World Bank Document

signals a permanent shift toward slower growth in embrace new instruments. These instruments now
their international lending, or whether they are evolving in the international markets may encourmerely
consolidating before starting a new phase age second-tier banks and nonbanking institutions
of expansion. However, it is clear that international to maintain or increase their presence in internabanks
are having to learn new ways of collaborat- tional lending.
ing-with each other, with the International Mone- * The evolution of a viable secondary market for bank
tary Fund, with their own central banks, and with loans. Banks making loans are typically locked in
their largest borrowers in the developing world. for the duration, albeit at a variable interest rate, so
They are also showing a renewed interest in are less able to adjust their exposure to changing
project-related lending, so they are also cooperat- circumstances. This makes them more reluctant to
ing with the World Bank on cofinancing (see Box increase their lending. A secondary market might
8.9). Furthermore, the banks are seeking ways to add depth to the lending market by encouraging a
cope with some of the risks involved in interna- wider range of investors to take up developingtional
lending.
country paper. Without a mature secondary mar-
Despite the many problems they have had ket, there is no adequate mechanism for pricing
recently, developing countries need a continuing assets and revealing the market's collective judgflow
of bank lending to regain their growth ment about risk. As a result, bank lending is more
momentum. For this to happen, however, devel- likely to be volatile. Secondary markets for loans to
oping countries must restore their creditworthi- developing countries are controversial, however.
ness-and that depends on their own policies and Bankers, for instance, do not want to publicize the
on the strength and stability of world economic fluctuating value of their assets, and borrowers are
growth. Because banks examine closely the returns concerned about the difficulty of managing their
relative to the risks involved on each loan, an debt in the secondary market. Moreover, secondincrease
in creditworthiness would reduce the risk ary markets offer a guide to creditworthiness that
and increase the attractiveness of developing- could signal the need to modify policies if borrowcountry
loans. Beyond that, the revival of bank ing difficulties were emerging. The expansion of
lending depends upon:
secondary markets is desirable, but it must be a
a The ability of banks to rebuild their capital bases. phased process in which creditors and debtors, as
There is evidence that such a trend is already well as banking regulators, are given time to delinunder
way among U.S. banks. This is significant eate and then adapt to their functions. Without a
because these banks have been major lenders to phased introduction of secondary markets, the
developing countries in the past. Their capital banks, for instance, might be forced to write down
grew by approximately 12 percent a year during the value of large amounts of lending, which could
1982-84, and their capital ratios have risen sharply. reduce their ability to provide new resources.
U.S. banks' exposure to developing countries The international bond markets may continue to
declined substantially relative to their capital in flourish, as they have done for the past three
1982-84. Whether this development will presage years. For the fixed rate markets to remain buoyant
an increase in lending to developing countries will will require a continuation of low inflation. Floatdepend
on the relative attraction of domestic lend- ing rate notes, meanwhile, are likely to remain a
ing during the present phase of financial deregula- feature of these markets. It is possible that the
tion in the United States. The capital position of locus of lending to developing countries may shift
non-U.S. banks would also improve if the dollar to the innovative shorter-term segment of the
weakened appreciably on the foreign exchange securities markets. The restoration of the cremarkets.
ditworthiness of developing countries will be the
* The degree to which developing countries can key to their access to the securities markets.
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