World Bank Document

8 International bank lending and the securities markets
The relationship between commercial banks and banks, while the middle-income groups have
developing countries has been transformed in the become net borrowers. This contrast reflects the
past fifteen years. Before 1970 banks lent develop- fact that low-income countries are seldom crediting
countries relatively small amounts to finance worthy enough to borrow from the banks.
trade and to meet the requirements of subsidiaries Developing countries have dealt both with the
of multinational companies located there. After head offices of international banks and with offices
1970, banks went on to become the fastest-growing operating in the Eurocurrency markets. However,
and most flexible source of foreign finance for many banks have set up offices in developing
developing countries-primarily to cover balance countries, both to channel external finance and to
of payments deficits-only to run into the debt undertake domestic banking business. Altogether
problems of the early 1980s. The past three years the various banks located within developing counhave
been traumatic for many banks and their bor- tries have received about 36 percent of the funds
rowers in the developing world. There has been a channeled by outside banks to these countries over
retrenchment of bank lending that has emphasized the past four years. Developing countries' own
the instability of the relationship with developing banks are playing an increasing role in raising
countries. All parties have learned some valuable external funds for domestic users as well as in perlessons,
which will help to redefine their relation- forming a broad range of business services (see
ship for the years ahead. The securities markets, in Box 8.1).
contrast, have not had such strong ties with devel- Lending has been the main form of international
oping countries. Given that the markets for bonds banks' business with developing countries (see
and a number of innovative securities have grown Figure 8.2), and it grew very rapidly between 1973
recently while traditional bank lending has fallen, and 1981. Bank claims on developing countries
there is a question as to whether the securities increased at an average annual rate of 28 percent
markets could play a bigger role in financing devel- over this period. In 1973 total new international
oping countries.
lending amounted to $33 billion, of which 29 percent
went to developing countries. By 1981 new
The banking relationship
lending was $165 billion, of which developing
countries composed 32 percent. Much of the lend-
The commercial links between banks and develop- ing was syndicated Eurocurrency loans carrying
ing countries are complex and extensive. They run five- to ten-year maturities and floating interest
from simple deposit taking to short-term lending, rates. Lending to developing countries in this form
trade financing (both with and without official increased from $7 billion in 1973 to $45 billion in
guarantees), and medium-term lending (often in 1981. Most syndicated loans were arranged by a
syndicated form). All of these types of business core of twenty-five to fifty large commercial banks
appear on banks' balance sheets. But off-balance- (hereafter called first-tier banks) based in the
sheet operations have also been important; they industrial countries. Up to 3,000 others (secondinclude
advice on managing debt and reserves, tier banks) joined in from time to time. They
and business such as letters of credit for financing included regional banks from industrial countries,
trade. banks from developing and centrally planned
These ties often started when developing coun- economies, and consortium banks.
tries placed their liquid reserves with the banks. Initially in the 1970s it was the large U.S. banks
As Figure 8.1 shows, the low-income countries that increased their international lending, with
have consistently been net depositors with the much going to developing countries. By 1977 the
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