Federal Deposit insurance Corporation
FDIC
Chairman
1-. William Seidnian
Division of Research
and Statistics,
Director
Wni. Roger Warson
Editor
Creole E. French
Editorial Committee
Fredericks Cams
Ciary S. Fi'iscl
Arthur J. Mimun
Administrative Manager
Delta Vuesar
liditorialSecrelary
Cathy Wright
Design and Production
Graphics and Distribuiion llnil
1 he views expressed arc those
:jf The auiliur^ and do not neces
sarily reflect official posi linns of
rhe Federal Deposit Insurance
Corporation. Articles may he re
printed or flbsiraeied if the Rt-
ureap jnd author are credited.
Please provide the FRICs Di
vision of Research and.SiatiMics
with a copy of any publications
jontaining reprinted material.
Single-copy Mibscripiions arc
available to the public free of
charge. Requests for subsenp-
iionsh back isstics or address
changes should lie mailed IO1
FDIC limiting Rmm, Office of
CjHporatc Commun icMlions.
Federal Deposii Insurance Cur-
potaiion, 550 17th Street, NW,
Washingion, D.C., 20429.
Review
Spring/Summer 1991
Vol.4, No. 1
Table of Contents
The Anatomy of the LDC Debt Crisis page I
by Gary S. Fissel
The structural factors that have caused the economies of certain less-developed countries to
become heavily dependent on commercial bank borrowing are examined in this paper. In addition,
balance sheet information is presented regarding the exposure of the money-center banks arising
from their loans to these developing countries.
Resolution Costs of Thrift Failures page 15
by Joseph B. Blalock, Timothy J. Curry and Peter J'. Elmer
The determinants of resolution costs for 97 thrifts resolved by FSLIC from 1984 to 1987 are
examined in this paper. The authors conclude that the assec mix of the institutions was the primary
determinant of resolution costs. "High-risk" assets such as land, development and construction
loans are found to increase resolution costs, while the operation of a more ttaditional franchise is
found to reduce resolution costs.
Summary of Proceedings: International Conference on Deposit Insurance
and Problem-Bank Resolution Policies page 27
by A lane K. Moysich
Representatives from various countries met at the FDIC on September 26, 1990, to discuss
alternative approaches to deposit insurance, bank-failure resolution strategies and the bank "safety
net." A summary of the fottt panel discussions is presented in this paper.
Recent Developments Affecting Depository Institutions page 35
by Benjamin 8. Christopher
This regular feature oft he FDiC BankingReview con tains information on regulatory agency actions,
state legislation and regulation, and articles and studies pertinent to banking and deposit insurance
issues.
FDIC
Chairman
1-. William Seidnian
Division of Research
and Statistics,
Director
Wni. Roger Warson
Editor
Creole E. French
Editorial Committee
Fredericks Cams
Ciary S. Fi'iscl
Arthur J. Mimun
Administrative Manager
Delta Vuesar
liditorialSecrelary
Cathy Wright
Design and Production
Graphics and Distribuiion llnil
1 he views expressed arc those
:jf The auiliur^ and do not neces
sarily reflect official posi linns of
rhe Federal Deposit Insurance
Corporation. Articles may he re
printed or flbsiraeied if the Rt-
ureap jnd author are credited.
Please provide the FRICs Di
vision of Research and.SiatiMics
with a copy of any publications
jontaining reprinted material.
Single-copy Mibscripiions arc
available to the public free of
charge. Requests for subsenp-
iionsh back isstics or address
changes should lie mailed IO1
FDIC limiting Rmm, Office of
CjHporatc Commun icMlions.
Federal Deposii Insurance Cur-
potaiion, 550 17th Street, NW,
Washingion, D.C., 20429.
Review
Spring/Summer 1991
Vol.4, No. 1
Table of Contents
The Anatomy of the LDC Debt Crisis page I
by Gary S. Fissel
The structural factors that have caused the economies of certain less-developed countries to
become heavily dependent on commercial bank borrowing are examined in this paper. In addition,
balance sheet information is presented regarding the exposure of the money-center banks arising
from their loans to these developing countries.
Resolution Costs of Thrift Failures page 15
by Joseph B. Blalock, Timothy J. Curry and Peter J'. Elmer
The determinants of resolution costs for 97 thrifts resolved by FSLIC from 1984 to 1987 are
examined in this paper. The authors conclude that the assec mix of the institutions was the primary
determinant of resolution costs. "High-risk" assets such as land, development and construction
loans are found to increase resolution costs, while the operation of a more ttaditional franchise is
found to reduce resolution costs.
Summary of Proceedings: International Conference on Deposit Insurance
and Problem-Bank Resolution Policies page 27
by A lane K. Moysich
Representatives from various countries met at the FDIC on September 26, 1990, to discuss
alternative approaches to deposit insurance, bank-failure resolution strategies and the bank "safety
net." A summary of the fottt panel discussions is presented in this paper.
Recent Developments Affecting Depository Institutions page 35
by Benjamin 8. Christopher
This regular feature oft he FDiC BankingReview con tains information on regulatory agency actions,
state legislation and regulation, and articles and studies pertinent to banking and deposit insurance
issues.
The Anatomy of the LOC Debt Ctisis
The Anatomy
of the
International Debt Crisis
by Gary S. Fissel1
"Neither a borrower nor a lender be. "
William Shakespeare, Hamlet
Developing economics must
look back with great longing
to those halcyon days when
foreign capital funds flowed freely
into their countries, and commercial
banks were the most generous of
creditors.1 At the end of 1982, $313
billion in long-term debt, with a
maturity greater than one year, was
owed to commercial banks by the
most severely-indebted developing
economies. This represented 63
percent of their total long-term debt
outstanding. Moreover, commercial
bank loans accounted for
approximately 79 percent of the
increase in long-term debt
outstanding from 1975 through 1982
for four of the largest developing
country debtors (Brazil, Mexico,
Argentina and Venezuela).
Developing economies rely upon
foreign credit to assist in financing the
investment projects that form the un
derpinnings for economic growth.
This was the best, but certainly not
the only, rationale for commercial
banks worldwide to extend vast
amounts of credit to developing econ
omies in the late 1970s and early
1980s. However, by 1982, the heavily-
indebted developing economies were
not realizing the growth that would
support the weight of their accumu
lated debts. With many developing
economies unable to fully service
their debt obligations, commercial
banks were left holding a large vol
ume of assets of uncertain, and subse
quently diminishing, value. These
events were crystalized in the public
eye by the Mexican debt moratorium
in August 1982, and labelled "The
International Debt Crisis."'
The international debt crisis has
two intimately related facets: the
creditor problem and the debtor prob
lem. On the one hand, the debt crisis
involves the many large commercial
banks that hold sizable volumes of
loans to debt-burdened developing
economies. The uncertain value of
these loans, combined with the large
volumes of these assets on the balance
sheets of many large banks, have the
potential to make financial markets
nervous about the financial condition
of these institutions, thereby destabi
lizing these markets. This is the cred
itor problem. For example, at the end
of 1982, the combined book value of
loans outstanding from the nine larg
est U.S. commercial banks (hereafter
referred to as the money-center
banks) to the four largest Latin Amer
ican debtors (Brazil, Mexico, Venezu
ela and Argentina) was 143 percent of
their solvency buffer or their com
bined stock of equity capital plus
loan-loss reserves."
On the other side of the debt crisis
are the heavily-indebted developing
economies that have been unreliable
debtors but that remain reliant upon
the foreign financing of worthy in-
* Gary S. Kissel is a financial economist in
the FDIC's Division of Rcseatch and Statistics.
The author would like to thank George French
and Frederick Cams for their helpful com
ments and suggestions, Kenneth Walsh for his
assistance with the database, and Jeanine Rossi
for her research assistance.
The term "developing economies" in this
paper will refer to middle-income developing
economies, unless otherwise noted. The World
Bank defines the criterion used to identify a
middle-income developing economy thar is
based upon its per capita national income. This
paper focuses on middle-income developing
economies because of their more extensive ac
cess and use of private capital markets (i.e.,
commercial bank loans), as compared to low-in
come developing economies.
" Of course, Mexico was not the only devel
oping economy at the time that was being
squeezed to make even the intetest payments
on its external debt.
The money-center banks are Bankers
Trust, Chase Manhattan, Chemical, Citibank,
Manufacturers Hanover, Morgan Guaranty,
Kirst Chicago, Bank of America and Continen
tal Illinois.
The Anatomy
of the
International Debt Crisis
by Gary S. Fissel1
"Neither a borrower nor a lender be. "
William Shakespeare, Hamlet
Developing economics must
look back with great longing
to those halcyon days when
foreign capital funds flowed freely
into their countries, and commercial
banks were the most generous of
creditors.1 At the end of 1982, $313
billion in long-term debt, with a
maturity greater than one year, was
owed to commercial banks by the
most severely-indebted developing
economies. This represented 63
percent of their total long-term debt
outstanding. Moreover, commercial
bank loans accounted for
approximately 79 percent of the
increase in long-term debt
outstanding from 1975 through 1982
for four of the largest developing
country debtors (Brazil, Mexico,
Argentina and Venezuela).
Developing economies rely upon
foreign credit to assist in financing the
investment projects that form the un
derpinnings for economic growth.
This was the best, but certainly not
the only, rationale for commercial
banks worldwide to extend vast
amounts of credit to developing econ
omies in the late 1970s and early
1980s. However, by 1982, the heavily-
indebted developing economies were
not realizing the growth that would
support the weight of their accumu
lated debts. With many developing
economies unable to fully service
their debt obligations, commercial
banks were left holding a large vol
ume of assets of uncertain, and subse
quently diminishing, value. These
events were crystalized in the public
eye by the Mexican debt moratorium
in August 1982, and labelled "The
International Debt Crisis."'
The international debt crisis has
two intimately related facets: the
creditor problem and the debtor prob
lem. On the one hand, the debt crisis
involves the many large commercial
banks that hold sizable volumes of
loans to debt-burdened developing
economies. The uncertain value of
these loans, combined with the large
volumes of these assets on the balance
sheets of many large banks, have the
potential to make financial markets
nervous about the financial condition
of these institutions, thereby destabi
lizing these markets. This is the cred
itor problem. For example, at the end
of 1982, the combined book value of
loans outstanding from the nine larg
est U.S. commercial banks (hereafter
referred to as the money-center
banks) to the four largest Latin Amer
ican debtors (Brazil, Mexico, Venezu
ela and Argentina) was 143 percent of
their solvency buffer or their com
bined stock of equity capital plus
loan-loss reserves."
On the other side of the debt crisis
are the heavily-indebted developing
economies that have been unreliable
debtors but that remain reliant upon
the foreign financing of worthy in-
* Gary S. Kissel is a financial economist in
the FDIC's Division of Rcseatch and Statistics.
The author would like to thank George French
and Frederick Cams for their helpful com
ments and suggestions, Kenneth Walsh for his
assistance with the database, and Jeanine Rossi
for her research assistance.
The term "developing economies" in this
paper will refer to middle-income developing
economies, unless otherwise noted. The World
Bank defines the criterion used to identify a
middle-income developing economy thar is
based upon its per capita national income. This
paper focuses on middle-income developing
economies because of their more extensive ac
cess and use of private capital markets (i.e.,
commercial bank loans), as compared to low-in
come developing economies.
" Of course, Mexico was not the only devel
oping economy at the time that was being
squeezed to make even the intetest payments
on its external debt.
The money-center banks are Bankers
Trust, Chase Manhattan, Chemical, Citibank,
Manufacturers Hanover, Morgan Guaranty,
Kirst Chicago, Bank of America and Continen
tal Illinois.