Table Of ContentLENDING IN INTERNATIONAL COMMERCIAL
BANKING
INTERNATIONAL BANKING SERIES
Published by Palgrave Macmillan
General Editor: Steven I. Davis
Steven I. Davis
THE MANAGEMENT OF INTERNATIONAL BANKS
T. H. Donaldson
LENDING IN INTERNATIONAL COMMERCIAL BANKING
Nigel R. L. Hudson
MONEY AND EXCHANGE DEALING IN INTERNATIONAL
BANKING
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Also by T. H Donaldson and published by Palgrave Macmillan
HOW TO HANDLE PROBLEM LOANS
THE MEDIUM-TERM LOAN MARKETS
(with J. A. Donaldson)
UNDERSTANDING CORPORATE CREDIT
Lending in
International
Commercial Banking
Second Edition
T. H. Donaldson, FCIB
Foreword by Steven 1 Davis
M
MACMILLAN
PRESS
© T. H. Donaldson 1979, 1988
Foreword © Steven I Davis 1979, 1988
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First edition 1979
Reprinted 1981, 1983
Second edition 1988
Published by
THE MACMILLAN PRESS LTD
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and London
Companies and representatives
throughout the world
Phototypeset by
STYLESET LIMITED, Warminster, Wiltshire
British Library Cataloguing in Publication Data
Donaldson, T. H.
Lending in international commercial
banking.--2nd ed.--(International
banking services)
I. Bank loans
I. Title II. Donaldson, T. H. International
lending by commercial banks III. Series
332.1'5 HG1641
ISBN 978-0-333-40454-6 ISBN 978-1-349-19027-0 (eBook)
DOI 10.1007/978-1-349-19027-0
Contents
Editor's Foreword vii
Acknowledgements ix
1 Introduction 1
2 Lending to Companies 19
3 Country Lending and Country Limits 40
4 Specialised Forms of Lending 56
5 Syndicated Lending and Modem Forms of
Multibank Lending 70
6 The Organisation of Credit Decisions, Credit
Controls and Review 98
7 Loan Documentation 118
8 International Insolvency 136
9 Experience in International Lending 154
10 The Outlook 174
Appendix: Risk/Reward Ratios of US Banks 192
Glossary 196
Bibliography 204
Index 206
v
Editor's Foreword
The internationalisation of banking since the 1970s has been one of
the most intriguing trends in the financial industry since the Second
World War. Whether one measures it by the volume of overseas
lending, the modification of traditional banking tenets, or changes in
physical structures, it is a truly revolutionary development compar
able, for example, to the appearance of international merchant
banking in the Renaissance period and the nineteenth-century
growth of commercial banks financing trade with the developing
countries of the time.
This phenomenon has not, however, been matched by a compar
able development in banking literature. While a variety of books
have described the theory and structures of the new Euromarkets and
the function of the traditional foreign exchange markets, relatively
few books have been written about how bankers actually manage
their new international responsibilities. Even more unique are
volumes written by experienced, practising bankers about how they
deal with the practical problems and issues they face.
The purpose oft he Macmillan series in International Banking is to
fill at least a portion of this gap. While not specifically designed as a
series of textbooks, in that it is oriented towards the management
issues of international banking, the series does explain how the basic
international banking functions are performed, both in theory and in
practice. It will hopefully, therefore, serve as a useful reference point
for students of banking; individuals who are entering the field of
international banking, and outside observers such as customers and
academicians who would like to know more about how bankers run
their international business.
In view of the fundamental importance of lending to an inter
national bank's image, as well as its profit and loss statement, Mr
Donaldson's book is a key element in this series. Drawing on his own
extensive experience as well as that of a number of other bankers he
has interviewed, Mr Donaldson explains in detail how banks analyse
international credits and how such lending differs from the domestic
activity of these banks. He also explores the problems encountered in
the documentation and syndication of international loans and
analyses the loss record and relative profitability of international
lending using the limited data available at present.
vii
viii Editor's Foreword
Mr Donaldson's experience in international lending gives him
some unique qualifications in his role as author. An Englishman
with 20 years of banking experience, he has spent most of his career
with the London branch of an American bank which is generally
acknowledged as one oft he most highly regarded leaders in the inter
national banking sector. Equally useful has been his spread of
responsibilities, which have included not only that of senior officer
responsible for a variety of multinational corporate accounts, but
also, in recent years, that of senior credit officer in the branch with
staff responsibility for the quality of the bank's credits and its
lending procedures.
I am most grateful to Mr Donaldson for taking the time and effort
to produce this essential element in the Macmillan series. Should the
reader be interested in how the lending function meshes with inter
bank lending and other operations usually associated with the
money dealing function, he is referred to Nigel Hudson's book Money
and Exchange Dealing in International Banking. Also, the asset
management function as a whole is described from the standpoint of
the senior management of an international bank in another volume
in the series, The Management of International Banks.
1979 STEVEN I. DAVIS
Acknowledgements
My thanks are due to a number of my colleagues at branches of
Morgan Guaranty who provided me with written material on
banking in their countries, and introduction to bankers in London
who could talk in more detail. Also those who read and commented
on various chapters of the book and made suggestions which greatly
improved them.
My thanks also to the numerous bankers who talked to me
willingly and at length about the way their banks operate. Anything
that is original in this book stems from these interviews, and I am
profoundly grateful.
My thanks to my wife, and to my secretary, Mrs Sheila Parsons,
who shared the typing; and again to my wife and to my children for
putting up with me while I wrote the book.
Morgan Guaranty Trust has provided me with the experience on
which much of the book was based; but the views in the book are
mine and mine alone.
1979 T. H. DONALDSON
ix
1 Introduction
LENDING BY COMMERCIAL BANKS
Bank lending is a function of commercial banks. However, in the
early to mid-1980s, new forms of borrowing which combine some
aspects of securities with some aspects of lending (the securitisation
of lending) have begun to blur the distinction between commercial
and investment banking, at least at the margin. The enforcement by
law of the distinction in the United States is under attack, and its exis
tence in practice in the UK (and some other countries) has become
less clear cut. Nevertheless, the theoretical differences are clear, even
when in practice both concepts are covered by one organisation; and
so are the implications for the structure of the balance sheet, the
internal organisation, type of management and of service offered.
Commercial banks take deposits many times their capital and
relend at a narrow margin above cost, which is turned into a satisfac
tory return on equity by the substantial gearing. This has always
involved holding unused facilities available; a major impact of
securitisation is to multiply the importance of committed but unused
lending facilities. An investment bank does little or no lending, but
mobilises funds of others by means of underwriting, private
placements, etc. While it may take substantial risks - particularly in
underwriting - they are short term, with no continuing massive
gearing. Indeed, their nature makes such gearing inappropriate.
Because a commercial bank is highly geared, the loss of only 5 to 10
per cent of its loan portfolio can wipe out its capital. Because
depositors who provide the funds receive no share of profits, such a
risk is unacceptable. But low risks earn a low profit margin, and this -
since banks do not share in borrowers' profits - in turn helps to
condition the attitude to acceptable risks.
Naturally different banks in many countries will take varying
specific approaches to lending. Nevertheless, the attitude of all to risk
and risk control is conditioned by the fact that commercial banks are
highly geared lenders.
To remain highly geared and to earn a sound return on capital
despite a low return on each individual asset requires external
confidence. A bank thought to have a poor loan portfolio may lose
1
