The Accountability of Banks in the International Debt Crisis
Date
1990-07
Authors
Dahlquist, Jean Frederick
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Abstract
The question underlying this study was whether or not banks are accountable for the losses they sustained, and are still sustaining, from their role in the international debt crisis which began in 1982. In that crisis many less developed countries (LDCs) heavily indebted to foreign commercial banks were unable to meet their repayment obligations. The study examined whether or not imprudent banking decision and practice accounted for the vulnerable position in which banks found themselves in 1982, or whether their position was caused by random, unforeseeable, adverse circumstances.
In the study factors both external and internal to the banking environment were examined. External factors pertained to those needed for adequate credit analysis of sovereign borrowers, namely, sufficiently timely and comprehensive international data and adequate credit histories. The conclusion reached in the study was that adequate, though imperfect, international data was available to banks and that banks developed analytical systems capable of rendering adequate credit profiles from the data. A second conclusion was that sufficiently numerous and analogous historical precedents of troubled sovereign loans prior to 1982 existed for banks to be considered warned.
Internal factors examined were the three major components of sound banking practice: capital adequacy, sufficient diversification of assets, and adequate return in relation to risk. The conclusion reached in the study was that, in direct contravention to warning signals coming from their credit-risk assessment systems, international banks, and in particular U.S. banks, committed themselves excessively and unwisely to LDC borrowers. Banks violated prudent capital/asset ratios, concentrated their assets in particular regions and countries, and failed to achieve adequate return in relation to risk. For these reasons, the major conclusion of the study was that international banks are accountable for the losses they sustained from the international debt crisis of 1982.
A question which arose from the outcome of the study was why such an aberration of banking behavior arose, that is, why such inconsistency developed between bank credit risk analyses and banking decision and practice. Three reasons were proposed in the study. First, banks were ill equipped to deal with the political and economic complexities associated with sovereign lending. Secondly, bankers were encouraged to recycle petro-dollars not just because of strong supply, demand, and facilitating market mechanisms, but because of strong encouragement from important institutions in their societies. Thirdly, and most significantly, those institutions which should have provided a warning voice were silent. Neither monetary authorities nor banking supervisors nor international agencies provided adequate guidance.
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Keywords
debts, foreign loans, developing countries, banks, international banking
Citation
Dahlquist, J.F. (1990). The accountability of banks in the international debt crisis (Unpublished thesis). Southwest Texas State University, San Marcos, Texas.