LENDING IN INTERNATIONAL COMMERCIAL BANKING

LENDING 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 Series Standing Order If you would like to receive future titles in this series as they are published, you can make use of our standing order facility. To place a standing order please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address and the name of the series. Please state with which title you wish to begin your standing order. (If you live outside the UK we may not have the rights for your area, in which case we will forward your order to the publisher concerned.) Standing Order Service, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire, RG212XS, England. 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 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended), or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33-4 Alfred Place, London WClE 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First edition 1979 Reprinted 1981, 1983 Second edition 1988 Published by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS 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 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 vii 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 comparable, 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 comparable 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 of the 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 international 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 of the most highly regarded leaders in the international 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 interbank 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