International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

VI
INTERNATIONAL BANKING

International banks have been among the major causes--and possibly the only beneficiaries--of the rapid expansion and internationalization of debt financing.

In the 1970s international banks managed to successfully recycle tens of billions of petrodollars to potential (and in many cases marginally qualified) borrowers, a process that greatly benefited the banks. By the early 1980s the euphoria of the 1970S had ended and the myopic policies of international banks created the debt crisis, as first marginal borrowers and eventually almost all state borrowers from the LDCs were unable to meet their debt servicing obligations. After an initial delay the banks reacted by accommodating rescheduling demands of many debtor countries. They also devised a series of new techniques for recovering as much of their loans as possible.

In Chapter 11 John Glascock, Imre Karafiath, and Robert Strand examine the financial impact of the international debt crisis on U.S. banks by measuring the effects of the debt crisis on U.S. bank equity returns. Specifically, this chapter is a study of the impact of five major international defaults and reschedulings ( Argentina, Brazil, Chile, Mexico, and Venezuela) on U.S. bank equity returns. In this study the authors apply intervention analysis to the equity returns of three portfolios of bank stocks: multinational banks, regional wholesale banks, and regional consumer banks. They find that in each case the market assimilated the news of international defaults within one trading day. According to the authors' findings, all three portfolios show a one-day positive abnormal return within five trading days of each event day.

In Chapter 12 George W. Trivoli and James I. Bullen discuss many of the techniques available as tools of risk management as manifested in blocked funds. Their specific definition of blocked funds refers to the process utilized by some governments in attempting to regulate the transfer of foreign exchange out of their respective countries. The authors review and categorize the various techniques used by business firms and banks for anticipating and reacting to blocked funds in selected Latin American countries. In addition, they provide a simple valuation model that can be used to estimate the value of blocked funds in other countries and/or regions.

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