(FORTUNE Magazine) – It's getting to be a familiar plot: Banks throw dollars at fast-developing countries. The borrowers gorge on cheap credit until their propped-up currencies collapse, swamping them with dollar debt they can't repay.

In the past, the black hats with the big losses were usually U.S. banks. But the Latin American debt crisis of the 1980s taught U.S. lenders a lesson: Avoid massive loans to volatile young markets. This time around, in Asia, the reckless players are the Europeans and the Japanese. The Godzilla threat is that Japan's bad loans to the rest of Asia could cause a banking crisis at home--hammering the Japanese economy and thereby shutting down a mammoth market for Southeast Asia's exports (see "Asia's Meltdown: The Risks Are Rising").

For U.S. banks, the numbers are comforting. They have $23.8 billion in loans to the five problem markets: South Korea, Indonesia, Thailand, Malaysia, and the Philippines--held mostly by six banks (BankAmerica, Bankers Trust, Chase, Citicorp, First Chicago, and J.P. Morgan). That's peanuts compared with the almost $100 billion Latin America owed U.S. banks in the late 1980s.

American banks also hold $18.2 billion in Asia-related derivatives, mainly foreign exchange contracts. Wild currency swings have hammered the value of those instruments at some big banks--at J.P. Morgan, derivatives troubles contributed in a big way to a 35% drop in fourth-quarter earnings. But unless currency chaos persists, the damage should prove manageable.

If only Japanese banks could say the same. Already riddled with bad loans at home, the Japanese banks hold $97.2 billion in loans to the five distressed countries. "It's a huge problem," says William Seidman, the former head of the U.S. savings-and-loan bailout agency and an adviser to the Japanese government. As many as 75% of Japanese banks are already insolvent--they simply lack the balance-sheet strength to set up reserves for another slew of bad loans. The Japanese government has stepped up with a $228 billion bailout plan that would give weak banks a massive infusion of capital. Says Seidman: "If the Japanese don't clean up the banking system, their economy won't recover."

Meanwhile, French banks hurled more money at Southeast Asia than all U.S. lenders. So did German banks. The threat of heavy losses has prompted Moody's Investors Service to downgrade the credit ratings of two French banks and put three others, including perennially troubled Credit Lyonnais, on warning.

The Japanese and Europeans got into this fix for the same reason: a desperate bid for growth. Japanese and French banks struggle with stagnant markets at home, while big German lenders face competition from nimble local savings banks. So they recklessly courted the world's most credit-hungry region. Japanese banks could raise funds for 1% at home and clean up by lending the yen to Korean or Thai banks at 4% to 5%. The local bank would then relend the money at 7% or 8% for a risky condo or office project.

The Japanese and Europeans ignored two dangers: overexposure to a single region and the potential for devaluation. Despite the warning signs, they courted new business right up until panic began to spread in the summer.

Then many Japanese banks reversed course. In November and December, they became much less willing than U.S. banks to issue fresh credit to replace short-term loans to customers. Though it isn't well known, that about-face threatened Asia with a disastrous wave of bankruptcies. Two days before Christmas, U.S. officials successfully lobbied the Japanese government to push its banks to start writing new loans.

U.S. lenders were saved from major Asian troubles in part by sophisticated risk-management systems that balance their portfolios by region and industry. "The Americans are way ahead of the Japanese and Europeans in limiting risks," says Kevin Mellyn of Mitchell Madison Group, which advises banks on risk management. Citicorp's system--called Windows-on-Risk--began flashing a red light in early 1997. Months before the crisis, Citicorp reportedly cut its exposure to the Philippines by 15% and its loans to Thailand by 50%.

Citicorp got an astonishing 23.5% of its earnings in 1997--$940 million--from the region, according to Thomas H. Hanley, a managing director at UBS. It's the only bank that offers mortgages, credit cards, and car loans from Hong Kong to Bangkok. The crisis will slow its powerful retail growth. But it's also creating big opportunities. Since the crisis, Asians have been shifting their savings en masse from shaky local banks to Citibank branches. Analyst Hanley reckons that in Indonesia, deposits jumped 40% in 1997. In the future, those surging deposits will give Citicorp the baht and won to grow its local lending. "The crisis is not a net plus for 1998," Citicorp CEO John Reed said at an investor conference in January, "but it could be a major plus in three years." That is, if his Japanese rivals don't mess things up.

REPORTER ASSOCIATE Eileen P. Gunn