A close look at those big, unpaid US bank loans to Latin America

What would you do if you learned that your friendly neighborhood bank had more than 100 percent of its capital lent out to borrowers who could not repay? You might hop right down, withdraw your savings, and try a more prudent bank.

Such is the knife-edge of risk on which part of the United States banking system is balanced, because top American banks are in just that situation with loans out to Latin America.

Name the major US banks - Citibank, Bank of America, Chase Manhattan, Morgan Guaranty, among others. All, according to the Institute for International Economics (IIE), have lent well over 100 percent of their capital to five Latin American powers - Brazil, Argentina, Mexico, Venezuela, and Chile. (See story on Argentina's debt problem, Page 10.)

Manufacturers Hanover has 262.6 percent of its capital in those five lands, says the IIE, with the biggest exposure in Brazil and Mexico - the world's No. 1 and No. 2 debtors.

''With the present governments in Mexico and Brazil,'' says Robert Solomon, a former Federal Reserve Board official now with the Brookings Institution, ''no one would overtly use the word (debt) repudiation,'' or default.

Rather, in Mr. Solomon's view, the governments would persist in what they have been doing - ask for periodic rescheduling of their enormous debts, thus allowing them to pay interest to creditors.

At some point in this process, US bank regulators would have to determine when loans should be reclassified as bad, no longer to be carried as assets by the banks.

Currently the Latin American loans are listed as assets on the books of the banks, because at least some interest is being paid.

''The real danger to American banks (if the situation got out of hand),'' says international banking specialist Richard Dale, ''would be a defection of depositor confidence. Funds would flow out of those banks, which could not attract new deposits.''

How much discretion do the US agencies that regulate the nation's more than 14,000 banks have in reclassifying loans?

''If a debtor country said publicly, 'we repudiate our debt and will never repay it,' the examiners would have no choice but to classify those loans as bad.''

So says C. Fred Bergsten, former assistant Treasury secretary and now director of the Washington-based IIE. ''But anything short of outright repudiation,'' said Dr. Bergsten, ''allows the regulators to make very flexible interpretations.''

''If the debtors are paying interest, there is some leeway,'' said a top Federal Reserve Board official. ''If not, then loans must be reclassified.''

Reclassification does not automatically mean dropping all the way into ''bad loan'' status. Five categories of loans are listed by the Fed:

* Pass - no comment, i.e., a good loan.

* Special mention loan - a credit file deficiency, a minor problem.

Then come three categories of ''classified'' loans:

* Substandard - a clearly visible problem.

* Doubtful - based on a review of the bank's books, some loss is inevitable.

* Loss - a bad loan, not to be carried as an asset on the books. This ruling reduces a bank's capital and assets, restricting its ability to earn money through fresh loans.

Most experts reject the doomsday thesis that a rash of defaults lies ahead. But the ability of third world countries to handle their debts depends on three things:

* World economic recovery sustained enough to expand the exports of debtor lands to industrial nations like the United States.

* Belt-tightening in domestic third world economies to convince lenders that further loans would be safe.

* A continuing flow of loan funds - partly through the International Monetary Fund, which enforces belt-tightening measures, partly from commercial banks.

Of the nation's 14,500 banks, the comptroller of the currency examines those that are federally chartered, about 4,300 in all.

State-chartered banks, roughly 9,000, are examined by their state comptrollers and by the Federal Deposit Insurance Corporation. State-chartered banks which join the Federal Reserve System are examined by the Fed.

If a bank is owned by a holding company - as Citibank belongs to Citicorp - the holding company is examined by the Federal Reserve.