BANKS' LDC RESERVES TERMED INADEQUATE

BANKS' LDC RESERVES TERMED INADEQUATE

Large U.S. banks don't have sufficient capital to cover potential losses from loans to foreign countries, because federal regulators have failed to ensure sufficient reserves, according to a federal report released last week.

The General Accounting Office study, International Banking: Supervision of Overseas Lending Is Inadequate, criticizes federal regulatory agencies for not setting realistic reserve requirements based on accurate country-risk ratings for less-developed countries.This report is an embarrassment to the regulators, said Rep. Jim Leach, R-Iowa, who released the report to reporters. Federal regulation has improved, but it's still far from being adequate.

The agencies - Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Federal Reserve - have required banks to hold only $2.3 billion in reserves, far below the $49 billion the GAO calculated was necessary to back the loans, the report stated.

Rep. Leach credited banks for reserving $21 billion - but noted with concern the $28 billion gap.

Because of the too-big-to-fail syndrome . . . taxpayer liabilities will be enormous unless regulators understand no institution is too big to regulate, he said.

However, Dean Debuck, spokesman for the comptroller, said that banking conditions have improved markedly in the past five years.

We testified on the subject as the report was going forward, and at that time, we pointed out that banks' vulnerability to foreign debt has been reduced substantially - since 1982 by about $50 billion - while their capital positions have increased by about the same amount, he said.

Foreign exposure as a percentage of capital has decreased from 490 percent to about 250 percent.

Stephen Katsanos, spokesman for the FDIC, said agency officials could not respond until they had seen the report.

Congress in 1983 passed the International Lending Supervision Act to strengthen and better regulate loans to developing countries and to establish minimum levels of banking capital.

The GAO report recommends that regulators require reserves for loans that currently have no requirements, based on secondary market prices; issue forecasts for countries likely to develop debt problems; eliminate deficiencies in the information used to rate loans, and ensure that bank examiners comply with federal laws.

The study analyzed appropriate reserves on the basis of debt prices in the secondary market.

Much (less developed country) debt sells at large discounts on the secondary market because investors believe it to be particularly risky, the report said, and October 1987 secondary market prices imply that at least $49 billion of reserves is needed.