Transcript banking crises in latin america and the political economy

BANKING CRISES IN LATIN
AMERICA AND THE POLITICAL
ECONOMY OF FINANCIAL
SECTOR POLICY
Agustin Carstens
International Monetary Fund
March 28, 2004
• Uruguay’s ex-President Sanguinetti
summarized precisely a widely held view
about banking in Latin America when he
said:
“The banking system will never take you to
paradise, but it can bury you in hell in an
afternoon.”
2
Countries of LAC Have Suffered
Numerous Episodes of Financial Sector
Difficulties
Subjects of concern:
Frequency
Severity
Tendency to repeat
3

Frequency and Repetitiveness
• From 1980 onwards, 22 countries in LA have
suffered either a financial sector crisis or
financial system distress and averted crises
Number of Episodes
4
Number of
Countries
3
3
2
1
3
9
7
4
 Severity
• Crises have been extremely costly from the
point of view of:
― Public debt
― Economic activity
5

Severity (cont’d)
•
Fiscal costs
Fiscal Costs of Banking Resolution, 1997-2003
Number of
Crises
Average
Nonperforming
Loans
(% of total loans)
Fiscal Cost
(% of GDP)
LAC
14
35
19
Developed
7
14
12
Type of
Countries
Source: Hoggarth and Sapporta (2003) and IMF staff estimates.
6
 Severity (cont’d)
• Banking crises accelerates dramatically in short
periods of time the accumulation of public debt:
― During the last ten years, six countries in
LAC have seen their public debt increase by
about 40 percentage points in terms of GDP
within one year
7
•
Speed kills
Figure 2: Dominican Republic: Evolution of Public Debt
(Annual change in total public sector debt; percent of GDP)
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
1999
2000
Foreign currency denominated
2001
Domestic currency denominated
2002
2003
Attributable to exchange rate movements
8

Propensity to Crisis Repetitiveness
• “Short-termism” and low intermediation
Bank Intermediation in Developing Countries, 1987-2002
(in percent)
Bank Deposits
Bank Credit
Median
Upper
Quartile
Lower
Quartile
Median
Upper
Quartile
Lower
Quartile
LAC
26.8
37.1
16.6
22.5
26.2
15.0
Other developing
countries
42.5
67.0
33.1
45.8
59.9
24.8
Sources: IFS, IMF staff estimates.
9

Propensity to Crisis Repetitiveness
(cont’d)
• Poorly enforced property and creditor
rights
• High interest rate spreads
• Cost of bank rescue might threaten fiscal
sustainability
10
Institutional Factors that Exacerbate
Banking Distress
•
Deficiencies in prudential regulation and supervision
FSAPS in Latin America: Summary of Main Findings
Observance of Basel Core Principles for Effective Banking Supervision
(Percentage of countries “materially non-compliant” or non-compliant”)
All Countries
Other
Developing
Countries
Latin American
and Caribbean
Countries
Independence
43
42
75
Legal Framework
12
6
38
Legal Protection
32
23
63
Capital Adequacy
41
42
75
Loan Evaluation and Loan-Loss
Provisioning
35
35
50
Market Risks
53
61
75
Internal Control and Audit
41
48
63
Off-Site Supervision
28
29
50
Consolidated Supervision
53
55
75
Basel Core Principle
11
Main Policy Change
 Supervisory and Regulatory Independence
•
•
•
Analogy with approach to combat inflation
It is essential that society express its outcry for
financial stability by enshrining in the law their
desire of having within the state an institution
exclusively devoted to this objective.
Key elements:
a. Supervisory authority needs mandate to procure
above all financial soundness;
b. Autonomy in decision-making;
c. Availability of resources;
d. Accountability regime.
12
Urgent Need to Strengthen Institutions
and Supervisory and Regulatory
Framework
 Some policy priorities
• Limits on exposure to government
• Stronger governance of state banks
–
–
–
–
Clear and well-defined objectives
Provision of the means to fulfill such mandate
Isolation of institutions as much as possible from political pressures
Strict supervision and regulation
• Adaptation of supervision and regulation to new challenges
– Risk-based supervision
– Off-balance sheet exposures
– Conglomerates and cross-border financial institutions
• Effective crisis management
13
Causes and Triggers of Banking
System Distress
• The key issues associated with crises in LAC are:
– A boom in credit for the private sector, both for
consumption and investment
– Wholesale liberalization in the absence of an appropriate
and effective prudential regulatory framework
– Direct effect of fiscal difficulties on the banking system
– Contagion and spill-overs
– Terms of trade shocks and movements in RER
– Political instability, unrest, and, in some cases, civil
conflict
14
Output Losses Associated with Banking Crises
(1977-98)
Number of Crises
Average Crises
Length
(in years)
Average
Cumulative
Output Losses
(in percent of
GDP)
All
43
3.7
16.9
Single banking crises
23
3.3
5.6
20
4.2
29.9
Developed Countries
13
4.6
23.8
Emerging market countries
30
3.3
13.9
Twin banking and currency crises
Sources: Hoggarth and Sapporta, 2001.
15