Banks at the Brink

Faced with the vaporization of a large part of their foreign-loan portfolios, the big money-center commercial banks in the U.S. have launched a campaign to defend themselves. Quietly nervous before the bursting of the Mexican bubble, they are noisily nervous after it. Their constituents—shareholders, depositors, borrowers—are showing less willingness to accept bankerly platitudes and are demanding hard answers. The regulatory agencies and the accounting profession are plainly wringing their hands in indecision, pushed one way by the purists of full disclosure and quick write-offs, prodded in another by the don’t-rock-the-boat-or-we’ll-all-sink school. Congress and the Administration have members in both camps; a unified clarion call is far from being heard.

The visible tremors of the bankers stem from several causes, but the one attracting the most attention is their billions of dollars of loans to LDCs—“less developed countries,” a more candid term than the once popular “developing countries.” The size of these portfolios, once an arcane matter underplayed by the banks and seldom sought even by bank-stock analysts, is now being abruptly revealed. Among the abundance of statistics, a few have dramatic impact: Bank of America, the nation’s largest, has $2.25 billion of loans outstanding to Mexico, some to the central government, some to government agencies, and some to industrial companies that, in a country like Mexico, stand or fall with the state itself. This figure represents only about 8 per cent of the B of A’s total foreign-loan portfolio, but more than half of the bank’s equity capital, which gives an idea of how highly a state-of-the-art bank is leveraged these days. Continental Illinois, already troubled by domesticloan disasters that have brought shareholder legal actions, has about $750 million outstanding to Mexico and $400 million to Argentina, against equity of about $1.8 billion. A recent report by the House Banking Committee discloses that the nine largest U. S. banks (Bank of America, Citibank, Chase, Manufacturers Hanover, Morgan Guaranty, Continental Illinois, Chemical, Bankers Trust, and First Chicago) have outstanding loans to LDCs and Communist nations equal to about 3.5 times their combined equity capital of $23 billion.

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Richard Coulson

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Faced with the vaporization of a large part of their foreign-loan portfolios, the big money-center commercial banks in the U.S. have launched a campaign to defend themselves. Quietly nervous before the bursting of the Mexican bubble, they are noisily nervous after it. Their constituents—shareholders, depositors, borrowers—are showing less willingness to accept bankerly platitudes and are demanding hard answers. The regulatory agencies and the accounting profession are plainly wringing their hands in indecision, pushed one way by the purists of full disclosure and quick write-offs, prodded in another by the don’t-rock-the-boat-or-we’ll-all-sink school. Congress and the Administration have members in both camps; a unified clarion call is far from being heard.

The visible tremors of the bankers stem from several causes, but the one attracting the most attention is their billions of dollars of loans to LDCs—“less developed countries,” a more candid term than the once popular “developing countries.” The size of these portfolios, once an arcane matter underplayed by the banks and seldom sought even by bank-stock analysts, is now being abruptly revealed. Among the abundance of statistics, a few have dramatic impact: Bank of America, the nation’s largest, has $2.25 billion of loans outstanding to Mexico, some to the central government, some to government agencies, and some to industrial companies that, in a country like Mexico, stand or fall with the state itself. This figure represents only about 8 per cent of the B of A’s total foreign-loan portfolio, but more than half of the bank’s equity capital, which gives an idea of how highly a state-of-the-art bank is leveraged these days. Continental Illinois, already troubled by domesticloan disasters that have brought shareholder legal actions, has about $750 million outstanding to Mexico and $400 million to Argentina, against equity of about $1.8 billion. A recent report by the House Banking Committee discloses that the nine largest U. S. banks (Bank of America, Citibank, Chase, Manufacturers Hanover, Morgan Guaranty, Continental Illinois, Chemical, Bankers Trust, and First Chicago) have outstanding loans to LDCs and Communist nations equal to about 3.5 times their combined equity capital of $23 billion.