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Bank Portfolio Exposure to Emerging Markets and Its Effects on Bank Market Value

Large U.S. banks have been heavily exposed to debt from emerging countries. As these countries have encountered serious financial problems, the value of emerging country debt has decreased, with a potential negative impact upon banks. This paper addresses the issue of whether the market, through the equity price of the banks, fully values these debt valuation changes. Crucial to the analysis is whether the information about individual country debt holdings of large U.S. banks is sufficiently transparent so that it can be recognized by investors.

Market participants may only be aware of the total foreign debt exposure of the banks, but not the exposure from individual countries. The extent of general knowledge about country exposure will affect the degree to which changes in the value of country debt is reflected in the value of bank equity. This paper examines whether country debt valuation is reflected in bank stock prices overall and during the periods of financial crises.

The devaluation by Mexico of the peso on December 20, 1994, the rapid depreciation of the Thai baht and Indonesian rupiah in the Fall of 1997, and the Russian ruble devaluation by over 60 percent in 2 weeks in August 1998, followed by massive infusions of capital by the IMF to avert an international monetary crisis, serve as a reminder of the financial and political instability of many of the lesser developed countries and emerging markets.

As a consequence, lenders and investors to Mexico, Russia. Indonesia, the Philippines, or other emerging nations, must rely upon the timeliness and willingness of international organizations, central bankers of major industrialized countries, and the world’s bankers to provide funding to avert crises and support investor value bank or nonbank.

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Bank Portfolio Exposure to Emerging Markets and Its Effects on Bank Market Value