LOS ANGELES, JUNE 11 -- First Interstate Bancorp and Chemical New York Corp. yesterday became the latest of the nation's major banks to make large additions to their loan-loss reserves to cover expected losses on troubled international loans.
Los Angeles-based First Interstate added $750 million to its reserves and said the action would result in a loss of about $455 million for the second quarter and a "substantial" loss for the year. Chemical New York Corp. added $1.1 billion to its reserves that will produce a big loss in the current quarter.
First Interstate and Chemical join other major U.S. banking companies in recognizing that a significant portion of their loans to developing countries will never be repaid. Bankers hope that adding to their reserves will strengthen their hand in negotiating with their borrowers and clear the way for more innovative solutions to the five-year-old debt crisis.
Major U.S. banks are following the lead set last month by New York's Citicorp, the nation's largest bank holding company, which set aside $3 billion for bad foreign loans.
The moves were prompted by Brazil's unilateral suspension of interest payments on $68 billion in foreign loans in February.
However, First Interstate said $250 million of its added reserves were to cover troubled domestic real estate loans that it planned to dispose of.
"We felt it appropriate not only to reassess our international debt posture but also to accelerate the disposal of certain domestic nonperforming assets," said Joseph J. Pinola, chairman and chief executive.
Pinola said the reserves would cover about one-third of First Interstate's Third World loans. The ninth-largest banking company said extra loan-loss provisions would put its reserves at about $1.2 billion, or 3.7 percent of loans and leases outstanding.
Chemical New York said its action will cause a $1.1 billion loss in the second quarter and bring its allowance for possible loan losses to about $2.1 billion, or about 4.1 percent of total loans.