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How Exposed are Banks to Developing Countries

Wells Fargo Economics Group Special Commentary

16 February 2016

It appears that investors may have become concerned in recent weeks about the exposure that some banks in advanced economies have to countries in the developing world. We find that Austria and Greece, countries with relatively small banking systems, are the advanced economies with the most exposure (when expressed as a ratio to their total assets) to developing countries. However, the banking systems of Austria and Greece are not very large relative to the banking systems of major economies, such as France, Germany, the United States or Japan.

 Outside of Belgium, Spain and the United Kingdom, developing economies account for 5 percent or less of banking system assets in major economies. Of course, individual banks in specific advanced economies could have high amounts of exposure to the developing world. In general, however, systemic banking crises in most advanced economies due to their exposure in developing economies does not seem likely, at least not in the foreseeable future.

How much has Bank Exposure to Developing Economies Increased?

  • Many developing countries have experienced an increase in financial leverage since 2007

Which Advanced Economies are most Exposed?

  • The U.K., the U.S., and Spain have the most exposure on an absolute basis.

Are External Debt Crises Brewing?

  • Most of the foreign lending to developing countries has been denominated in U.S. dollars.

Which Developing Countries have Borrowed the Most?

  • The probability of an external debt crisis in China in the foreseeable future appears to be rather low.
  • South Africa could be at risk.

Outside of Belgium, Spain and the United Kingdom, developing economies account for 5 percent or less of banking system assets in advanced economies. Of course, individual banks in specific advanced economies could have high amounts of exposure to the developing world. Because a detailed analysis of the balance sheets of individual banks is beyond the scope of this report, we would encourage motivated readers to do their diligence if they have any concerns about individual banks. In general, however, systemic banking crises in most advanced economies due to their exposure in developing economies does not seem likely, at least not in the foreseeable future.

Read the complete commentary here:  bank-exposure-developing-countries-20160216

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