Past IMF bail-outs have encouraged risky lending in Asiaby John Plender / February 20, 1998 / Leave a comment
The capacity for collective memory loss in the banking community inspires awe and wonder in equal measure. Over the past 25 years the banks have bombed in property (mid-1970s), wrecked Latin America (1980s), bombed again in property (first half of the 1990s) and gone overboard in Asia (second half of the 1990s). Yet despite this remarkable tally the cavalry, in the shape of the IMF, has once again come over the hill in time to rescue them from the consequences of their folly. So the banks may not lose their shirts; but we lose ours, because the rescue bill falls on the taxpayer. How does this happen?
Most bankers do not actually take big punts on the cynical basis of heads-we-win, tails-the-taxpayer-loses. Moral hazard-the inducement to imprudent behaviour which results from the existence of a safety net-is more insidious. The absence of punishment for past errors slackens credit judgements without the banker necessarily recognising it. Meantime, depositors do not demand that banks maintain a capital cushion commensurate with the risks they run where they are judged too big to fail.
The problem is compounded by the loss of conventional corporate lending business to the securities markets. Bankers feel driven to explore the outer reaches of the globe in pursuit of old-fashioned credit opportunities. Growthmanship has long been imposed on them by their transformation from national utilities to deregulated profit-maximisers, fearful of losing business to the competition. Banks have thus become a destabilising influence on the world economy.
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all the same, it is possible to feel some sympathy for the bankers over the Asian d?b?cle. South Korea, for example, was a phenomenally successful economy, growing at 8-9 per cent. Yet its banks were under- capitalised and its companies over-borrowed. The whole system was short of equity capital because this made it easier for the politicians and the dominant chaebols (conglomerates) to keep control. The banks could have said that it was not worth lending to some of the world’s most competitive companies because they were financially unsound. Or they could take the view that this was how the corporate Korean system worked and if they failed to cash in on one of the world’s fastest growing economies, their competitors would.
The snag was that if their lending in foreign currency ever became significant in relation to the overall economy, they would be taking an enormous foreign exchange…