U.S. Bank Exposure to Emerging-Market Countries during Recent Financial Crises.Global financial markets have experienced significant volatility Volatility 1. A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time. 2. A variable in option pricing formulas that denotes the extent to which the return of the underlying asset will fluctuate between now and the in recent years. In two major cases, actual financial crises arose--the first emanating from Asia in 1997 and the second from Russia Russia, officially the Russian Federation, Rus. Rossiya, republic (2005 est. pop. 143,420,000), 6,591,100 sq mi (17,070,949 sq km). 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 an·a·lyze v. 1. To examine methodically by separating into parts and studying their interrelations. 2. To separate a chemical substance into its constituent elements to determine their nature or proportions. 3. information on the amount and type of claims on foreign counterparties Counterparties The parties on either side of an interest rate swap or a currency, equity or commodity swap, or to an options or futures position. 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 su·per·vi·sor n. 1. One who supervises. 2. One who is in charge of a particular department or unit, as in a governmental agency or school system. 3. One who is an elected administrative officer in certain U.S. scrutiny Scrutiny (Fr. scrutin, Late Lat. scrutinium, from scrutari, to search or examine thoroughly) is a careful examination or inquiry (as though there was a mistake). 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 Counterparty The other participant, including intermediaries, in a swap or contract. held by a U.S. bank to become impaired See assistive technology. 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 BANKRUPT. A person who has done, or suffered some act to be done, which is by law declared an act of bankruptcy; in such case he may be declared a bankrupt. 2. It is proper to notice that there is much difference between a bankrupt and an insolvent. . Transfer risk arises when exchange-rate difficulties (such as a depreciation or currency controls) impair im·pair tr.v. im·paired, im·pair·ing, im·pairs To cause to diminish, as in strength, value, or quality: an injury that impaired my hearing; a severe storm impairing communications. 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 June: see month. 1997 to June 1999 and discusses the different ways that emerging-market claims can be analyzed an·a·lyze tr.v. an·a·lyzed, an·a·lyz·ing, an·a·lyz·es 1. To examine methodically by separating into parts and studying their interrelations. 2. Chemistry To make a chemical analysis of. 3. . 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 Revaluation A calculated adjustment to a country's official exchange rate relative to a chosen baseline. The baseline can be anything from wage rates to the price of gold to a foreign currency. In a fixed exchange rate regime, only a decision by a country's government (i.e. 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 ...
(1.) Cross-border claims are those booked outside the foreign counterparty's home country, usually at a U.S. bank's head office in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . (2.) Local claims are those booked in the U.S. bank's local offices in the foreign counterparty's country. (3.) See text note 5. (4.) See table 2 for a list of emerging-market countries by region. ... Not applicable. Total claims on counterparties in developed countries and banking centers rose in the aggregate, from $485 billion to $572 billion (an increase of 18 percent).(5) Cross-border claims rose at about the same pace as local claims and generally represented two-thirds of total claims on developed countries and banking centers over the period. In contrast, combined cross-border and local claims on counterparties in emerging-market countries fell from $195 billion to $183 billion, a 6 percent drop.(6) Cross-border claims fell significantly over the period, from $108 billion to $88 billion, while local claims rose 9 percent, from $87 billion to $95 billion. By the end of the period, cross-border claims had fallen to less than half of total claims for emerging-market countries. Notably, by June 1999, local claims represented a larger portion of total claims on emerging-market countries (52 percent) than of total claims on developed countries (35 percent). Despite volatile With regard to computer memory, it means "temporary" and not "highly changeable," which is the usual meaning of the word. See volatile memory. 1. (programming) volatile - volatile variable. 2. (storage) volatile - See non-volatile storage. conditions in many emerging markets in recent years, U.S. banks continued to maintain one-quarter of their total foreign claims and one-third of local claims on counterparties in these markets. Although there was a significant retreat Retreat may refer to:
v. lib·er·al·ized, lib·er·al·iz·ing, lib·er·al·iz·es v.tr. To make liberal or more liberal: "Our standards of private conduct have been greatly liberalized . . . and the increased openness to U.S. and other developed-country banks in these markets. Claims on Emerging-Market Counterparties From June 1997 to June 1999, claims on counterparties in the countries directly affected by the two major crises registered serious declines (table 2). Total claims on the five troubled countries in Asia--Indonesia, Korea Korea (kôrē`ə, kə–), Korean Hanguk or Choson, region and historic country (85,049 sq mi/220,277 sq km), E Asia. , Malaysia Malaysia (məlā`zhə), independent federation (2005 est. pop. 23,953,000), 128,430 sq mi (332,633 sq km), Southeast Asia. The official capital and by far the largest city is Kuala Lumpur; Putrajaya is the adminstrative capital. , the Philippines Philippines officially Republic of the Philippines Island country, western Pacific Ocean, on an archipelago off the southeast coast of Asia. Area: 122,121 sq mi (316,294 sq km). Population (2005 est.): 84,191,000. , and Thailand--fell from $55 billion in June 1997 to $37 billion in June 1999, with claims on Indonesia Indonesia (ĭn'dənē`zhə), officially Republic of Indonesia, republic (2005 est. pop. 241,974,000), c.735,000 sq mi (1,903,650 sq km), SE Asia, in the Malay Archipelago. and Thailand Thailand (tī`lănd, –lənd), Thai Prathet Thai [land of the free], officially Kingdom of Thailand, constitutional monarchy (2005 est. pop. 65,444,000), 198,455 sq mi (514,000 sq km), Southeast Asia. both dropping more than 40 percent. Total claims on counterparties in Eastern Europe Eastern Europe The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991. fell 42 percent, mainly because of a decline in the value of claims on counterparties in Russia, which plummeted from a peak of $9 billion in September September: see month. 1997 to $940 million in June 1999. 2. Total claims of U.S. banks on emerging-market counterparties, by country, 1997:Q2-1999:Q2 Millions of dollars except as noted
1997, quarter ending
Region and country June 30 Sept. 30 Dec. 31
Africa 3,403 3,545 3,119
Algeria 300 332 146
Cameroon 0 0 0
Egypt 731 730 666
Ethiopia 1 0 1
Gabon 44 42 52
Ghana 147 173 228
Ivory Coast 247 227 274
Kenya 278 192 168
Malawi 1 1 1
Morocco 564 71 1 469
Nigeria 375 380 303
Senegal 116 130 115
Sudan 47 43 35
Tunisia 344 344 329
Zaire 6 4 6
Zambia 49 30 37
Zimbabwe 50 33 54
Other Africa 103 173 235
Asia-Pacific 86,691 85,623 87,032
China 3,437 3,565 3,488
India 5,136 5,036 5,069
Indonesia 7,015 8,711 9,024
Iran 1 29 0
Iraq 48 48 48
Israel 1,359 1,292 1,157
Jordan 166 193 168
Korea 23,397 22,939 25,270
Kuwait 474 490 737
Macao 83 113 108
Malaysia 7,536 6,952 6,700
Oman 145 297 245
Pakistan 2,062 2,075 2,123
Philippines 6,023 5,247 4,899
Qatar 121 139 169
Saudi Arabia 1,526 1,588 1,821
Sri Lanka 53 80 50
Syria 5 5 5
Taiwan 13,307 12,596 12,821
Thailand 10,845 10,357 9,350
United Arab Emirates 1,265 1,139 1,014
Other Asia-Pacific 2,687 2,732 2,766
Eastern Europe 12,589 15,983 11,880
Bulgaria 326 391 203
Czech Republic 1,399 1,575 1,330
Hungary 932 1,158 946
Poland 2,007 2,017 1,925
Romania 256 294 178
Russia 6,773 9,307 6,156
Slovakia 343 418 435
Other Eastern Europe 553 823 707
Latin America and
Caribbean 92,427 102,557 100,693
Argentina 17,018 20,422 20,033
Bolivia 202 184 262
Brazil 30,330 32,335 33,399
Chile 10,566 11,178 11,705
Colombia 4,813 4,909 5,024
Costa Rica 120 133 140
Dominican Republic 401 451 484
Ecuador 1,068 1,321 905
El Salvador 461 401 457
Guatemala 326 437 370
Honduras 118 136 152
Jamaica 222 249 218
Mexico 19,486 21,020 18,801
Nicaragua 17 21 32
Paraguay 353 421 461
Peru 1,289 1,611 2
Trinidad and Tobago 169 286 397
Uruguay 1,530 1,604 1,667
Venezuela 3,374 3,438 3,723
Other Latin America and
Caribbean 564 2,000 570
All 195,110 207,708 202,724
1998, quarter ending
Region and country Mar. 31 June 30 Sept. 30 Dec. 31
Africa 3,048 3,621 3,609 3,267
Algeria 130 270 270 307
Cameroon 0 0 4 7
Egypt 658 1,010 959 937
Ethiopia 0 0 1 2
Gabon 46 47 58 61
Ghana 205 204 48 56
Ivory Coast 303 268 323 236
Kenya 172 189 195 197
Malawi 1 1 6 3
Morocco 484 511 482 452
Nigeria 406 453 401 398
Senegal 100 97 97 89
Sudan 38 24 4 8
Tunisia 300 328 515 307
Zaire 5 11 32 12
Zambia 37 19 29 24
Zimbabwe 45 37 32 28
Other Africa 118 152 153 143
Asia-Pacific 78,304 73,044 70,042 69,004
China 2,978 2,967 2,644 2,340
India 5,221 5,196 5,518 5,427
Indonesia 6,673 5,040 4,370 4,222
Iran 0 1 3 0
Iraq 45 48 48 48
Israel 1,295 1,338 1,313 1,417
Jordan 160 157 167 205
Korea 22,192 20,202 18,211 17,335
Kuwait 631 675 662 533
Macao 107 103 99 94
Malaysia 5,954 5,290 5,373 5,919
Oman 238 285 269 291
Pakistan 2,037 1,808 1,768 1,504
Philippines 4,794 4,659 4,557 4,822
Qatar 147 168 185 148
Saudi Arabia 1,873 2,075 3,150 2,984
Sri Lanka 71 75 79 58
Syria 5 0 2 0
Taiwan 12,413 12,667 12,175 12,883
Thailand 8,072 6,874 6,616 5,567
United Arab Emirates 1,115 975 1,079 1,456
Other Asia-Pacific 2,283 2,441 1,754 1,751
Eastern Europe 14,152 14,299 9,136 8,517
Bulgaria 228 123 112 135
Czech Republic 1,535 1,648 1,890 1,719
Hungary 1,464 1,568 1,444 1,373
Poland 2,403 3,260 2,720 3,064
Romania 222 222 225 221
Russia 7,266 6,621 1,822 1,047
Slovakia 432 506 521 488
Other Eastern Europe 602 351 402 470
Latin America and
Caribbean 108,275 106,763 102,605 104,334
Argentina 22,571 22,869 22,405 23,260
Bolivia 276 356 562 569
Brazil 37,252 35,652 29,940 27,551
Chile 11,692 11,731 11,115 10,889
Colombia 4,389 5,198 4,832 5,078
Costa Rica 165 176 174 238
Dominican Republic 479 467 559 549
Ecuador 949 912 867 956
El Salvador 442 443 438 376
Guatemala 387 446 723 634
Honduras 169 194 181 199
Jamaica 236 253 246 256
Mexico 20,088 19,069 22,108 24,145
Nicaragua 15 28 35 32
Paraguay 472 438 445 484
Peru 2,053 2,146 1,912 2,121
Trinidad and Tobago 379 376 401 404
Uruguay 1,698 1,711 1,936 2,128
Venezuela 3,817 3,623 3,141 3,344
Other Latin America and
Caribbean 746 675 585 761
All 203,779 197,727 185,392 185,122
Percent
1999, quarter change,
ending June 1997
to
Region and country Mar. 31 June 30 June 1999
Africa 3,230 3,216 -5.5
Algeria 119 137 -54.3
Cameroon 8 9
Egypt 1,108 1,184 62.0
Ethiopia 1 2 100.0
Gabon 50 47 6.8
Ghana 76 82 -44.2
Ivory Coast 185 194 -21.5
Kenya 203 144 -48.2
Malawi 2 1 .0
Morocco 418 442 -21.6
Nigeria 511 412 9.9
Senegal 77 100 -13.8
Sudan 6 6 -87.2
Tunisia 261 301 -12.5
Zaire 9 8 33.3
Zambia 33 42 -14.3
Zimbabwe 6 7 -86.0
Other Africa 157 98 -4.9
Asia-Pacific 68,713 68,729 -20.7
China 2,453 3,340 -2.8
India 5,655 5,790 12.7
Indonesia 4,120 4,065 -42.1
Iran 0 0 ...
Iraq 48 49 2.1
Israel 1,960 1,846 35.8
Jordan 190 203 22.3
Korea 18,006 17,027 -27.2
Kuwait 570 541 14.1
Macao 89 94 13.3
Malaysia 6,457 6,456 -14.3
Oman 341 299 106.2
Pakistan 1,528 1,366 -33.8
Philippines 4,151 4,518 -25.0
Qatar 157 222 83.5
Saudi Arabia 2,831 2,567 68.2
Sri Lanka 59 68 28.3
Syria 0 1 -80.0
Taiwan 12,085 12,561 -5.6
Thailand 5,123 4,770 -56.0
United Arab Emirates 1,287 1,271 .5
Other Asia-Pacific 1,603 1,675 -37.7
Eastern Europe 7,536 7,321 -41.8
Bulgaria 117 164 -49.7
Czech Republic 1,573 1,383 -1.1
Hungary 1,399 1,368 46.8
Poland 2,465 2,475 23.3
Romania 168 131 -48.8
Russia 881 940 -86.1
Slovakia 465 481 40.2
Other Eastern Europe 468 379 -31.5
Latin America and
Caribbean 106,529 103,960 12.5
Argentina 24,792 23,975 40.9
Bolivia 559 574 184.2
Brazil 27,770 28,815 -5.0
Chile 10,771 8,614 -18.5
Colombia 4,957 4,651 -3.4
Costa Rica 239 274 128.3
Dominican Republic 469 531 32.4
Ecuador 732 656 -38.6
El Salvador 395 435 -5.6
Guatemala 509 483 48.2
Honduras 180 169 43.2
Jamaica 227 249 12.2
Mexico 26,079 25,227 29.5
Nicaragua 22 15 -11.8
Paraguay 552 456 29.2
Peru 2,126 2,319 79.9
Trinidad and Tobago 275 329 94.7
Uruguay 1,959 1,953 27.6
Venezuela 3,188 3,325 -1.5
Other Latin America and
Caribbean 728 910 61.3
All 186,008 183,226 -6.1
... Not applicable. By contrast, total claims on Latin Lat·in n. 1. a. The Indo-European language of the ancient Latins and Romans and the most important cultural language of western Europe until the end of the 17th century. b. American American, river, 30 mi (48 km) long, rising in N central Calif. in the Sierra Nevada and flowing SW into the Sacramento River at Sacramento. The discovery of gold at Sutter's Mill (see Sutter, John Augustus) along the river in 1848 led to the California gold rush of counterparties rose 13 percent over the period, driven by strong increases in Argentina Argentina (ärjəntē`nə, Span. ärhāntē`nä), officially Argentine Republic, republic (2005 est. pop. 39,538,000), 1,072,157 sq mi (2,776,889 sq km), S South America. and Mexico Mexico, city, Mexico Mexico or Mexico City, Span. Ciudad de México (Méjico), city (1990 pop. 8,236,960; 1991 met. area est. 20,899,000), central Mexico, capital and largest city of Mexico. . Interestingly, while Latin American financial markets experienced considerable volatility over the period, U.S. banks did not withdraw from that region. For several decades, U.S. banks have maintained a sizable siz·a·ble also size·a·ble adj. Of considerable size; fairly large. siz  a·ble·ness n. presence in Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. , and two years of crisis
in other emerging markets appears to have solidified so·lid·i·fy v. so·lid·i·fied, so·lid·i·fy·ing, so·lid·i·fies v.tr. 1. To make solid, compact, or hard. 2. To make strong or united. v.intr. that position. Thus, during the recent crisis period, U.S. banks did not retreat from emerging markets across the board, but only from certain regions; as a result, the relative share of claims among regions shifted (table 3). 3. Distribution of total claims of U.S. banks on emerging-market counterparties, by region, 1997:Q2-1999:Q2 Percent
1997, quarter ending
Region June 30 Sept. 30 Dec. 31
Total 100 100 100
Africa 1.7 1.7 1.5
Asia-Pacific 44.4 41.2 42.9
Troubled Asia(1) 28.1 26.1 27.3
Eastern Europe 6.5 7.7 5.9
Russia 3.5 4.5 3.0
Latin America and Caribbean 47.4 49.4 49.7
1998, quarter ending
Region Mar. 31 June 30 Sept. 30 Dec. 31
Total 100 100 100 100
Africa 1.5 1.8 1.9 1.8
Asia-Pacific 38.4 36.9 37.8 37.3
Troubled Asia(1) 23.4 21.3 21.1 20.5
Eastern Europe 6.9 7.2 4.9 4.6
Russia 3.6 3.3 1.0 .6
Latin America and Caribbean 53.1 54.0 55.3 56.4
1999, quarter
ending
Region Mar. 31 June 30
Total 100 100
Africa 1.7 1.8
Asia-Pacific 36.9 37.5
Troubled Asia(1) 20.4 20.1
Eastern Europe 4.1 4.0
Russia .5 .5
Latin America and Caribbean 57.3 56.7
NOTE. See notes to table 1. In this and the following tables, percentage distributions may not sum to 100 because of rounding. (1.) The troubled Asian countries Noun 1. Asian country - any one of the nations occupying the Asian continent Asian nation country, land, state - the territory occupied by a nation; "he returned to the land of his birth"; "he visited several European countries" are Indonesia, Korea, Malaysia, the Philippines, and Thailand. Cross-Border versus Local Claims Over the June 1997-June 1999 period, cross-border claims on emerging-market counterparties fell markedly, while local claims rose somewhat. Cross-border claims fell 18 percent as a result of declines in Asia (36 percent) and Eastern Europe (60 percent). Unlike Asia and Eastern Europe, cross-border claims on Latin American counterparties rose slightly (table 4,). 4. Cross-border claims to U.S. banks on emerging-market counterparties, by region, 1997:Q2-1999:Q2 Millions of dollars except as noted
Region 1997, quarter ending
June 30 Sept. 30 Dec. 31
Total 107,674 119,081 115,834
Africa 1,661 1,979 1,543
Asia-Pacific 43,092 45,783 47,839
Troubled Asia(1) 30,018 32,803 34,658
Eastern Europe 8,916 11,494 7,664
Russia 5,359 7,202 4,434
Latin America and Caribbean 54,005 59,825 58,788
Region 1998, quarter ending
Mar. 31 June 30 Sept. 30 Dec. 31
Total 107,928 105,239 92,461 91,547
Africa 1,413 1,719 1,369 1,411
Asia-Pacific 37,145 33,701 30,872 28,480
Troubled Asia(1) 25,555 21,877 18,736 16,757
Eastern Europe 9,208 9,562 5,233 4,822
Russia 5,204 5,031 1,624 909
Latin America and Caribbean 60,162 60,257 54,987 56,834
Percent
1999, quarter change,
Region ending June 1997
to
Mar. 31 June 30 June 1999
Total 89,853 88,054 -18.2
Africa 1,210 1,193 -28.2
Asia-Pacific 28,516 27,651 -35.8
Troubled Asia(1) 16,367 14,758 -50.8
Eastern Europe 3,984 3,580 -59.8
Russia 737 699 -87.0
Latin America and Caribbean 56.14 55,630 3.0
NOTE. See notes to table 1. (1.) See note 1 to table 3. In the aggregate, local claims in emerging-market countries grew 9 percent over the period (table 5). Although local claims in Asia declined 6 percent overall, only in Thailand did they fall consistently over the period; in Korea, local claims actually re, se 19 percent. The overall decrease in Asia was offset by strong increases in Latin America, led by Argentina (72 percent) and Mexico (96 percent). 5. Local claims of U.S. banks on emerging-market counterparties, by region, 1997:Q2-1999:Q2
1997, quarter ending
Region June 30 Sept. 30 Dec. 31
Total 87,436 88,627 86,890
Africa 1,742 1,566 1,576
Asia-Pacific 43,599 39,840 39,193
Troubled Asia(1) 24,798 21,403 20,585
Eastern Europe 3,673 4,489 4,216
Russia 1,414 2,105 1,722
Latin America and Caribbean 38,422 42,732 41,905
1998, quarter ending
Region Mar. 31 June 30 Sept. 30 Dec. 31
Total 95,851 92,488 92,931 93,575
Africa 1,635 1,902 2,240 1,856
Asia-Pacific 41,159 39,343 39,170 40,524
Troubled Asia(1) 22,130 20,188 20,391 21,108
Eastern Europe 4,944 4,737 3,903 3,695
Russia 2,062 1,590 198 138
Latin America and Caribbean 48,113 46,506 47,618 47,500
Percent
1999, quarter change,
ending June 1997
to
Region Mar. 31 June 30 June 1999
Total 96,155 95,172 8.8
Africa 2,020 2,023 16.1
Asia-Pacific 40,197 41,078 -5.8
Troubled Asia(1) 21,490 22,078 -11.0
Eastern Europe 3,552 3,741 1.9
Russia 144 241 -83.0
Latin America and Caribbean 50,386 48,330 25.8
NOTE. See notes to table 1. (1.) See note 1 to table 3. One explanation for the disparity dis·par·i·ty n. pl. dis·par·i·ties 1. The condition or fact of being unequal, as in age, rank, or degree; difference: "narrow the economic disparities among regions and industries" between movements in cross-border and local claims is that U.S. banks have made significant efforts to establish a local presence in many emerging-market countries, in part because of expections of higher profit margins from banks' local business.(7) But establishing a profitable local business usually requires a long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. commitment to local markets. As a result, banks have an incentive to maintain local market share and stand by local counterparties in downturns. In addition, severe exchange-rate depreciation often accompanies emerging-market crises, as occurred in Asia and Russia, so that dollar-denominated claims (usually in the form of cross-border claims) become more expensive for emerging-market counterparties to repay, given the decline in local currency relative to the U.S. dollar. As a result, U.S. banks may have been forced to write off more of these cross-border claims as losses, may have decided against extending new claims, or may have done both. Thus, supervisors have an interest in monitoring the growth of cross-border versus local claims because in a crisis, these two types of claims might be affected differently. Revaluation Gains on Foreign Exchange and Derivatives derivatives In finance, contracts whose value is derived from another asset, which can include stocks, bonds, currencies, interest rates, commodities, and related indexes. Purchasers of derivatives are essentially wagering on the future performance of that asset. Contracts Over the past decade, off-balance-sheet Off balance sheet usually means an asset or debt or financing activity not on the company's balance sheet. It could involve a lease or a separate subsidiary or a contingent liability such as a letter of credit. transactions, such as derivatives, have played an increasingly larger role in U.S. banks' overall business. The value of derivatives contracts is based on--or "derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. " from--the value of other financial or economic variables, such as an exchange rate or a stock market index. When these underlying variables exhibit strong swings, the value of derivatives contracts can be subject to similar or even more volatile swings, depending on the type of contract. As the Asian crisis began to unfold unfold - inline in the second half of 1997, U.S. banks' derivatives contracts with Asian counterparties rose in value, mostly because of sharp declines in underlying variables in Asian economies.(8) Revaluation gains on foreign exchange and derivatives contracts during 1997-99 exhibited large swings in value (table 6). For example, aggregate revaluation gains jumped initially from $5 billion in June 1997 to $17 billion in December December: see month. 1997, but fell back to initial levels by June 1999. In troubled Asia, these value swings were particularly pronounced: Year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. 1997 levels were nearly five times higher than levels just six months earlier. At the height of the Asian crisis, claims stemming stemming - stemmer from off-balance-sheet contracts represented 22 percent of total claims on counterparties in troubled Asian countries but by June 1999 had declined to only 4 percent of total claims (chart 1). The drop occurred mostly for three reasons: The underlying market factors recovered to some extent; many of these contracts were short in duration; and U.S. banks wrote off some of the contracts for which payment seemed unlikely. Similar volatility in revaluation gains occurred in Eastern Europe, although quarterly swings were not as extreme as those in Asia.(9) Revaluation gains as a percentage of total claims reached 10 percent for claims in Eastern Europe in September 1998, the peak of the Russian Russian associated in some way with Russia. Russian blue a breed of cats with short, dense, silver-tipped blue-colored coat and vivid green eyes. crisis. [Chart 1 ILLUSTRATION OMITTED] 6. Revaluation gains of U.S. banks on foreign exchange and derivatives contracts with emerging-market counterparties, by region, 19997:Q2-1999:Q2 Millions of dollars except as noted
1997, quarter ending
June 30 Sept. 30 Dec. 31
Total 5,377 11,712 16,681
Africa 261 292 226
Asia-Pacific 3,519 7,794 13,551
Troubled Asia(1) 2,717 6,983 12,306
Eastern Europe 346 1,282 492
Russia 75 898 71
Latin America and Caribbean 1,251 2,344 2,412
1998, quarter ending
Mar. 31 June 30 Sept. 30 Dec. 31
Total
12,190 11,406 11,312 8,993
Africa
179 339 195 198
Asia-Pacific
Troubled Asia(1) 8,996 7,846 6,869 5,816
7,775 6,457 5,237 4,167
Eastern Europe
Russia 597 709 965 601
144 203 157 74
Latin America and Caribbean
2,418 2,512 3,283 2,378
Percent
1999, quarter change,
ending June 1997
to
Mar. 31 June 30 June 1999
Total 8,560 5,480 1.9
Africa 20 49 -81.2
Asia-Pacific 4,769 2,616 -25.7
Troubled Asia(1) 3,394 1,593 -41.4
Eastern Europe 387 207 -40.2
Russia 14 0 -100.0
Latin America and Caribbean 3,384 2,608 108.5
NOTE. See notes to table 1. See box "Types of Claims on Emerging-Market Counterparties," for a discussion of revaluation gains. (1.) See note 1 to table 3. Revaluation gains on contracts with counterparties in Latin America doubled over the period--to neatly neat 1 adj. neat·er, neat·est 1. Orderly and clean; tidy. 2. Orderly and precise in procedure; systematic. 3. $3 billion. But peak levels were only one-quarter of the peak levels reached in Asia, reflecting in part the relatively less extreme movements in economic variables in Latin America. In addition, U.S. banks were not as likely to engage in less-traditional, off-balance-sheet activities (such as derivatives contracts) with Latin American counterparties as they were with counterparties in other regions.(10) Large market declines during the Asian crisis generated rapid increases in counterparty credit risk for U.S. banks. Essentially, U.S. banks were seeing the market value of their contracts increase, but, in certain cases, so much so that the ability of some Asian counterparties to make payments, given their large losing positions in some contracts, came into question. These contracts are generally marked to market on a daily basis, so that losses create additional pressure on foreign counterparties in the midst Adv. 1. in the midst - the middle or central part or point; "in the midst of the forest"; "could he walk out in the midst of his piece?" midmost of a crisis. Banking supervisors view the increased importance of revaluation gains during the past several years as evidence of change in the nature of country exposure. The increased use of, and broader marked-to-market Marked-to-market An arrangement whereby the profits or losses on a futures contract are settled each day. reporting of, derivatives contracts has highlighted the way that market risk and counterparty credit risk interact Interact can refer to:
Fall of Interact While the Game Boy device was first released, Interact acquired the rights to sell Datel's Action Replay . In particular, counterparty credit risk can be negatively correlated cor·re·late v. cor·re·lat·ed, cor·re·lat·ing, cor·re·lates v.tr. 1. To put or bring into causal, complementary, parallel, or reciprocal relation. 2. with market risk, so that a positive market move--from a U.S. bank's perspective--could quickly increase counterparty credit risk. One of the important lessons from the Asian crisis is that a U.S. bank could have completely hedged hedge n. 1. A row of closely planted shrubs or low-growing trees forming a fence or boundary. 2. A line of people or objects forming a barrier: a hedge of spectators along the sidewalk. its market risk and still faced significant counterparty credit risk if a change in market prices affected the ability of the foreign counterparty to pay. In the Russian crisis, some U.S. banks' ability to hedge local currency exposure broke down because Russian banks--suffering heavy losses from the ruble depreciation--were unable or unwilling to make payments owed to U.S. banks. The fast-moving nature of derivatives markets The derivatives markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. means that exposure can change more quickly than in the past. Thus banks must rely on even better risk-management techniques to ensure that they can manage latent Hidden; concealed; that which does not appear upon the face of an item. For example, a latent defect in the title to a parcel of real property is one that is not discoverable by an inspection of the title made with ordinary care. counterparty credit risk that might arise rapidly. In turn, supervisors must caution banks when risk-management techniques do not appear to be fully capturing the risks generated by derivatives contracts with emerging-market counterparties. The Asian and Russian crises provided lessons for internationally active U.S. banks, and to some extent the banks have been able to apply what they learned. For example, a number of banks are integrating their market risk and counterparty credit risk functions to better manage cases in which one risk arises from the other. In addition, more institutions are stress testing Determining the durability of a system by pushing it to its limits. Stress testing a network is performed by transmitting excessive numbers of packets or attempting to break in illegally. their emerging-market portfolios--in effect "shocking" their current portfolios with a range of possible outcomes.(11) In the Asian crisis, more thorough stress testing before the events in 1997 might have provided the banks with some warning about the negative effects of severe exchange-rate depreciations. Distribution by Counterparty Sector Starting in June 1997, cross-border claims on counterparties in all emerging-market countries were distributed evenly among banks, the public sector, and nonbank non·bank adj. Of, relating to, or done by a business or an institution that is not a bank but performs similar services. private counterparties.(12) By June 1999, the distribution had shifted away from banks and toward the nonbank private sector. Although claims on banks represented 33 percent of all cross-border claims in June 1997, the share had fallen to 25 percent by June 1999. At the same time, the share of claims on the nonbank sector rose from 36 percent to 42 percent. This trend reflects to some extent the difficulties experienced by certain emerging-market banks over the period. The shift in the distribution of claims among counterparty sectors varied across regions. Much of the shift in aggregate numbers occurred because of changes in cross-border claims on Asian counterparties. In June 1997, banks represented 50 percent of the total for Asia, the nonbank private sector 41 percent, and the public sector 9 percent. By June 1999, the distribution in Asia had shifted toward the public sector and away from banks (table 7). A large number of Asian banks were hindered in their ability to make good on liabilities because of their financial difficulties during the Asian crisis. As a result, U.S. banks wrote off some of their claims on Asian counterparties or at least did not renew them once payment was received. A second factor affecting the aggregate sectoral distribution was the relative increase in claims on Latin American counterparties (as discussed previously). The cross-border claims on Latin American counterparties were distributed more between the public sector and nonbank private sector, so that this region's increased share of the aggregate contributed to the overall sectoral pattern over the two years. In Russia, the precipitous fall in cross-border claims was driven largely by a 92 percent decline in claims on the public sector, representing a default by the Russian government on its foreign-currency bonds in August and September 1998. 7. Distribution of cross-border claims of U.S. banks on emerging-market counterparties, by region and counterparty sector, 1997:Q2-1999:Q2
Region and 1997, quarter ending
counterparty sector
June 30 Sept. 30 Dec. 31
Africa
Banks 20.0 13.6 16.7
Public sector 72.7 67.6 69.1
Nonbank private sector 7.2 18.7 14.3
Asia Pacific
Banks 49.9 49.9 48.5
Public sector 8.9 10.2 11.1
Nonbank private sector 41.2 39.9 40.4
Eastern Europe
Banks 11.9 9.4 13.3
Public sector 77.6 82.1 72.8
Nonbank private sector 10.6 8.4 14.0
Latin America and Caribbean
Banks 22.2 21.4 24.7
Public sector 41.4 40.6 35.1
Nonbank private, sector 36.5 38.0 40.2
Region and 1998, quarter ending
counterparty sector
Mar. 31 June 30 Sept. 30 Dec. 31
Africa
Banks 19.3 18.5 20.7 25.8
Public sector 69.2 65.7 64.0 58.7
Nonbank private sector 11.5 15.8 15.3 15.5
Asia Pacific
Banks 42.5 42.8 39.1 40.4
Public sector 13.8 15.8 19.0 19.7
Nonbank private sector 43.6 41.4 41.9 40.0
Eastern Europe
Banks 13.8 17.1 23.1 22.4
Public sector 72.6 68.4 52.5 49.9
Nonbank private sector 13.7 14.5 24.4 27.7
Latin America
and Caribbean
Banks 25.1 26.3 26.3 21.2
Public sector 32.8 30.5 26.7 33.6
Nonbank private, sector 42.2 43.2 47.0 45.3
Region and 1999, quarter ending
counterparty sector
Mar. 31 June 30
Africa
Banks 25.1 26.2
Public sector 55.3 52.3
Nonbank private sector 19.6 21.5
Asia Pacific
Banks 37.6 35.2
Public sector 19.5 22.8
Nonbank private sector 42.9 42.0
Eastern Europe
Banks 24.9 17.6
Public sector 48.8 54.8
Nonbank private sector 26.3 27.7
Latin America
and Caribbean
Banks 20.4 20.3
Public sector 34.3 36.5
Nonbank private, sector 45.3 43.2
NOTE. See notes to table 1. Distribution by Maturity On the whole, the maturity distribution of crossborder claims on counterparties in emerging-market countries indicates the continued prevalence prevalence /prev·a·lence/ (prev´ah-lins) the number of cases of a specific disease present in a given population at a certain time. prev·a·lence n. of short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. credits.(13) For example, the share of cross-border claims with a maturity of one year or less held steady over the period, accounting for two-thirds of crossborder claims. In June 1997, short-term claims on Asian counterparties accounted for about 75 percent of total cross-border claims on counterparties in that region, with the share falling to 65 percent after the crisis. At the beginning of the period, U.S. banks held many short-term claims on Asian banks but, in some instances, did not roll over extensions of credit during and immediately after the crisis. In Latin America, the maturity distribution shifted slightly toward the short term, but the level of short-term claims remained below that in emerging Asia. The lower percentage of short-term claims in Latin America may have resulted from a greater share of loans to the public sector, which generally have a longer maturity. The share of short-term claims in cross-border claims on Eastern Europe fell from a peak of 78 percent in June 1998 to 62 percent in June 1999. By this time, most of the short-term speculative Speculative Securities that involve a high level of risk. speculative Of or relating to an asset or a group of assets with uncertain returns. The greater the degree of uncertainty the more speculative the asset. positions in Russian government debt had been closed out. In general, the prevalence of short-term claims indicates that U.S. banks were cautious about extending maturities of claims on emerging-market counterparties in order to have the ability to reduce exposure quickly if a crisis developed. Initial Claims and Adjustments for Guarantees As noted previously, U.S. banks report initial crossborder claims before adjustments for guarantees. Comparing initial claims and adjusted claims shows the extent to which the ultimate risk on those claims is being borne by counterparties outside the country of the initial borrower BORROWER, contracts. He to whom a thing is lent at his request. 2. The contract of loan confers rights, and imposes duties on the borrower' 1. In general, he has the right to use the thing borrowed, during the time and for the purpose intended between the .(14) Subtracting claims adjusted for guarantees from initial claims provides a figure for net credit guarantees received (if positive) or net credit guarantees extended by counterparties in those countries (if negative) on initial claims held by U.S. banks. In the aggregate, for claims initiated by U.S. banks, counterparties in emerging-market countries were net receivers of guarantees over the period, meaning that they received more guarantees than they offered. In addition, the percentage of initial claims that received guarantees rose from 10 percent in 1997 to 18 percent in 1999. Not surprisingly, these data indicate that initial claims on emerging-market counterparties held by U.S. banks were sometimes protected by guarantees from counterparties in developed countries or from international development banks. In fact, U.S. banks may have sought greater protection on those initial claims, given the crises in emerging markets. Interestingly, in 1997 counterparties in emerging Asia were net granters of credit guarantees on the initial claims of U.S. banks because of roughly $3 billion in guarantees extended by Korean Korean, language of uncertain ancestry. It is thought by some scholars to be akin to Japanese, by others to be a member of the Altaic subfamily of the Ural-Altaic family of languages (see Uralic and Altaic languages), and by still others to be unrelated to any known counterparties, particularly large Korean conglomerates A Conglomerate is the term used to describe a large corporation that consists of diverse divisions. Conglomerate companies tend to be large multinational corporations with operations in multiple regions of the world. , or chaebols.(15) That trend in Asia reversed as Korean chaebols encountered financial difficulties, so that by 1998 counterparties in Asia, as a group, were net receivers of credit guarantees on initial claims. Regarding other regions, Latin American counterparties were net receivers of credit guarantees over the entire period, with the amounts ranging between 15 percent and 18 percent of initial claims. The most drastic increase occurred in Eastern Europe, where by June 1999, nearly half of all initial claims were guaranteed.(16) Claims in Relation to Total Assets and to Tier 1 Capital Tier 1 Capital A term used to describe the capital adequacy of a bank. Tier I capital is core capital, this includes equity capital and disclosed reserves. Notes: Equity capital includes instruments that can't be redeemed at the option of the holder. Examined in isolation, the outstanding claims on emerging-market counterparties held by U.S. banks give only a partial view of the relative importance of emerging-market activity for banks. For a more complete picture, supervisors must examine claims as a percentage of assets and as a percentage of capital. Claims as a percentage of capital, in particular, provide supervisors with an initial assessment of U.S. banks' ability to weather the potentially volatile nature of emerging markets. Over the two-year period, emerging-market claims as a percentage of U.S. bank assets (for those banks reporting country exposure data) fell from 6.7 percent of total assets to 4.5 percent, a result more of the overall increase in total assets than of the decline in claims (table 8). For example, even though total claims on counterparties in Latin America registered double-digit dou·ble-dig·it adj. Being between 10 and 99 percent: double-digit inflation. growth, that growth rate was outpaced by that of the reporting banks' total assets, thus driving the percentage of claims-to-assets for that region lower. The decline in this percentage for Asian counterparties, for which claims fell, was even more dramatic. 8. Total claims of U.S. banks on emerging-market counterparties as a percentage of reporting bank's assets and reporting bank' tier 1 capita, 1997:Q2-1992:Q2
1997, quarter ending
Region
June 30 Sept. 30 Dec. 31
Percentage of reporting
banks' total assets
Total emerging-market claims 6.7 6.8 6.2
Africa .1 .1 .1
Asia-Pacific 3.0 2.8 2.7
Troubled Asia(1) 1.9 1.8 1.7
Eastern Europe .4 .5 .4
Russia .2 .3 .2
Latin America and Caribbean 3.2 3.3 3.1
Percentage of reporting
banks' tier 1 capital
Total emerging-market claims 102.1 104.6 97.0
Africa 1.8 1.8 1.5
Asia-Pacific 45.4 43.1 41.6
Troubled Asia 28.7 27.3 26.4
Eastern Europe 6.6 8.0 5.7
Russia 3.5 4.7 29.0
Latin America and Caribbean 48.4 51.6 48.2
1998, quarter ending
Region
Mar. 31 June 30 Sept. 30 Dec. 31
Percentage of reporting
banks' total assets
Total emerging-market
claims 6.0 5.8 5.3 4.8
Africa .1 .1 .1 .1
Asia-Pacific 2.3 2.1 2.0 1.8
Troubled Asia(1) 1.4 1.2 1.1 1.0
Eastern Europe .4 .4 .3 .2
Russia .2 .2 .1 .0
Latin America and
Caribbean 3.2 3.1 2.9 2.7
Percentage of reporting
banks' tier 1 capital
Total emerging-market
claims 93.9 88.5 80.3 75.7
Africa 1.4 1.6 1.6 1.3
Asia-Pacific 36.1 32.7 30.3 28.2
Troubled Asia 22.0 18.8 17.0 15.5
Eastern Europe 6.5 6.4 4.0 3.5
Russia 3.3 3.0 .8 .4
Latin America and
Caribbean 49.9 47.8 44.5 42.7
1999, quarter ending
Region
Mar. 31 June 30
Percentage of reporting
banks' total assets
Total emerging-market
claims 4.8 4.5
Africa .1 .1
Asia-Pacific 1.8 1.7
Troubled Asia(1) 1.0 .9
Eastern Europe .2 .2
Russia .0 .0
Latin America and
Caribbean 2.7 2.6
Percentage of reporting
banks' tier 1 capital
Total emerging-market
claims 73.2 72.3
Africa 1.3 1.3
Asia-Pacific 27.0 27.1
Troubled Asia 14.9 14.5
Eastern Europe 3.0 2.9
Russia .3 .4
Latin America and
Caribbean 41.9 41.0
NOTE: For a definition of tier 1 capital, see text not 17. 1. See note 1 to table 3. Total claims as a percentage of tier 1 capital peaked in September 1997 at 105 percent (table 8).(17) However, by June 1999 that percentage had fallen to 72 percent, a decline stemming mostly from a significant increase in tier 1 capital (chart 2). Total claims on Latin American counterparties as a percentage of tier 1 capital fell slightly over the period, but never below 41 percent. In contrast, total claims on Asian counterparties fell from 45 percent of tier 1 capital to 27 percent. Total claims on Eastern European European emanating from or pertaining to Europe. European bat lyssavirus see lyssavirus. European beech tree fagussylvaticus. European blastomycosis see cryptococcosis. counterparties peaked at 8 percent of tier 1 capital about one year before the onset on·set n. A beginning; a start, as of a cold. of the crisis in Russia. Generally, internationally active U.S. banks reduced their exposure to emerging markets while bolstering their capital. [Chart 2 ILLUSTRATION OMITTED] As discussed earlier, supervisors cannot assess country risk by simply looking at the absolute levels of claims. Claims-to-capital figures serve as a preliminary indicator Indicator Anything used to predict future financial or economic trends. Notes: In the context of technical analysis, an indicator is a mathematical calculation based on a securities price and/or volume. The result is used to predict future prices. of how much cushion Cushion In the context of project financing, the extra amount of net cash flow remaining after expected debt service. cushion See call protection. U.S. banks might have available to absorb absorb To offset sell orders or a new security offering with buy orders. potential losses in their emerging-market portfolios. When viewed at the level of the individual institution, these figures allow supervisors to recognize those institutions with high exposure relative to capital. Banks identified as having elevated claims-to-capital ratios receive greater supervisory scrutiny in the area of country risk. For example, supervisors would focus on a bank with a claims-to-capital ratio of more than 100 percent, even if the amount of claims was small. But claims-to-capital ratios, on their own, might not always reflect the underlying riskiness risk·y adj. risk·i·er, risk·i·est Accompanied by or involving risk or danger; hazardous: "Anything that promises to pay too much can't help being risky" of the claims or the ability of the banks to manage that risk, so supervisors conduct assessments of the risk-management systems of individual banks to achieve a more accurate picture of how country risk is affecting those institutions. For the most part, U.S. banks did not suffer large losses stemming directly from emerging-market crises in recent years. When banks did suffer losses, they were generally able to offset them with earnings from other business segments.(18) In fact, the ability of U.S. banks to charge their losses in Asia and Russia against income--rather than drawing down their capital--indicates both their high levels of overall profitability during this period and their low levels of exposure. It is possible, however, that a similar period of international crisis coinciding co·in·cide intr.v. co·in·cid·ed, co·in·cid·ing, co·in·cides 1. To occupy the same relative position or the same area in space. 2. To happen at the same time or during the same period. 3. with a domestic downturn Downturn The transition point between a rising, expanding economy to a falling, contracting one. downturn A decline in security prices or economic activity following a period of rising or stable prices or activity. in the United States might have put pressure on U.S. banks' capital positions. Concentrations among Reporting Banks The discussion thus far has centered on U.S. banks in the aggregate. However, because most of the claims on emerging-market counterparties are concentrated at a small number of U.S. banks, a smaller capital base is available to absorb their potential losses. Serious country exposure difficulties at just a few of these banks would have the potential to trigger (1) A mechanism that initiates an action when an event occurs such as reaching a certain time or date or upon receiving some type of input. A trigger generally causes a program routine to be executed. broader problems within the entire U.S. banking system. In general, supervisors focus on the riskiness of any U.S. bank's foreign claims but are particularly sensitive to the implications of exposure at large banks. The U.S. banks that report in the "Money Center Banks Money center banks Banks that raise most of their funds from the domestic and international money markets , relying less on depositors for funds. " category on the Country Exposure Report generally represent those with the largest claims on counterparties in emerging-market countries.(19) Over the 1997-99 period, money center banks consistently accounted for about 80 percent of total claims on counterparties in emerging markets and more than 40 percent of the total assets of all U.S. banks. For the money center banks, the share of their emerging-market claims in total assets fell from 13 percent in 1997 to 6 percent in 1999 (table 9). Commensurate com·men·su·rate adj. 1. Of the same size, extent, or duration as another. 2. Corresponding in size or degree; proportionate: a salary commensurate with my performance. 3. with that decline was a decrease in emerging-market claims as a percentage of tier 1 capital, from a peak of 232 percent in 1997 to 113 percent in 1999. Notably, the decrease in this percentage stemmed stemmed adj. 1. Having the stems removed. 2. Provided with a stem or a specific type of stem. Often used in combination: stemmed goblets; long-stemmed roses. largely from an 88 percent increase in tier 1 capital. 9. Total claims of U.S. money center banks on of their total assets and tier 1 capital 1997:Q2-1999:Q2
1997, quarter ending
Item
June 30 Sept. 30 Dec. 31
Total emerging-market claims
as a percentage of total assets 13.1 13.4 12.3
Total emerging-market claims
as a percentage of tier 1 capital 225.7 232.2 205.9
1998, quarter ending
Item
Mar. 31 June 30 Sept. 30 Dec. 31
Total emerging-market
claims
as a percentage of
total assets 11.9 11.1 8.4 7.2
Total emerging-market
claims as a percentage
of tier 1 capital 204.4 190.0 144.4 121.8
1999, quarter ending
Item
Mar. 31 June 30
Total emerging-market
claims as a percentage
of total assets 6.9 6.3
Total emerging-market
claims as a percentage
of tier 1 capital 113.0 112.6
NOTE: For a definition of tier 1 capital, see text note 17. Analyzing the claims-to-capital ratio for money center banks is especially important, given the concentration of claims on emerging-market counterparties at these banks. Whenever claims-to-capital ratios are identified as particularly high, supervisors may conduct a special analysis of the selected bank's ability to manage country risk in the context of broader risk-management functions. EMERGING-MARKET EXPOSURE OF BANKS FROM OTHER DEVELOPED COUNTRIES Briefly comparing U.S. banks' exposure to emerging-market countries over 1997-99 with the exposure of banks from other developed countries provides some overall context for assessing the relative role played by U.S. banks. U.S. banks, along with banks from other developed countries, report their country exposure data to the Bank for International Settlements (BIS), which then compiles data for all of its members and reports the consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: results.(20) From June 1997 to June 1999, BIS reporting bank claims on emerging-market counterparties fell in the aggregate from $829 billion to $782 billion (table 10). Claims on Asian counterparties fell 20 percent, while claims on Latin American and African counterparties rose. By June 1999, claims on Asia still represented the largest share of total emerging-market claims, but by a smaller margin because of an increase in the share of claims on Latin American counterparties. Compared with U.S. bank data on emerging-market claims, the shifts for Asia and Latin America were relatively similar; however, claims on Eastern European counterparties fell only slightly for all BIS reporting banks, and claims on African counterparties increased almost one-third. 10. Distribution of total claims of BIS reporting banks on emerging-market counterparties, by region, 1997:Q2-1999:Q2
1997, quarter ending
Region
June 30 Dec. 31
Total claims on
emerging-market
counterparties (millions
of dollars)
All emerging-market countries 828,567 862,147
Africa 34,179 35,637
Asia-Pacific 430,366 423,683
Eastern Europe 116,188 122,445
Latin America and Caribbean 247,834 280,382
Distribution of
cross-border
claims among
emerging-market
regions (percent)
All emerging-market countries 100 100
Africa 4.1 4.1
Asia-Pacific 51.9 49.1
Eastern Europe 14.0 14.2
Latin America and Caribbean 29.9 32.5
1998, quarter ending
June 30 Dec. 31
Total claims on
emerging-market
counterparties
(millions of dollars)
All emerging-market countries 835,606 798,184
Africa 41,536 41,911
Asia-Pacific 371,489 351,268
Eastern Europe 131,561 121,619
Latin America and Caribbean 291,020 283,386
Distribution of cross-border
claims among emerging-market
regions (percent)
All emerging-market countries 100 100
Africa 5.0 5.3
Asia-Pacific 44.5 44.0
Eastern Europe 15.7 15.2
Latin America and Caribbean 34.8 35.5
1999, Percent
quarter ending change,
June 30 June 1997
to
June 1999
Total claims on
emerging-market
counterparties
(millions of dollars)
All emerging-market countries 781,971 -5.6
Africa 45,028 31.7
Asia-Pacific 344,237 -20.0
Eastern Europe 110,988 -4.5
Latin America and Caribbean 281,718 13.7
Distribution of cross-border
claims among emerging-market
regions (percent)
All emerging-market countries 100 ...
Africa 5.8 ...
Asia-Pacific 44.0 ...
Eastern Europe 14.2 ...
Latin America and Caribbean 36.0 ...
... Not applicable BIS Reporting Bank Claims by Country of Origin In June 1997, claims held by U.S. banks accounted for 13 percent of the cross-border claims on emerging-market counterparties held by all BIS reporting banks (table 11). Banks from Japan had the highest share, with Germany Germany (jûr`mənē), Ger. Deutschland, officially Federal Republic of Germany, republic (2005 est. pop. 82,431,000), 137,699 sq mi (356,733 sq km). a close second. Over the two-year period, the share held by U.S. banks fell slightly. The share of Japan's banks dropped significantly. Japanese Japanese (jăp'ənēz`), language of uncertain origin that is spoken by more than 125 million people, most of whom live in Japan. There are also many speakers of Japanese in the Ryukyu Islands, Korea, Taiwan, parts of the United States, and banks were facing considerable domestic financial difficulties over this period, which contributed to their retrenchment re·trench·ment n. The cutting away of superfluous tissue. in emerging markets. Most European reporting banks increased their relative positions. 11. Distributing of cross-border claims of BIS reporting banks on emerging-market counterparties, by lending country, 1997:Q2-1992:Q2
1998, quarter ending
Country
June 30 Dec. 31
Total cross-border claims on
emerging-market counterparties
(millions of dollars)
All reporting banks 828,567 862,147
United States 109,462 107,770
Japan 146,092 137,563
Germany 139,626 147,911
France 82,824 95,683
United Kingdom 55,260 63,607
Other Europe 130,830 149,710
All others 164,473 159,904
Distribution of cross-
border claims
among reporting
banks from BIS-member
countries (percent)
All reporting banks 100 100
United States 13.2 12.5
Japan 17.6 16.0
Germany 16.9 17.2
France 10.0 11.1
United Kingdom 6.7 7.4
Other Europe 15.8 17.4
All others 19.9 18.5
1998, quarter ending
Country
June 30 Dec. 31
Total cross-border claims on
emerging-market counterparties
(millions of dollars)
All reporting banks 835,606 798,184
United States 103,685 94,299
Japan 120,797 108,643
Germany 147,484 154,347
France 92,090 87,750
United Kingdom 65,728 64,504
Other Europe 160,941 159,250
All others 144, 881 129,392
Distribution of cross-border
claims among reporting banks
from BIS-member countries (percent)
All reporting banks 100 100
United States 12.4 11.8
Japan 14.5 13.6
Germany 17.6 19.3
France 11.0 11.0
United Kingdom 7.9 8.1
Other Europe 19.3 20.0
All others 17.3 16.2
1999
Country quarter ending Percent
change,
June 30 June 1997
to
June 1999
Total cross-border claims on
emerging-market counterparties
(millions of dollars)
All reporting banks 781,971 -5.6
United States 96,539 -11.8
Japan 94,050 -35.6
Germany 155,079 11.1
France 91,054 9.9
United Kingdom 58,141 5.2
Other Europe 149,168 14.0
All others 137,940 -16.1
Distribution of
cross-border claims
among reporting banks
from BIS-member
countries (percent)
All reporting banks 100
United States 12.3 ...
Japan 12.0 ...
Germany 19.8 ...
France 11.6 ...
United Kingdom 7.4 ...
Other Europe 19.1 ...
All others 17.6 ...
NOTE. Data in this table do not include adjustments for guarantees; as a result, data for U.S. banks may differ from data reported in earlier tables. ... Not applicable BIS Reporting Bank Claims by Emerging-Market Region A regional breakdown breakdown /break·down/ (brak´doun) 1. the act or process of ceasing to function. 2. an often sudden collapse in health. 3. loss of self-control. indicates that the relative shares were not uniform by emerging-market regions. Japanese banks held nearly 30 percent of all claims on Asian counterparties in June 1997, but that share had fallen to 23 percent by June 1999. That decline can be compared with a slight increase in the portion of claims on Asian counterparties held by European banks (nearly 50 percent), while the share held by U.S. banks remained relatively steady (7 percent). In Latin America, U.S. banks held a large share (25 percent), while European banks, as a group, expanded their share of claims to more than 50 percent, led by a rise in the share of Spanish banks
Overall, the BIS data indicate that U.S. banks' general reduction in claims on emerging-market counterparties contrasted with the rise in claims held by most European banks. Banks from European countries appear to be expanding cross-border lending to emerging-market counterparties, despite the events of recent years, whereas U.S. banks have focused their efforts more on Latin America. Japanese banks have had little choice but to scale back their emerging-market business because of capital pressures. U.S. COUNTRY EXPOSURE DATA BEFORE 1997 Supervisors still draw on valuable lessons from the past in evaluating recent country exposure data. While it is not within the scope of this article to conduct an extensive analysis of country exposure data over several decades, a brief examination of trends since 1982 provides a necessary context for more accurate analysis of the 1997-99 period.(21) In particular, drawing comparisons with data from crises in the 1980s, in which U.S. banks suffered sizable losses on their developing-country portfolios, is useful.(22) Despite some changes in how claims are reported, data from before and after 1997 are relatively comparable.(23) Therefore, it is possible to view the 1997-99 period in the context of broader trends in country exposure, including claims on emerging-market counterparties. Cross-Border and Local Claims, 1982 to 1998 In examining country exposure data for selected years from 1982 to 1998, the first item of interest is that total claims on counterparties in emerging-market countries--in absolute terms--were nearly as high in the 1980s as in 1998, with cross-border claims in 1982 and 1986 actually exceeding cross-border claims in 1998 (table 12). However, local claims underwent tremendous growth from 1982 to 1998--an astounding a·stound tr.v. a·stound·ed, a·stound·ing, a·stounds To astonish and bewilder. See Synonyms at surprise. [From Middle English astoned, past participle of astonen, 566 percent. The increasing importance of local claims during the 1997-99 period is thus part of a long-term trend. In some sense, this trend reflects the market penetration Noun 1. market penetration - the extent to which a product is recognized and bought by customers in a particular market penetration - the act of entering into or through something; "the penetration of upper management by women" achieved by U.S. banks in local banking markets during the past decade. In addition, the relatively larger portion of local claims means that the transfer risk element of country risk is lessened less·en v. less·ened, less·en·ing, less·ens v.tr. 1. To make less; reduce. 2. Archaic To make little of; belittle. v.intr. To become less; decrease. insofar in·so·far adv. To such an extent. Adv. 1. insofar - to the degree or extent that; "insofar as it can be ascertained, the horse lung is comparable to that of man"; "so far as it is reasonably practical he should practice as more claims are denominated and funded in local currency.(24) However, the counterparty credit risk element of country exposure may have increased because in the recent period, fewer claims have an explicit or implicit public-sector guarantee than in the period before 1997.(25) 12. Claims of U.S. banks on foreign counterparties, by type of claim and region, selected years, 1982-98
Item 1982 1986 1990
Total claims (millions of dollars)
Developed countries and 278,948 286,671 269,235
banking centers
Cross-border 213,478 185,713 152,314
Local 65,470 100,958 116,921
Emerging markets 150,925 132,988 85,281
Cross-border 137,040 116,072 61,938
Local 13,885 16,916 23,343
Africa 7,612 4,110 2,344
Cross-border 7,119 3,662 1,898
Local 493 448 446
Asia-Pacific 46,614 36,581 31,919
Cross-border 40,558 28,190 18,204
Local 6,056 8,391 13,715
Eastern Europe 5,876 3,710 2,086
Cross-border 5,876 3,585 1,830
Local 0 125 256
Latin America 90,823 88,587 48,932
Cross-border 83,487 80,635 40,006
Local 7,336 7,952 8,926
Total claims as a percentage
of total assets
Developed countries 22.1 17.8 14.4
and banking centers
Cross-border 16.9 11.5 8.1
Local 5.2 6.3 6.2
Emerging markets 12.0 8.2 4.5
Cross-border 10.9 7.2 3.3
Local 1.1 1.0 1.2
Africa .6 .3 .1
Cross-border .6 .2 .1
Local .0 .0 .0
Asia-Pacific 3.7 2.3 1.7
Cross-border 3.2 1.7 1.0
Local .5 .5 .7
Eastern Europe .5 .2 .1
Cross-border .5 .2 .1
Local .0 .0 .0
Latin America 7.2 5.5 2.6
Cross-border 6.6 5.0 2.1
Local .6 .5 .5
Total claims as a percentage
of total capital
Developed countries 395.1 246.7 166.5
and banking centers
Cross-border 302.4 159.8 94.2
Local 92.7 86.9 72.3
Emerging markets 213.8 114.4 52.7
Cross-border 194.1 99.9 38.3
Local 19.7 14.6 14.4
Africa 10.8 3.5 1.4
Cross-border 10.1 3.2 1.2
Local 7.0 .4 .3
Asia-Pacific 66.0 31.5 19.7
Cross-border 57.4 24.3 11.3
Local 8.6 7.2 8.5
Eastern Europe 8.3 3.2 1.3
Cross-border 8.3 3.1 1.1
Local .0 .1 .2
Latin America 128.6 76.2 30.3
Cross-border 118.3 69.4 24.7
Local 10.4 6.8 5.5
Item 1994 1998
Total claims (millions
of dollars)
Developed countries and 280,718 466,965
banking centers
Cross-border 160,218 259,314
Local 120,500 207,651
Emerging markets 122,724 176,129
Cross-border 79,876 83,629
Local 42,848 92,500
Africa 1,682 3,069
Cross-border 1,131 1,213
Local 551 1,856
Asia-Pacific 51,199 63,188
Cross-border 27,237 23,386
Local 23,962 39,802
Eastern Europe 4,551 7,916
Cross-border 2,424 4,292
Local 2,127 3,624
Latin America 65,292 101,956
Cross-border 49,084 54,738
Local 16,208 47,218
Total claims as a
percentage of total assets
Developed countries 12.8 11.5
and banking centers
Cross-border 7.3 6.4
Local 5.5 5.1
Emerging markets 5.6 4.3
Cross-border 3.6 2.1
Local 2.0 2.3
Africa .1 .1
Cross-border .1 .0
Local .0 .0
Asia-Pacific 2.3 1.6
Cross-border 1.2 0.6
Local 1.1 1.0
Eastern Europe .2 .2
Cross-border .1 .1
Local .1 .1
Latin America 3.0 2.5
Cross-border 2.2 1.4
Local .7 1.2
Total claims as a
percentage of total capital
Developed countries 125.3 110.2
and banking centers
Cross-border 71.5 61.2
Local 53.8 49.0
Emerging markets 54.8 41.6
Cross-border 35.7 19.7
Local 19.1 21.8
Africa 0.8 0.7
Cross-border 0.5 0.3
Local .2 .4
Asia-Pacific 22.9 14.9
Cross-border 12.2 5.5
Local 10.7 9.4
Eastern Europe 2.0 1.9
Cross-border 1.1 1.0
Local .9 .9
Latin America 29.2 24.1
Cross-border 21.9 12.9
Local 7.2 11.1
NOTE. In this table, figures for claims as a percentage of total assets and for claims as a percentage of total capital in 1998 are not consistent with 1998 figures in table 8 for two reasons: The figures in this table do not include revaluation gains (see text note 26); also total capital is used in this table instead of tier 1 capital (see text note 28). Distribution by Counterparty Sector, 1982 to 1998 The composition, not just the levels, of emerging-market claims changed from the 1980s to the late 1990s, particularly the distribution of claims by counterparty sector.(26) In 1986 and 1990, cross-border claims on the public sector represented one-half of total cross-border claims. Soon thereafter, the shift away from public-sector lending began; by 1998 the distribution had changed markedly, with claims on the nonbank private sector at nearly one-half of total claims. Although there was a general shift toward the nonbank private sector, claims on public-sector counterparties in Latin America and claims on banks in Asia remained significant. Distribution by Maturity, 1982 to 1998 The maturity distribution has also shifted since the early 1980s, with more claims classified as short-term (one year or less). In 1982, short-term claims represented one-half of all claims but fell below 50 percent in 1986 and 1990. By 1994, short-term claims had risen, to 60 percent of total claims. This fluctuation Fluctuation A price or interest rate change. in short-term claims as a percentage of total claims may have been directly tied to the developing-country debt crisis. Specifically, as emerging-market counterparties encountered difficulty in repaying debts, U.S. banks closed out many of their short positions and ceased to roll over short-term claims, leaving mostly longer-term claims.(27) So the percentage of short-term claims in the total fell. U.S. banks later became more comfortable extending new credits to emerging markets, starting with short-term claims. The resumption RESUMPTION. To reassume; to promise again; as, the resumption of payment of specie by the banks is general. It also signifies to take things back; as the government has resumed the possession of all the lands which have not been paid for according to the requisitions of the law, and the of short-term lending was perhaps an indicator of U.S. banks' changed attitude toward lending to emerging-market counterparties. Claims Relative to Total Assets and Capital, 1982 to 1998 More revealing comparisons emerge from an examination of claims as a percentage of total assets and claims as a percentage of capital.(28) Claims on counterparties in emerging-market countries as a percentage of total assets were as high as 12 percent in 1982 but fell sharply, as banks reduced their emerging-market portfolios during the debt crisis of the 1980s. Claims on emerging-market counterparties as a percentage of total capital in 1982 were well above 200 percent, much larger than the 42 percent recorded in 1998. The fallout fallout, minute particles of radioactive material produced by nuclear explosions (see atomic bomb; hydrogen bomb; Chernobyl) or by discharge from nuclear-power or atomic installations and scattered throughout the earth's atmosphere by winds and convection currents. from the debt crisis of the 1980s caused the major downward shift in claims as a percentage of total assets and claims as a percentage of capital. By 1990, U.S. banks had lowered their claims-to-capital ratios, primarily as a result of the decrease in total claims as U.S. banks retrenched (chart 3). In 1994 and 1998, the reduction in the claims-to-capital percentages came as a result of improved capital positions and not from a reduction in claims. [Chart 3 ILLUSTRATION OMITTED] In the 1980s, U.S. banks' emerging-market claims-to-capital ratios were much higher than current ratios. The overall decline in these ratios provides some assurance that emerging-market country exposure poses less of a potential threat to U.S. banks today than a decade ago. However, the relative riskiness of claims must be taken into account to develop a more accurate overall picture of those risks. Also, there is an increasing trend toward marking claims to market, meaning that a change in their value can have a direct effect on a bank's reported income; in the 1980s, the process of first provisioning for, and then writing off, claims meant that losses in emerging markets were reported on a lagged basis. While the trend toward better disclosure is generally welcome, it does mean that any losses may have an immediate, and sometimes volatile, effect on banks' capital, forcing them to be more adept at managing risks in relation to their capital. Indeed, U.S. banks today apply a number of risk-management techniques that were not widely used in the 1980s, such as measurements of potential exposure, distributions of possible loss amounts, and estimates of capital at risk. CONCLUSION U.S. banks continue to be active in emerging-market countries despite the crises in recent years. Claims held by U.S. banks on counterparties in Asia and Eastern Europe declined over 1997-99, as U.S. banks either suffered losses on claims or actively reduced their exposure to those regions. Claims on counterparties in Latin America increased over the period, perhaps an indication that U.S. banks rely on their longer-standing, more entrenched en·trench also in·trench v. en·trenched, en·trench·ing, en·trench·es v.tr. 1. To provide with a trench, especially for the purpose of fortifying or defending. 2. ties to that region and likely view it as a strategic growth area. However, for all regions the claims-to-capital ratios have fallen, a result of U.S. banks bolstering their capital over the entire period--international crises notwithstanding. Banking supervisors determine the potential threat from international exposures by identifying risk areas among foreign claims, assessing the capital supporting those claims, and evaluating banks' ability to manage the risks associated with those claims. In particular, high claims-to-capital ratios for U.S. banks act as a signal for supervisors to focus on specific U.S. banks or, in some cases, groups of banks. Such a signal, in turn, may require a more detailed analysis of country risk at the institutions in question. Finally, supervisors evaluate the manner in which country risk is being managed along with the other risks facing U.S. banks. (1). Hereafter In the future. The term hereafter is always used to indicate a future time—to the exclusion of both the past and present—in legal documents, statutes, and other similar papers. , U.S. banking organizations, which include U.S. banks and bank holding companies, will be referred to as "U.S. banks." (2.) U.S. banks report their claims on foreign counterparties quarterly on the Country Exposure Report of the Federal Financial Institutions Examination Council The Federal Financial Institutions Examination Council, or FFIEC, is a formal interagency body of the United States government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of (FFIEC FFIEC Federal Financial Institutions Examination Council reporting form 009). These claims are aggregated by country and published by the FFIEC as the Country Exposure Lending Survey (available at www.ffiec.gov/E16/default.htm). (3.) Supervisors from the Federal Reserve, the Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (or OCC) was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States. , and the Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation (FDIC), an independent U.S. federal executive agency designed to promote public confidence in banks and to provide insurance coverage for bank deposits up to $100,000. meet regularly within the framework of the Interagency in·ter·a·gen·cy adj. Involving or representing two or more agencies, especially government agencies. Country Exposure Review Committee (ICERC) to discuss transfer risk issues that affect U.S. banks. Examiners present ICERC's country assessments to U.S. banks to inform them of potentially risky conditions. (4.) Data on the claims of individual banks are not publicly available. (5.) Banking centers are countries where international banks often book assets not associated with economic activity in that country, mostly for tax reasons or to establish a regional headquarters. (6.) Table 2 contains the list of emerging-market countries. (7.) A number of recently liberalized emerging markets are considered less competitive and may offer opportunities for higher profits. (8.) For example, before the onset of the crisis a U.S. bank may have entered into a contract with a Thai bank in which the value of the contract depended on the level of the Thai baht baht n. pl. bahts or baht See Table at currency. [Thai b  t.]Noun 1. relative to the U.S. dollar. The contract may have been structured such that it would have a positive value from the U.S. bank's perspective if the Thai baht fell in value; any decline in the baht relative to the dollar would result in a gain for the U.S. bank and a loss for the Thai bank. (9.) Contracts with Russian counterparties changed drastically dras·tic adj. 1. Severe or radical in nature; extreme: the drastic measure of amputating the entire leg; drastic social change brought about by the French Revolution. 2. in value in August 1998 but by September had largely been charged off. (10.) The crisis in Mexico and Latin America in 1994-95 may have led U.S. banks to be more cautious about their derivatives business with Latin American counterparties. In that crisis, a sharp devaluation devaluation, decreasing the value of one nation's currency relative to gold or the currencies of other nations. It is usually undertaken as a means of correcting a deficit in the balance of payments. of the Mexican Mexican named after or originating in Mexico. Mexican axolotl see ambystomamexicanum. Mexican beaded lizard (Heloderma horridum peso generated large derivatives (and other) losses for Latin American counterparties of U.S. banks. In contrast, before 1997 many U.S. banks, and banks from other countries as well, may have been less concerned about potential losses on contracts with Asian counterparties. (11.) For example, a U.S. bank might revalue its existing portfolio based on a hypothetical Hypothetical is an adjective, meaning of or pertaining to a hypothesis. See:
(12.) Breakdowns by counterparty sector are not reported for local claims; they are available only for cross-border claims. (13.) Maturity data are based on initial claims before adjustments for guarantees and do not include revaluation gains. (14.) For example, if a U.S. bank held a claim on a Chinese Chinese, subfamily of the Sino-Tibetan family of languages (see Sino-Tibetan languages), which is also sometimes grouped with the Tai, or Thai, languages in a Sinitic subfamily of the Sino-Tibetan language stock. from in the amount of $100 million, and if $20 million of that claim were guaranteed by a French bank, then initial claims on China would be $100 million, adjusted claims on China would be $80 million, and adjusted claims on France would increase $20 million. (15.) Guarantees extended by Korean counterparties were not restricted to claims on other Korean counterparties; some guarantees applied to initial claims held by U.S banks on other counterparties in emerging Asia. (16.) U.S. banks are increasingly involved with credit derivatives Credit Derivative Privately held negotiable bilateral contracts that allow users to manage their exposure to credit risk. Credit derivatives are financial assets like forward contracts, swaps, and options for which the price is driven by the credit risk of economic agents (private , which transfer counterparty credit risk to a third party. As the credit derivatives market grows, there may be many more cases in which supervisors will want to examine shifts in counterparty credit risk from the initial obligor The individual who owes another person a certain debt or duty. The term obligor is often used interchangeably with debtor. obligor (ah-bluh-gore) n. to a third party, similar to the way guarantees transfer risk. (17.) Tier 1 capital generally consists of common stockholders' equity Stockholders' Equity The portion of the balance sheet that includes capital received from investors in exchange for stock (paid-in capital), donated capital, and retained earnings. This is equal to total assets minus liabilities, preferred stock and intangible assets. , noncumulative Noncumulative Applies mainly to convertible securities. Type of preferred stock on which unpaid or Omitted dividends do not accrue. Omitted dividends are, as a rule, gone forever. perpetual PERPETUAL. That which is to last without limitation as to time; as, a perpetual statute, which is one without limit as to time, although not expressed to be so. preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. and any related surplus, and minority interests in equity capital accounts of consolidated subsidiaries (18.) See Antulio N. Bomfim and William William, crown prince of Germany William or Frederick William, 1882–1951, crown prince of Germany, son of William II. In World War I he commanded (1914) an army on the Western Front and was nominal commander in the German attack R. Nelson, "Profits and Balance Sheet Developments at U.S. Commercial Banks in 1998," Federal Reserve Bulletin, vol. 85 (June 1999), pp. 369-95. (19.) Over time, this group has varied in size from six to nine banks (currently six). See the Country Exposure Lending Survey for details. (20.) These data represent cross-border claims from individual country submissions of claims on non-BIS member countries. The data are consolidated at the BIS to eliminate any double counting Double counting may refer to:
(networking) org - The top-level domain for organisations or individuals that don't fit any other top-level domain (national, com, edu, or gov). Though many have .org domains, it was never intended to be limited to non-profit organisations. RFC 1591. ). BIS member countries include the Group of Ten, plus Austria Austria (ô`strēə), Ger. Österreich [eastern march], officially Republic of Austria, federal republic (2005 est. pop. 8,185,000), 32,374 sq mi (83,849 sq km), central Europe. , Denmark Denmark (dĕn`märk), Dan. Danmark, officially Kingdom of Denmark, kingdom (2005 est. pop. 5,432,000), 16,629 sq mi (43,069 sq km), N Europe. , Finland Finland, Finnish Suomi (swô`mē), officially Republic of Finland, republic (2005 est. pop. 5,223,000), 130,119 sq mi (337,009 sq km), N Europe. , Ireland Ireland, Irish Eire (âr`ə) [to it are related the poetic Erin and perhaps the Latin Hibernia], island, 32,598 sq mi (84,429 sq km), second largest of the British Isles. , Luxembourg Luxembourg, province, Belgium Luxembourg, Du. Luxemburg, province (1991 pop. 232,813), 1,706 sq mi (4,419 sq km), SE Belgium, in the Ardennes, bordering on the Grand Duchy of Luxembourg in the east and on France in the south. , Norway Norway, Nor. Norge, officially Kingdom of Norway, constitutional monarchy (2005 est. pop. 4,593,000), 125,181 sq mi (324,219 sq km), N Europe, occupying the western part of the Scandinavian peninsula. , and Spain Spain, Span. España (āspä`nyä), officially Kingdom of Spain, constitutional monarchy (2005 est. pop. 40,341,000), 194,884 sq mi (504,750 sq km), including the Balearic and Canary islands, SW Europe. . Because the BIS does not collect capital figures for these countries, claims-to-capital ratios cannot be calculated. (21.) Data from 1998 are included to provide an overlapping comparison (at intervals coming or happening with intervals between; now and then. See also: Interval of four years) of earlier data with the 1997-99 period. (22.) U.S. banks began reporting on the Country Exposure Report in 1978, so the data series captures the entire period of crisis in developing countries during the 1980s. (23.) As discussed earlier, data on revaluation gains were not collected before June 1997. In addition, the definition of local claims was altered slightly in June 1997. However, cross-border measures are nearly identical before and after June 1997, and the definitional change in local claims affects only a few countries. (See note 3 in box "Types of Claims.") (24.) Transfer risk applies to cross-border claims and any local claims not funded by local liabilities. For the most part, growth in local liabilities has kept pace with growth in local claims. (25.) The significance of this development became clear in both the Asian and the Russian crises, as expectations that local country governments would provide guarantees for banks and nonbank companies were not realized. (26.) The same methodology used to examine data from the 1997-99 period fits this broader comparison as well, except that cross-border revaluation gains were not reported before 1997 and thus are excluded from the 1998 figures to ensure comparability. (27.) The short-term claims that were granted anew a·new adv. 1. Once more; again. 2. In a new and different way, form, or manner. [Middle English : a, of (from Old English of; see of) + new often came in the form of trade credits, which were considered much less risky. (28.) Because tier I capital was not reported before 1990, capital figures used in the comparisons consist of equity capital, subordinated debentures subordinated debenture An unsecured bond with a claim to assets that is subordinate to all existing and future debt. Thus, in the event that the issuer encounters financial difficulties and must be liquidated, all other claims must be satisfied before , and reserves for loan losses, or what is referred to as total capital. This measure of capital was used on the Country Exposure Lending Survey until 1998, when tier 1 capital was adopted. RELATED ARTICLE: Types of Claims on Emerging-Market Counterparties Data reported on the Country Exposure Lending Survey can be disaggregated Broken up into parts. by type of claim to provide a picture of the various types of exposure. Cross-Border versus Local Claims Cross-border claims are those booked outside the foreign counterparty's home country, usually at a U.S. bank's head office in the United States. A claim on a Korean bank booked at the U.S. head office or at the Singapore Singapore (sĭng`gəpôr, sĭng`ə–, sĭng'gəpôr`), officially Republic of Singapore, republic (2005 est. pop. 4,426,000), 240 sq mi (625 sq km). office of a U.S. bank would in both cases be considered a cross-border claim. This type of claim is usually denominated in U.S. dollars. Local claims on foreign counterparties are those booked in the local offices of the reporting bank, that is, offices located in the country of the counterparty. A claim on a Korean bank booked at the Seoul Seoul (sā`  l, sā` l, sōl), city (1995 pop. 10,229,262), capital of South Korea, NW South Korea, on the Han River. office of a U.S. bank is considered a local claim.Revaluation Gains on Foreign Exchange and Derivatives Contracts On the Country Exposure Report, off-balance-sheet claims arising from foreign exchange and derivatives contracts are recorded as revaluation gains.(1) U.S. banks continually con·tin·u·al adj. 1. Recurring regularly or frequently: the continual need to pay the mortgage. 2. determine the market value of these off-balance-sheet contracts--"revaluing" them--to see if a positive or negative value results (based on movements in market factors or other variables). If the contract has a positive market value for the U.S. bank, that is considered a revaluation gain, similar to a claim in that the counterparty owes a payment to the U.S. bank.(2) For example, if a U.S. bank enters into a contract with a Latin American bank whereby the U.S. bank benefits from a rise in the level o? the Brazilian stock market, a subsequent rise in the level of the stock market would translate (1) To change one language into another; for example, assemblers, compilers and interpreters translate source language into machine language. (2) In computer graphics, to move an image on screen without rotating it. into a revaluation gain.(3) Initial Claims versus Claims Adjusted for Guarantees Some claims initially booked by U.S. banks may be partially or wholly guaranteed by a counterparty in another foreign country (or in the United States). U.S. banks report these initial claims plus any cases in which guarantees on those claims would shift the ultimate risk from the U.S. bank to another counterparty. For example, a U.S. bank might extend a credit to a construction company domiciled dom·i·cile n. 1. A residence; a home. 2. One's legal residence. v. dom·i·ciled, dom·i·cil·ing, dom·i·ciles v.tr. 1. in Thailand, but the claim might actually be guaranteed by a Japanese bank. After adjusting for the guarantee, the U.S. bank would report a claim on the Japanese bank and not on the Thai construction company. Aggregating data on claims by country reveals, on a net basis, the extent to which a country has extended guarantees on the initial claims of U.S. banks. For example, Japanese counterparties might guarantee a certain amount of claims that U.S. banks have on other countries over and above the initial claims that U.S. banks have on Japanese counterparties and, thus, as a group would be net guarantors. Example of Types of Claims The following example shows how different types of claims are classified: Bank A has initiated a $400 million loan to a Taiwanese company that is booked in New York--a $400 million cross-border claim. But if $100 million of that claim is guaranteed by a German bank, the adjusted claim is actually $300 million (the $100 million guaranteed by the German bank is added to Bank A's claims on German counterparties). Bank A also has a $200 million loan outstanding to another Taiwanese company that is booked in Bank A's Taipei Taipei (tībā`), city (1995 est. pop. 2,632,863), N Taiwan, capital of Taiwan and provisional capital of the Republic of China. Taiwan's largest city, it is the administrative, cultural, and industrial center of the island. office--a $200 million local claim. These two claims combined (cross-border and local), represent the total on-balance-sheet claims of Bank A on Taiwanese counterparties--$500 million. Finally, Bank A has also entered into an off-balance-sheet contract, arranged in New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , with a Taiwanese counterparty that has generated cross-border revaluation gains of $50 million. Total claims now add up to $550 million, which can be viewed as either the sum of cross-border and local claims ($350 million plus $200 million) or the sum of on-balance-sheet claims and revaluation gains ($500 million plus $50 million). (1.) Technically, revaluation gains are carried on the balance sheet, even though they arise from off-balance-sheet contracts. For the purposes of this explanation, revaluation gains will be categorized cat·e·go·rize tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es To put into a category or categories; classify. cat as off-balance-sheet claims. (2.) Generally, if the contract has a negative value, the resulting revaluation loss is similar to a liability in that the U.S. bank owes a payment to the foreign counterparty. (3.) In March 1997, the FFIEC amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. the Country Exposure Report in two ways. For the first time, the FFIEC required the reporting of revaluation gains on off-balance-sheet contracts (Schedule 2). Also, the definition for local claims was altered so that instead of reporting local claims denominated in local currency, banks report focal country claims (and no longer local currency claims). This change expanded the definition of local claims to include those cases in which local transactions in foreign countries were conducted in non-local currency. If a foreign country had a significant portion of local transactions conducted in U.S. dollars, classifying claims associated with those transactions as local rather than cross-border was considered preferable because generally such claims were locally funded and hence did not involve transfer risk. For most countries, this definitional change had little effect on the amounts reported. David E. Palmer palmer: see pilgrim. , of the Board's Division of Banking Supervision and Regulation, prepared this article. Peggy Peggy may refer to:
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