Federal Reserve Board Chairman Paul A. Volcker yesterday denied that international efforts to help debt-ridden developing countries like Brazil and Mexico are a "bail-out" for big multinational banks that lent the countries hundreds of billions of dollars.
Volcker, testifying before the House Banking Committee, said that if these countries are unable to repay their bank debts, there could be an international financial collapse that would "jeopardize prospects for our recovery--for our jobs, for our export markets and for our financial markets."
But he agreed that bank lending to countries like Mexico and Brazil may have grown too fast. The nine biggest U.S. banks have lent Brazil and Mexico more than $25 billion, equal to 93 percent of their capital.
Volcker said federal regulators were studying the way they supervise U.S. banks to see if there are better methods of making big banks aware of the risks of international lending.
He said an "integral part of the overall effort" to help financially strapped countries meet their debts is a big increase in the resources of the International Monetary Fund.
In December, the major industrial nations decided that IMF resources should be increased about 50 percent, or by about $30 billion. The U.S. share would be $8 billion.
When Treasury Secretary Donald T. Regan appeared before the committee last December, in part to push for congressional approval of a big increase in the U.S. commitment to the IMF, he was met with skepticism. Chairman Fernand St Germain (D-R.I.) said the increase smacked of a bail-out for big banks that made too many risky loans to countries like Mexico, Brazil and Argentina.
Those three countries alone have international debts totaling roughly $200 billion, many of them to private banks in the United States, Europe and Japan.
Volcker said the banks will be helped if the problems of the major debtor nations are solved, but said the entire international financial system is at risk in the current crisis. "There is no intention to protect bank stockholders. But everybody benefits if there is a resolution," including the banks, he testified.
Furthermore, he said, the IMF agreements to aid Brazil, Mexico and Argentina all require banks to increase their lending to these countries. For the banks, it is a "bail-in," Volcker said.
Criticism of the increase in IMF resources was muted yesterday, although several legislators said it is hard to understand why the Reagan administration is willing to help troubled developing countries and the banks, but unwilling to take steps to reduce the record unemployment in the United States.
Rep. Frank Annunzio (D-Ill.) said his constituents could not understand a vote to increase IMF resources, but could understand a vote for a $5 billion jobs bill. Rep. Barney Frank (D-Mass.) questioned why the administration has an "activist" approach to international economic problems but is content with a "laissez-faire" attitude toward equally serious domestic problems.
Volcker said regulators are studying a variety of approaches to supervising international lending by U.S. banks including:
Setting fixed limits on the amount any bank may loan to one country, similar to limits on loans banks may make to domestic companies or individuals. Volcker said such limits might be arbitrary.
Changing accounting and reserve practices to create "financial incentives" for banks to be more careful in taking on risky loans.
Increasing the amount of disclosure of a bank's loans to foreign countries.
On another matter, Volcker said the money supply will increase sharply in January, by about $50 billion. But he said much of the increase is attributable to the money market accounts offered by banks and savings associations. In less than two months, the deposits in those accounts grew from nothing to about $200 billion, he said.