Diversification is a long-standing,
practical, and prudential principle of sound lending. It is particularly
relevant to international lending because the assessment of country
risk involves great uncertainties and is subject to a considerable
margin of error. Determinations of the adequacy of diversification
within a bank’s portfolio are based primarily on comparisons of individual
country risk exposures to a bank’s capital funds. Where concentrations
are found, examiners separate a bank’s loans in a country by type
of credit, type of borrower, and loan maturities. The degree of risk
involved is assessed in the light of these components as well as of
internal and external factors that have an impact upon the debt-service
capacity of public and private borrowers within the country.
With the primary objective of encouraging
appropriate diversification in the international lending portfolios
of U.S. banks, the country exposure examination procedures attempt
to point out special risk situations and, where necessary, secure
corrective action. In a special section of the examination report,
examiners list all country risk exposures that seem large in relation
to the lending bank’s capital funds and make special comment on concentrations
of loans in countries with high debt-service requirements or other
actual or potential balance of payments weaknesses. Normally, these
comments will refer to relatively large exposures in such countries
and give particular emphasis to situations that include a high proportion
of longer-term loans. Lending in any country able to meet its current
obligations will not be subject to special comment unless the lending
is considered excessive relative to a bank’s capital funds. Aggregate
credits to a country will be classified substandard, doubtful, or
loss due to country risk only when there has been an interruption
in debt servicing or when such an interruption is considered imminent.
Another key element of the procedures is an assessment
of a bank management’s ability to analyze and monitor country risk
in its international lending. Examiners are instructed to evaluate
a bank’s procedures for monitoring and controlling exposure to country
risk, the bank’s system for establishing limits to lending in a country
and the bank’s methods for analyzing country risk. Senior bank management is
expected to monitor closely all situations listed or commented on
by examiners.
The examination system for assessing country-risk concentrations
is administered by a nine-member committee made up chiefly of experienced
examiners and supervisory personnel from the three federal bank regulatory
agencies. The committee is known as the Interagency Country Exposure
Review Committee. Its primary functions are to—
- review economic conditions in countries where loans
are made by U.S. banks;
- determine the levels of a bank’s capital funds at
which concentrations should be commented on;
- determine when credits should be classified as substandard,
doubtful, or loss because of an interruption in payment or when an
interruption is imminent; and
- prepare commentaries on developments in foreign countries
for use by examiners.
FB-31; May 7, 1979.
