Bank of England: US a big credit risk:
Financial Times
By Ed Crooks, Economics Editor
Published: June 25 2000 21:01GMT
The US is the country that poses the biggest potential threat to the stability of the British financial system, according to a report from the Bank of England.
The report, which will be published with the Bank's financial stability review later in the week, tries to assess the potential loss faced by UK-owned banks caused by defaults overseas.
The authors calculate an expected loss by multiplying the total exposure of British banks by a measure of credit risk, based on agency credit ratings, that reflects the chance of a default.
On this calculation, the US tops the list of threats because it is by far the biggest borrower from Britain. As of the end of last year, British banks' total exposure to the US was $95.2bn (œ63.5bn) - more than three times the lending to Germany, the next largest borrower, with $29.8bn.
But lending to the US is also on average more risky, because over half of it is to private sector corporations and individuals.
More than three-quarters of lending to Germany is to banks. So the risk of loss for every dollar lent is three times as great for the US as for Germany.
After the US, Argentina, Brazil and Indonesia are the three largest borrowers; British banks have lent $3.2bn to Indonesia, a country seen as riskier than any of the UK's principal debtor countries except Ecuador. Despite the widespread concern in recent years about lending to China, it is low on the list of potential threats to British banks.
The Bank says it hopes to use the research to see how best to deploy that portion of its œ32m expenditure on financial stability that goes to monitoring overseas economies.
Private investors will also want to take note of the implications for British banks.
The Bank warns, however, that its calculations can only be as good as the measure of credit risk used.
In the past - just before the Asian crisis, for example - those measures have sometimes proved less than reliable.
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