Items related to Bank Risk Analysis in Emerging Markets
Synopsis
Banking is a risk business, but one mistake can wipe out a year's profits or more. Correspondent banking is a reliable, high yield activity, and trade finance in the emerging markets offers some of the highest returns available in conventional banking. However, as the banker ventures into the emerging markets he finds risks which hardly exist in the developed economies. Balancing risk and reward is critical to maintaining profits and reputations, as well as operational independence.
It is all too easy to be seduced by the high yield on a short-term trade transaction, and to enter a deal without a thorough examination of the obligor. A review of the spreadsheet provided by a rating agency tells little more than the size of the bank and its own view of its profitability, and annual reports from emerging market banks are apt to be little more informative. A real understanding of the nature of the bank, the quality of its management and the probability of central bank support in case of need is also required.
As the author, Howard Palmer, so ably points out, transaction risk when dealing with banks in emerging markets is very much higher than in the correspondent banking relationship encountered in the developed world, and bankers ignore this at their peril. The tried and tested methods of dealing with the leading banks only in countries with good international exchange positions do not apply in the new markets.
In emerging economies, bankers cannot rely on the implicit guarantee of efficient supervision and probable bail out or rescue of banks in difficulty which is common in developed countries. Instead, they must devote care and attention to appraising the real risk of dealing with small and perhaps newly established banks, with only the most rudimentary accounts to guide them.
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About the Author
Howard Palmer, the author of International Trade Finance-A Practitioner's Guide (Euromoney 1995) and Correspondent Banking (Euromoney 1990), is the Assistant General Manager of Raiffeisen ZentralBank (Austria) London and is Head of Trade and Lending activities. Howard Palmer is a banker, lecturer, consultant and author who has the rare privilege of being both an active market-maker and theoretician. Previously consultant to Euromoney, EC Gardner and dozens of international banks, he has lectured, globally, to literally over a thousand bankers in 30 countries. Mr Palmer is married with four children.
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Preface
How often have you heard a colleague say on the other end of a phone line 'I'm sorry but our lines are full' or, worse, 'Yes, we are prepared to look at the transaction on a case-by-case basis. The overuse of these terms means that, like the benchmarks bankers use to determine their risk portfolio, they are reactive, historic and increasingly irrelevant in today's banking world. At best they display an inadequate response to an enquiry and evidence a lack of strategy in evaluating bank and political risk in the emerging markets.
However, this is not a book that has the hidden agenda that we should all lend money to every bank in every emerging market. The book's birth was in the Euromoney courses on Correspondent Banking, International Bank-to-Bank Marketing and Bank Risk Analysis run over the past eight years. In one way, the book is designed to be a follow-on from International Trade Finance - A Practitioner's Guide as much of the risk evident in international trade transactions is bank risk, and to go beyond that into other markets and products to present a more complete picture of risk in practice. Locating and mitigating risk and avoiding problem banks is the book's main objective.
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