Jounial of EJriHntial Services Rtsfardi. 3; 3 5 ^ )e 19K9 KJuwnf .Academic Puhlishers

Market Reaction to Increased Loan Loss Reserves atMoney-Center Banks

JFFF MADURA.*Vv.\(«•;«((• I'rok'SSiir of Finani't; Florida Alluiuic Univrr^i

Wm- K- McLMNlO-Profi'-isiir. Floridu Atlamtc L'tmcrsin

Ab>, tract

On M;iy l'>. IW7- fititcirp iir!n(iLn(;eJ (afttr mEirkcis clowd) (lul ii would add B hjllioii io its iiiiin loss reservein recognition of the rxiorquaiilv otduis:aiiding kiaiis toTlnrd World c™ntric<:- Eleven other mt mi-y-center hankstoliiwcd this polit-'y (iVLT the ne>:l five nuinths. Tht reptirted reactitiiis ol politicians, eomomists. iind marketaijatysis tu iht increast'd loii[i loss ri'seri-es varieit trom despiiir to praise. Nevertheless, the important issue is iheinvestor's rL-;ii;tio!i its evidcnt-ed |iy cliaiijies in the market priCL's of the h.mks' slock. Tins ariidc uses an eventsEiidy ii]ethodoioi;y to stie'd St-irae iighi on the issue.

The first section of this article discusses possible reactions to Citicorp's announcements ofincreased loan loss reserves. The second section describes ihc formulation and results of theevent sttitly methodology as applied to stock prices of money-center banks thai adjustedtheir loan loss reserves. The third section draws implications based on the empirical analysis,including some plausible signalling and agency inlerpretations.

1. Pas,sible reactions to the announcement

A number of analysts, quoted in the poptjlar financial press,' believed that A negative marketreaction to the increased loan loss reserve should occur. Investors may have not krtown theextent of the problems with foreign loans. Under this line of reasoning, the announcementwould convey a strong negative message to the market, causing negative residuals for theannouncing banks.

An alternate reason for expecting a negative reaction is that the announcements wouldindicate that banks had conceded that payments would not be made. This might reduce thedebtor nations" incentive to pursue policies that could enhance the ability to repay principaland interest in the future.

Our Ihanks to Richard Fosherg and two anonymous reviewers tor htlptul commenis and sugpeslions. Any errorsare out respiinsihi!ity.

3f>() JEEf- MADURA AND Wni R. MtDANiEL

A third rt;ason for ^ negative signal is that sdnie of the announcing banks wouldpurportedly be uii;ible to finance proposed projects. The analysts who presented this positionbelieved that using funds for increased rcser\'es was causing the money-center banks to loseopportunilies to invest in "new strytt;gies to compete with foreign batiks, fast-growingregional banks, investment-banking firms and other financiai-service companies."-^ Thisargutrient holds only if the market foresees that the money-center banks' future investmentswould return more than their cost of capital. The banks* investment history in the foreignloan portfolios might give the markets reason for pessimism about the banks' investmentptans.

Some aQidysts expected a positive reaction to the announcements. They felt investorsmight interpret the move lo be an aggressive signal, showing that fhe banks were willingto accept large losses in lieu of negotiating lower interest rates, extensions on principalpayments, or other concessions. After the announcements, the banks may be able tonegotiate equity positions in some of the debtor nation companies as part of the payments,A similar approach is used by Musttmeci and Sin key (1988) in their "mad as hell"hypothesis. The> posit that Citicorp was giving a strotig signal that it wouid cease to givein to regulatory pressure to continue to grant credit to Third World nations—loans thatCiticorp and it,s investors believed to be negaiive NPV, Later, we compare our findings tothose of Musumeci and Sinkey.

A second reason for a possible favorable reaction is ba,sed on cash flow. The market mayhave previously recognized the poor quality of the Third World loans, with this recogtiitionbeing discounted into the existing price of the shares. The reduced valuation of the shareprices may have occurred at the time of the debt issuance or sometime during the term ofthe loans. It the value reduction was at the time of the issuance, the market was, recognizingthat the banks wt;re lending to Third World nations at rates that were too h)W in view ofthe anticipated risk, if the revaluation occurred at some time during the term, the marketfound thai circumstances in the world economy were changing, creating a reappraisal of thepotential for timely servicing of these debt instruments. Regardless of the time of therevaluation, the loan loss reserve annotincements would have provided no sigtiificaiit newinformation about the t)uality of the existing loans. The announcements do, however,convey to the market that the batiks are likely to start writing off the loans sooner thanformerly contemplated by investors,' When the write-offs occur, tht banks will discontinuepaying taxes on accounting profits that are unlikely to be ever realised as economic benefits.Perhaps, just as impiirtant, the announcements couid indicate that the banks wiil start torecover excess tax previously paid because of the overstatetnent of profit for tax purposes.These two facets of anticipated tax reduction cause investors to reassess their projection ofthe banks' operational cash flows, The tax benefits of the economic ios,ses are suspectedto be realized earlier due to the probable earlier write-offs signalled through the increasedloan loss reserves. Consequently, the present vaiue of the operational cash flow streamincreases, increasing share price valuation.

Another less significant effect is the re.sult of bank employee bonuses based on earnings.When the value of the loans is overstated, accounting profit is accruing that is not beingearned in an economic sense. The payment of bonuses "from these profits" is a transfer otshareholder wealth to bank employees (both managers and non managers). The announce-

MARKET REACrrON TO INCRRASKD LOAN LOSS 361

ments signal that this transfer is ceasing, and that previous improper transfers will berecovered as accounting eartiings understate economic earnings in periods after thtannouncements. Shareholders stop taking this opportunity loss in the cases where the bankoffered a profit-based honus to employees.

Finally, the announcements may have elicited no measurable abnormal price changes inthe banks' shares. Thi.s result could be because announcements reveaied no new informationto the market, i.e.. the investment cotnmunity had discerned that the loans were of lowquality and that increased loan loss reserves were imminent. Another reason for the possiblelack of reaction is that the announcements of the money-center banks (excluding Citicorp)were fully anticipated, Musumeci and Sinkey "s (1988) study detected a market reaction otitheir bank stock sample in response to Citicorp's announcement, which they interpret toreflect an anticipation of forthcoming announcements by these banks. Thus, even if anadjustment in loan loss reserve were viewed as relevant by the market, its reaction couldbe complete prior to each individual bank's announcement. A lack of market reaction couldalso occur because some or al! of the positive and negative effects described above offset.

Our empirical findings support the notion that the market viewed the announcements ofincreasing the loan loss reserves positively. The findings are consistent with the argumentthat the announcements signalled an aggressive stance by the banks, or that theannouncements provided new information about enhanced expectations ol operational cashflow streams.

2. Empirical testing

Dala on money-center bank stock prices and the Standard and Poor (S&P) 5(K) werecompiled trom the Daily Stock Price Omic. Only those money-center banks that announcedan increase in their kian loss reserves during the period from May 1987 thmugli August 1987are included in the analysis. Table 1 identifies these hanks, along with their respectiveannouncemeni dates, increases in loan loss resen e, and capital ratios. Because this listencompasses the majority of money-center banks, the implications of the analysis shouldbe representative for money-center banks in aggregate.

AM the banks included in the sample had assets of more than $30 billion at the time ofthe attnouncements. More important, they alt had significant exposure to the debt of lessdeveloped countries (LDC), To assess our hypothesis regarding a potential favorable marketreaction if the market had already discounted share prices for the LDC exptisurc, werestricted our sample to include only money-tenIcr banks, whose exposure to LDC debt wasmuch greater than other small banks. A recent article by Puglisi (1987) confirms the distinctdifference in expected market reactions on share prices of money-center banks versus otherbanks. He states that "'in coatnist tu the money-center banks, reported earnings beyond 1987for most regional banks that have taken special LDC loan loss reser\es wilt be little affectedby tax benefits. Jn general, by virtue of substantially lower relative exposures, the specialloan loss provisions necessary to establish comparable oi larger reserve coverage of LDCdebt are much smaller than the ones taken by money-center banks." The inclusion of smallerbanks in the sample would possibly distort inferences to be drawn, since announcements

362 iEFF MADURA AND Wm. R. McDANIEL

Table I. information atiout money-center hanks announcing incrcasiid kran iuss rtsc;rvcs

Money-center hank.';

Citicorp

Security PacitK"Bank of Boston CorpBan kAm ericaFiret Ititiirstate BankChemical Bankf-irsi ChicagoMetion BankMantjfacturers

HarovtrBanker*; TrustCha.se ManhattanJ P Morgan

.Announcementdate (iyK7)

Mav tyJune tJune 3Junt HJune t iJune 11June 12June l->

June If)June 16June 27July S

Atnount oftriLTease tn loatiloss provisions

S3.0 biSlionS(J.5 billionSO 3 billionSl. l biiiiotiSO.75 billionSl. l biitionSO.K bitiionS().4t? billion

SI.7 billionSO 7 billionSI 6 billionS0.R75 billion

Ratio ofcapital toas.sets(%)

.\')4.24.5:?,24.44.54.'»s.O

4 i l4.74.4(1.2

ARnouncemenf*ef f tc l (%)

1.82?(1.W6t\.(t<r>H

0.1441.7671.14K1..562

l.(M51.1f i7

-()2tW0.2 H!

'The announcement effect is defined here as the average daily abnormal ritum tor eaeh money-center bank overlt)t five-day period from the announcetiierl ditte to four days after the anntiLincement date. The melhoilDlogy used(o estimate annt)utn;ement eftects is discussed shortly

by smaller banks without significant exposure to LDC debt eould eonvey unexpectedunfavorable information to the market and offset any favorable consecjuences (from taxbenefits or otherv.'ise).

To estimate the abnormal market response to the loan loss reserve announcements, themarket model application is:

R,, = H, -t- f>iR,n, + F,,

where; R,, - rate of return on bank ( on day (,R^, = rate of return on the market on day ;.

a, = intercept,1 , = slope of the linear relationship between bank f s return and

the market return.f__ = unsystematic component of bank fs return on day (,

The expected return for bank ( on day / is estimated as follows:

where a and p are ordinary I east-squares estimators of the intercept and slope coefficient.The estimatitm period used to derive a and ( ranges from day t ,„, to /_[,. The examinationperiod extends from f.,,,to Z.,,,, while A, is the announcement day. The abnormal return {AR)

MARKET REACTION TO INCREASED LOAN LOSS 363

for each bank, ;, on each day during the examination period is estimated as:

AR,, = R, - R,,= R, - (a, + m,)-

Abnormal returns are estimated for a!l banks in the sample over each day within theexamination period. The average abnormal return on any given day is:

AAR, = (Vn}2AR,,f.i

for all banks in the sample. This method of measuring and testing abnormal returns is similarto that of Asquith and Mullins (1986).

TTie average abnormal returns for each day within the examination period are summedto derive the cumulative average abnormal return (CAAR,). A r-test is applied to AAR, andCAAR, to test for significance. The standard error and co variance of the A4/?, series is usedto estimate the standard error of CAAR for the time interval from r, to /*:

SEiCAAR,,,.) = [Q V'dtiAAR) + 2{Q-l)Co\{AAR^ AAR,,,^)Y

where: Q -1* - / , + 1 (representing the number of trading daysin the interval).

Var(AAR) = x(AA/f, - AARy/90,I - I O I I l-l!

Co\{AAR,, AAR,,,) = (1/90) '^ [(.AAR, - AAR)(AAH,,, - AAR)\.I-.100

This formula captures any first-order serial dependence among the AAR, and, therefore.,adjusts the estimated standard error of the .AAR. series for autocorrelation that could resultfrom the clustering of events in calendar time.

The f-statistic estimate for the C.AAR over the interval from (i to /* is:

i. Results and implications

The estimated AAR^ over the examination period appear in table 2. The A.AR for days -'>and -5 are statistically .significant, perhaps implying that the market anticipated the banks'intentions before the actual announcement and believed the new information to befavorable. In addition, the CAAR accumulates to .03139 over the ten days before Iheevent.offcring further evidence of anticipated favorable information before the announce-ment. Although the AAR?, on days -10, -6, -2, and -1 are negative, they are not signifi-cantly different from zero.

The mean residual for the event day and the foilowing three days strongly suggest afavorabie market reaction to the announcements. The average AAR exceeded 1.0 percent

364 JEFF MADURA AND Wm. R. Mt DANIEL

Tahit' 2. t^mpincaf fesults: t'ffi'it tif iifinitum:t'd incn'UMf in Itxiti loss

l\\\ Ufi

-10

- f i

-A

intcrva!

(l,(hKlS4

O.OIOSh

O.OltW

t i l

C,\,\H

- j O 1,, - ;

0 to *4

(-statist tcfor A.AR

0.1.SK

2.(I45't..l28

-t.2'.MI

CAAR

O.i)O75,i

O.Ot.WfO.(I24K1

I.M 22.653-

-(1.407

i.:7:!-o.iw,

-('tl!i7Mi3(0

flitCAAR

O.0M41O.(jfi550

O.()77MSO.O7.i720.OS24Hi)_(IK!44

O.(I75M4

0.(17423

f j( '.ht

on me even! d^y alone, and then again on day i- and day i-,. None of the estimated AARsafter (Jay /: was significantly different irom zero. While the CAAR over the time inter\'alfrom (. .^ to / i is positive, it is not significant. The CAAR t)ver the inter\al t^^ lo l^ is positiveand significant. Market reaction appears to subside after that period.

li' the market reaction was significant only for the Citicoq) announcement, an ttnalysison all bank.s in the sample except for Citicorp would result in notisignlficani averageresiduals during the period from i,, to /j. We recstimated the residuals for a sample excludingCiticorp, and found them to be quite similar to those estimated from our original .sample.Therefore, the market reaction detected is not solely due to price movements in Citicorp'sstock.

One might he able to build an explanation'' of the significant mean residuals on the basisof the "aggressive signal'" mentioned in the first section. Thi.s explanation is hard to tie lo

MARKET REACTION TO INCREASED LOAN U)S,S 365

financial theory, although Musumeci and Sinkey (1988) present a plausible approach.Nevertheless, ati alternative exptanation, having more intuitive appeaJ lo us, is based on theimproved expected stream of operating cash flow approach as described below.

The announcements of increased ioan loss reserves may bear some similarity to a signalthrough a dividend change. Asqtjith and MulHns (1986) state that a signal via a dividendannouncement is effective because it is ' backed by hard, cold cash." The loan loss reserveannouncements signal that the bank will write off some bad TTiird World loans sooner thananticipated, and ihe economic consequences of the faulty investment policies of the bankswill be padiaJly offset by the reduction of cash payments for taxes on accounting incomethat was not earned (and is not being earned) in an economic sense. The market apparentlyhad already accounted for the banks" poor investment policy, as suggested by studies thatdetect an unfavorable market reaction to events affecting money-center banks with foreignloan exposure. For example, Bruner and Simms (1%7) detect an unfavorable marketreaction to Mexico's announcement that it could not meet its loan repayment schedule in1982. Cornel! and Shapiro (1986) found !hat the negative market reaction continued beyondthe initial recognition of an international debt crisis. SmirJock and Kaufoid (1987) detectedmore unfavorable market reactions on money-center banks with a greater decree ofexposure. White the market already discounted money-center bank values for foreign loanexposure, it may no! have accounted for the likely tax benefits that would be anticipatedwhen loan loss reserves were increased. At best, the market could have accounted for theanticipated tax benefits without knowledge of the timing of the benefits,; the announcementsin tbe summer of 1987 reduced the timing uncertainty.

This signal differs significantly from the one proposed by Musumeci and Sinkey (1988).Their empirical analysis measures the market's rcactioti to Citicorp s announcement byanalyzing the residuals of a sample of ten money-center banks and a sample of 25 bankholding companies. They found the CAAR to be significant on day 1 after Citicorp'sannouncement, and suggest that tbe delay in the market's digestion of the signal was causedby the "magnitude, importance, and unforeseen nature*' of Citicorp's announcement. Theirconjecture is supported by two facts: (1) the varied reaction reported in the financial pressand (2) the uncertainty of the "follow the leader" behavior on tbe part of other money-centerbanks.

The signal suggested by our empirical work is more bank-specific. Each bank'sannouncement of increased loan loss reserves signalled a desire for earlier write-off of someThird World loans. The market's recognition that the subsequent write-off would improvethe bank's expected operational cash How is more consistent with our empirical results.

A second interpretation, founded in agency theory, is plausible. If the remunerationpackage of bank managers includes a bonus based on earnings per share (EPS)performance,^ managers bave an incentive to delay increasing the loan loss reserves. Theycan maintain EPS artificially high, exploiting the flexibility built into accountitigconventions applicable to the loan loss reserve reporting.*" The announcement of increasedloan loss reserves leads to lower future EPS, thereby reducing cash outflows (in the formof EPS-based bonuses) to managers who benefited from the previous unwillingness of banksto acknowledge inevitable ioan losses,^

The consolidation of our explanation with that of Musumeci and Sinkey (M&S) may

366 JEFP MADURA AND Wm. R. ML DANIEL

provide an instructive, though hardly conclusive, story. M&S find evidence of strongnegative reaaion in their event study data for Brazil's announcement of its debt moratoriumto support a strong negative reaction to the announcement. The simple average day 0residual for our 12 money-center banks (see their table .5) is -2.92 percent^ (-2.67 percentwhen CiSicorp is excluded). M&S find that the increase in loan loss reserve by Citicorpinduced a positive reaction on the value of large banks that was not as strong as themoratorium-related negative reaction. The simple average clay (I residual for our 12money-center banks based on their table 6 is 0.92 percent (0.50 percent when Citicorp isesctuded). Our study shows an average residual of 1.146 percent for day 0 to each bank's,announce mem that it was increasing loan loss reserves.

The market may have expected that LDC debt had the poteniiai for reducingmoney-center bank asset values, with the timing of the reduction being uncertain. Ihemorau)rium anriouncement was not fuily anticipated, and, when it occurred, it changedpotential value reductions into actual reductions, the magnitude of the moratoriumannouncement effect is probably not targe enough to contain all the bad news about the poorquality of the LDC ioans, but intuitively its magtiitude is consistent with new informationabout when the eamomic losses would occur. By wmparison, the magnitude of themoney-center banks' average roatiion to Citicorp's loan loss reserve announcement issignificant but much smaller. The market can now foresee that these banks will sooner orlater announce loan loss reserve increases with the consequent benefits, whether the benefitscome from M&S's mad-as-heil thesis, the improved stream of operating cash flow notion,or the agency idea. Finally, the market's reaction to each bank's announcement of increasedloan reserve has a magnitude somewhere in betweeti the size of the a-actions to the othertwo announcements. The banks theoretically couki have delayed rea>gnition of the LDCdebt problem indefinitely, so the timing of the recognition cannot be inferred with accuracy.The announcement eliminates all uncertainty of when the loan loss reserve increase willoccur and informs the market that the benefits of the increase begin immediately. Thefruition of benefits of increased loan loss reserve conveys a more powerful p^>sittve messagethan the poteniiai for that increa.se. As expected, the negative rection to the bad news aboutihe severity ot low-quality LDC debt seems to be greater than the positive reactions toannouncements that signal coming benefits of write-offs of that debt.

The market reaction to each bank's announcement may vary because of differences inthe announced information and in the market's perception of the bank. The market reactioncould be affected by firm-specific information such as the magnitude of the increase in loanloss reserves and the bank's capital adequacy. To a.ssess these possible relationships, theSpearman rank correlation coefficient between the cumulative residua! for bank / during theperiod from /„ to (/ and the magnitude of additional loan loss reserves for bank / wasassessed. The coefficient is not significantly different from zero, suggesting that the size oithe increase in loan loss reserves did not influence the degree of market reaction. TheSpearman rank correlation coefficient was also computed to a.ssess the assodation betweenthat same residual and the capital ratio for each bank. The coefficient is negative andsignificant at the .10 level.'" This inverse relationship suggests that the market reaction ismore pronounced for batiks with less capital adequacy, .so that the banks perceived as beingmore risky benefited more from the announcement. A possible explanation is that the banks

MARKET REACTION TO INCREASED LOAN LOSS 367

with high capital ratios are in less danger of liquidity shortages both in the short andintermediate terms. Thus, the improved cash flow potentiaJ from reduced tax obligationswould increase value but have little influence on risk stemming from potential iliiquidity.Banks with the low capital ratios couid be marginal in terms oi short-term andintermediate-term liquidity. The market, as well as regulators, might welcome the improvedliquidity and reduced risk that the announced increase in loan loss reserves signals. leadingto a more pronounced revision of share price valuation.

4. Concluding commenls

The results of our study offer implications only tor the population of money-center banksand may not necessarily apply to regional and superregional banks. Increased loan lossreserves could cause an adverse reaction if the unfavorable information embedded in theannouncement was not already accounted for in market prices or bank shares. In our study,the unfavorable information appears to have been already accounted tor, possibly becauseof the publicity on money-center hank exposure to foreign loans." For other banks withfirm-specific loan problems, an announced increase in loan loss reserves may signalunfavorable information that was not previously known in tbe market. A study similar toours for superregional and regionai banks may he an interesting avenue for further research.

Based on our results, some analysts may conclude that lianks should have boosted loanloss reisertTs mueh earlier. Yet there was some concern that an earlier announced increasecould have adversely affected the banks' negotiating power with LDCs (see EconomicReview. 1W8).

LDC loan reserves are included In the primary capital ratios of ihe bank holdingcompanies. However, under the international capital adequacy guidelines (lo be phased infrom \'iH9 to 1^92), primary (or "core") capital will not include the,se rt;st;r\'es. Banks thatdecide to boost reserves under the new guidelines could be pressured by regulators tocompensate for the decline in primary capital. Once the guidelines are fuily implemented,lutiirc loan loss reserve announcements by money-center banks could elicit a differentmarket reaction.

Notes

L Poi cxampli:. see Tiill Menc-zes' Ass.i^i;iled Press stiirj, "Kspcfis Vxnd Ptaiit t(i CiLlairp," May 21, mST.

2. "Miijor Banks' tncrcases in l ^an - t ^ s s Reserves Mav f 'nmp Espansioii," Tht' Wull Srn'crJouriKi!. Jiilv 2^,

i. The Tail Rctbrm Act cif !9Sf) dittates ihat ti;inks wiifi assets In excess of S^iM) niillion nia\ not expenseincreases in loan loss ti;si;r\T for irtotut tax purposes. The tax doductibk' expense is alloiicd only when tht hankactuaiiy writts off the had loan

4. fivents within the examlnalion peruid. other than loan loss icsertc annouiictmenrs. m;i\ havi; had some cftcct(in the residuiils. Thus, wt fonducleJ an exhaustive search through the Vndl Sitcct Journal lo identify eventsaftecting the mnncy otnlLT hanks during ihe period. We found no event IhLit we doemcd to he sufficientlv hro:idand/or signiticanl in its effect for coiisidetatioii

5. information ahoiit wlirther the managements of the hanks in this study in faei have an Ei'S-bas

368 JEFF MADURA AND Wm. R. MrDANIEL

not public informaijon. Thus, tht agoncy argtimetii h hypothcticitl.6. A conflict of interest arises htrcaiLsc ihc invtstOTS desire that Ihc iticrcascd loan kiss reserves ciccjr as

as ptissihk, while map.agerrtent *ith EPS-based hi w uses desires to delay the increasL-s. Investors tnay be unahlctn protect themseh es from this conflict ot interest, shoti tif the proxy niechantsm. Regarding money center batiksnith large tJiptisurc to fiirtjgn loans,pressure irtim tegiilatfiry agenciesatiti unfavorahk-coverage by the pr(;ss mayhave greatly itifluenced the banks' managements to change their IOHI) loss policy

7. Pxssmore l H SJ!) suggests another agency factor, catiscd hy hank m;inagers who intend to move lo atiolherhank in the near tiiturt. These m;tniigirs have an incentive tD overstate current EPS, hoping fur short-run benefits,hut avoiditig the iotig.run market reprisals for the overstiitement by being etiipinyeil h\ a different hank.

K. l i l t averaces in this paragraph are given only to hint at the relative magnitude of the effect of the events.Any attempt to anthmeticaliy mantpulate the nutnhcrs from the various events would be improper, because eachJitimber is based on an event miKiel specified somewh:it differently.

y. The mark el reaction was most pronounced tiver this period.10. We also tifi <i regression nn.idi'i to assess tht.'.e rela(ionship,s. There was no sigjiificatit relationship between

the cumulative residual ^ud the size i.)t the increased loan los.s receives. "Hie satnc result occurretl evcrj afteriidjsi.sting the increased loan loss rcsenws ftir the levei of assets. A separiitu regression v 'as applied to assess therelationship ber\i'ecn the cumulative residual and the capital ratio acrf.vss banks. Again, the hypothesis of nosigitificatit relationship cannot he rejected. This result dtffers from that derived from the Spcarmati rest, stjgyestingthai whtle the reiatiotiship is nol iitiearly sijjnifieant, there is a .significant inverse relationship o! rank order,

11 Thcie is some e\idence that the ni.irkfi vi'outd ha\t already accoutued for the negative aspects of thetntetnaliotial debt crisis. LDt" ioans for sale iti tlic sccond:tr\ rnarkct were priced at a significant discount fromtheir face v.ihtt, lignalllng that Iwnks with LDC loans would have to ahsiirb some kisses.

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MARKET RhACnON TO INCREASED LOAN LOSS 369

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