World Bank Document

Box 8.4
Bank supervision and its impact on lending to developing countries
Banking supervisors in industrial countries seek in a limits, and lending to two or more subsidiaries owned by
variety of ways to ensure that commercial banks are pru- a single holding company may count as a single expodent
in their lending and balance sheet management.
sure. Typically borrowers within a country are not con-
* The assessment of capital adequacy. To ensure that solidated, so that banks can lend to a variety of enterbanks
have enough capital to meet potential losses, prises within a country without meeting exposure limits.
supervisors typically prescribe a ratio of capital to total Tighter exposure limits have not generally been introassets.
The ratio varies in its makeup and desired level duced. Increasingly, however, as developing-country
from country to country, but the normal range is 4 to 6 debt is rolled over in new financing packages for the
percent-that is, $4 milion to $6 million of capital can government and, as sometimes occurs, the government
support $100 million of lending. In determining this takes over private sector debt, these loans are accrued to
ratio, some supervisors weight assets according to their a single borrower, and exposure limits may be reached.
riskiness: the riskier the loan, the more capital a bank * Loan-loss provisioning. Supervisors have been conmust
have to back it.
cerned in recent years that the quality of assets on banks'
* Exposure limits. Supervisors pay close attention to books are properly reflected in their balance sheets and
how bank assets are diversified, aiming to avoid any so have encouraged banks to provision against losses.
undue concentration of risk. In recent years some of the Policies regarding provisioning-that is, the setting aside
adverse risks attached to international lending material- of funds to cover potential general or specific lossesized
simultaneously, which underlined the need to bol- vary significantly among countries. The accounting and
ster banks' capital bases. Supervisors normally require tax treatment of loan losses can have important implicathat
lending to a single borrower be limited to a fraction tions for the profitability of banks' loans to some counof
the bank's capital, or a group of large exposures to a tries and therefore for their willingness to lend. The
multiple of capital. In some countries, borrowers may be accounting issue revolves around whether provisions
consolidated for the purpose of determining exposure can be counted as part of a bank's capital base or not;
Box 8.5 Financial deregulation in Japan: some implications for developing countries
Developing countries and international development Box table 8.5B Foreign bond issues denominated in
banks have been active in raising funds from Japan (see yen, 1980-83
Box tables 8.5A and B). As of the end of 1983, developing
Share of
countries accounted for 24 percent of total yen-denomi- Amount developing countries
nated foreign bonds issued in Japan, with international Year (billions of dollars) (percent).
development banks accounting for another 24 percent. 1980 261.0 35
In 1983, Japanese banks made total medium- and long- 1981 612.5 16
term loan commitments of some $16.8 billion, 49 percent 1982 856.0 11
of which were for oil-importing developing countries. 1983 899.0 16
Along with other foreign borrowers, developing coun- a. Developing countries as defined by the DAC.
tries could perhaps benefit from the gradual liberaliza- Source: Japanese Ministry of Finance International Finance Bureau
tries col ehp eei rmtegaullbrlz- Annual Report 1984.
tion of the world's second-largest capital market.
The deregulation of the Japanese financial system has hold savings, which had once gone largely into compabeen
prompted by a marked change in the domestic flow nies, either were used to finance the public sector deficits
of funds resulting from the slowdown in economic
growh id-170s snce he Indstral mestent rew or found profitable investment opportunities overseas.
growth since the mid-1970s. Industrial investment grew Exchange controls were liberalized, while many Japaless
rapidly; corporate demand for credit fell; and house- nese corporations raised money abroad to strengthen
their overseas operations. At the same time, the govern-
BoX table 8.5A External loans by Japanese bans ment liberalized some domestic interest rates to be able
denorninated in foreign currency, 1980-83 tofnnc. t ow dfct.
'
~~~~~~~to
finance its own deficits.
Share These moves have recently been extended. External
of oil-importing
lending by Japanese banks is now free of any restrictions
Amount
developing countries
Year (billions of dollars) (percent) except those dictated by prudential guidelines. The gov-
1980 6.7 41 ernment has made it easier for foreigners to issue yen-
1981 12.7 44 denominated bonds in Japan through both public issues
1982 18.0 and private placements. It has also eased restrictions on
1983 16.8 49 Euroyen bond issues and Euroyen lending. As a result,
Source: Japanese Ministry of Finance International Finance Bureau the Euroyen market could become as accessible to non-
Annual Reports.
residents as the Eurodollar market already is.
116