Risk management of U.S. banks in less developed countries : a country-risk analysis
The object of this research is to determine whether U.S. commercial banks could have predicted in advance the debt crises of the developing countries, i.e., whether a particular LDC would reschedule or default on its loans. A secondary purpose was to determine whether the debt crisis was the fault of the banks or the developing countries who reneged on their loan contracts. What do the banks have to do to prevent this from happening? What do they have to do to manage country risk effectively? The study begins with a historical account of the United States banking system to the period of debt rescheduling by the LDCs. It continues by describing the different types of risks in international banking. Next it discusses the theoretical issues of LDC debt, including sustainability of debt policy, optimal level of country borrowing, optimal bank foreign lending, and credit rationing by the banks. This is followed by a description of the regulatory aspects of country risk management. The important issue of country risk management by U.S. banks is next, including a discussion of the various assessment methods used and a review of the major empirical studies that used econometric methods for predicting the incidence of external debt defaults. The empirical research investigates debt rescheduling by less developed countries. Linear discriminant function and logistic discrimination approaches were used to determine the predictive ability of any particular subset of economic variables. The sample comprises data on 37 countries over a period of 10 years, 1974-1983. This period was chosen because it was a time of important economic transition. The results of the discriminant and logistic analyses show modest discriminatory power for predicting the rescheduling of debt of a country with the set of economic predictors used.