U.S. Banks Must Write Off More Third World Debt

Federal banking regulators, in a surprise move, ordered U.S. banks to write off an additional 20% of their $2.9 billion in loans to Argentina and, for the first time, 20% of their $11.1 billion to Brazil.

Bankers privately confirmed that they recently got letters from a group known as the Interagency Country Exposure Review Committee, consisting of three federal bank regulatory agencies, ordering them to take the accounting actions.

Rumored for weeks, the agency’s move may have a dramatic impact on some U.S. bank earnings in the third quarter, when the reserves and charges must be recorded on earnings statements. “This is very . . . bad news for a lot of banks’ earnings,” one banker said. “This is not a happy day in the international banking community.”

The action is expected to trigger another round of additions to loan-loss reserves at banks such as Citicorp, which have lower reserve levels on loans in these countries, but it is not expected to hurt heavily reserved banks such as J. P. Morgan.

Citicorp, the nation’s largest bank, ranks as the biggest U.S. lender to Brazil, with $3.3 billion in loans. A Citicorp spokesman was not immediately available to comment.

Donald Crowley, banking analyst in San Francisco for the investment firm of Keefe, Bruyette & Woods, said that Bank of America may be the only California bank significantly affected by the decision. He said Bank of America may now choose to bolster its credit reserves by a modest amount.

A Bank of America spokesman declined comment on the regulatory action, but said the San Francisco-based financial institution has already set aside loss reserves of $2.4 billion on loans of $4.44 billion to developing countries, including Argentina and Brazil.

“We’ve been increasing those reserves steadily over the past several quarters,” the spokesman said.

Under U.S. law, banks must set aside funds to protect themselves against possible loan losses and may be forced to raise the level of those reserves if the loans are in jeopardy of not being paid back.

The ICERC, which reviews foreign loans, is made up of regulators from the Federal Reserve Board, Comptroller of the Currency and the Federal Deposit Insurance Corp.

The action was the first the regulatory agency has taken on Brazil, which froze interest payments on its bank debts more than a year ago and owes in excess of $5.5 billion in overdue payments.

The ICERC also told banks to raise reserves to 60% of their outstanding loans to Argentina, up from 40%, bankers said. Argentina owes banks about $40 billion of a total foreign debt of $66 billion.

The required 20% reserve addition is expected to cost Citicorp $660 million in the quarter, bankers at other institutions estimated. The total impact on Citicorp, including the Argentine charge, will be $735 million--an amount that will come out of existing reserves or be charged off against earnings in the third quarter.

After withholding interest payments for 26 months and building up arrears of more than $6 billion, Argentina resumed payments in June and has since paid a total of $80 million. The nation was declared “value impaired” by regulators last year, meaning the loans may never be paid back.