bank Exposure to Emerging-Market Countries during Recent Financial Crises
Palmer, David E., Federal Reserve Bulletin
Global financial markets have experienced significant volatility in recent years. In two major cases, actual financial crises arose--the first emanating from Asia in 1997 and the second from Russia in 1998. In both crises, financial markets in almost every country were affected, some suffering considerable declines.. Emerging-market countries, in particular, were subject to sharp downward market moves.
U.S. banking supervisors monitored these events carefully to determine the potential effect on U.S. banking organizations.(1) Supervisors analyze information on the amount and type of claims on foreign counterparties held by U.S. banks to assess the potential risks from lending, trading, and other activities conducted by U.S. banks in foreign markets (see box "Types of Claims on Emerging-Market Counterparties").(2)
Because emerging-market countries exhibited significant market volatility in the recent crises, supervisors paid additional attention to claims on counterparties in those areas. Furthermore, claims on emerging-market counterparties are concentrated at a small number of U.S. banks, which necessitates particular supervisory scrutiny of the international activities of those institutions.
A major purpose of collecting country exposure data is to identify country risk--the potential for a claim on a foreign counterparty held by a U.S. bank to become impaired or eventually subject to losses. Country risk encompasses counterparty credit risk and transfer risk. Counterparty credit risk relates to the inability of a counterparty to repay and may arise from country-specific factors, such as general economic or political disruptions; for example, a sharp recession in a foreign country might cause a foreign counterparty to go bankrupt. Transfer risk arises when exchange-rate difficulties (such as a depreciation or currency controls) impair those claims that are not offset by local liabilities; for example, a foreign counterparty might have difficulty acquiring U.S. dollars to repay an obligation that is not denominated in its home currency. Monitoring claims on emerging-market counterparties allows supervisors to identify any developing concentrations of risk that might warrant supervisory action and, if necessary, to assess the effect that a potential emerging-market crisis might have on U.S. banks.(3)
This article focuses on the claims U.S. banks held on emerging-market counterparties during the two-year period from June 1997 to June 1999 and discusses the different ways that emerging-market claims can be analyzed. In addition, the article provides a short analysis of the claims held by other developed-country banks on emerging-market countries to show the relative size of U.S. bank claims. Finally, the data from the 1997-99 period are discussed in the broader historical context of U.S. banks' country exposure dating back to 1982.
U.S. BANK CLAIMS ON FOREIGN COUNTERPARTIES
Country exposure data for June 1997 to June 1999 reveal that the aggregate claims of U.S. banks on counterparties from all foreign countries rose 11 percent, reaching $756 billion (table 1).(4) Cross-border claims (including revaluation gains) stood at $423 billion in June 1997 and rose to $461 billion in June 1999. Local country claims (including revaluation gains) also rose over the period, from $257 billion to $295 billion. Despite the overall increase in total claims held by U.S. banks over this period, a slight drop-off occurred in the first two quarters of 1999.
1. Claims of U.S. bans of foreign counterparts, 1997; Q2-1999:Q2
Millions of dollars except as noted
1997, quarter ending Item June 30 Sept. 30 Dec. 31 All countries 679,613 708,216 710,674 Cross-border(1) 422,493 435,861 446,619 Local(2) 257,120 272,355 264,055 Developed countries and banking centers(3) 484,503 500,508 507,950 Cross-border(1) 314,819 316,780 330,785 Local(2) 169,684 183,728 177,165 Emerging-market countries(4) 195,110 207,708 202,724 Cross-border(1) 107,674 119,081 115,834 Local(2) 87,436 88,627 86,890 MEMO: Emerging-market claims As a percentage of all claims 28. …