U.S. Bank Exposure to Emerging-Market Countries during Recent Financial Crises - Statistical Data Included

Federal Reserve Bulletin, Feb, 2000 by David E. Palmer

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      28.7       29.3      28.5
Cross-border claims as a
    percentage of all
    cross-border claims            25.5       27.2      25.9
Local claims as a percentage
    of all local claims            34.0       32.5      32.9

                                    1998, quarter ending

            Item                Mar. 31   June 30   Sept. 30

All countries                   704,884   719,889    728,628
  Cross-border(1)               427,900   438,186    440,663
  Local(2)                      276,984   281,703    287,965
Developed countries and
    banking centers(3)          501,105   522,162    543,236
  Cross-border(1)               319,972   332,947    348,202
  Local(2)                      181,133   189,215    195,034
Emerging-market countries(4)    203,779   197,727    185,392
  Cross-border(1)               107,928   105,239     92,461
  Local(2)                       95,851    92,488     92,931

MEMO:
Emerging-market claims
As a percentage of all claims      28.9      27.5       25.4
Cross-border claims as a
    percentage of all
    cross-border claims            25.2      24.0       21.0
Local claims as a percentage
    of all local claims            34.6      32.8       32.3

                                 1998,
                                quarter   1999, quarter
                                ending    ending

            Item                Dec. 31   Mar. 31   June 30

All countries                   781,784   767,707   755,653
  Cross-border(1)               467,733   461,028   460,797
  Local(2)                      314,051   306,679   294,856
Developed countries and
    banking centers(3)          596,662   581,699   572,427
  Cross-border(1)               376,186   371,175   372,743
  Local(2)                      220,476   210,524   199,684
Emerging-market countries(4)    185,122   186,008   183,226
  Cross-border(1)                91,547    89,853    88,054
  Local(2)                       93,575    96,155    95,172

MEMO:
Emerging-market claims
As a percentage of all claims      23.7      24.2      24.2
Cross-border claims as a
    percentage of all
    cross-border claims            19.6      19.5      19.1
Local claims as a percentage
    of all local claims            29.8      31.4      32.3

                                 Percent
                                 change,
                                June 1997
                                    to
            Item                June 1999

All countries                        11.2
  Cross-border(1)                     9.1
  Local(2)                           14.7
Developed countries and
    banking centers(3)               18.1
  Cross-border(1)                    18.4
  Local(2)                           17.7
Emerging-market countries(4)         -6.1
  Cross-border(1)                   -18.2
  Local(2)                            8.8

MEMO:
Emerging-market claims
As a percentage of all claims         ...
Cross-border claims as a
    percentage of all
    cross-border claims               ...
Local claims as a percentage
    of all local claims               ...