Current Legal Issues Affecting Central Banks, Volume III.
Chapter

COMMENT

Author(s):
Robert Effros
Published Date:
August 1995
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Author(s)
ERNESTO AGUIRRE-CARRILLO

The process of reforming Chile’s economy has given rise to a change in the role of the state and its interaction with the economic apparatus. All signs indicate that the process is being successfully implemented. In fact, a majority of the Latin American countries are undertaking processes of reform that include some of the aspects of the Chilean case, such as the liberalization of the economy on both the external and the internal fronts, the reduction in the size in the state, and the clarification of its role.

The most important features of this kind of reform process have to be reflected in the law. Within this context, reforms to the legal aspects of the central banks and financial systems are of particular interest, especially in the core of Latin American countries. It is likely that since the period between the two World Wars, when the Kemmerer missions went to the Andean and Central American regions to undertake works reforming the banking and central banking sectors in several countries, and when there were also reform processes in the Southern Cone and Mexico, there has been no reform movement in these matters so deep and simultaneous as that now under way.1 In general, several types of changes are occurring. In central banking, the charters of many central banks of the region (or the basic central banking rules at the constitutional level), and the complementary laws and regulations, either have been modified, as in Argentina, Chile, Colombia, El Salvador, Mexico, Nicaragua, and Venezuela, or are undergoing a process of reform, as in Bolivia, Paraguay, and Uruguay, among others.2 In general, efforts are being made to make the central banks more autonomous and to clarify and stress their main goal of ensuring the internal and external stability of the currency and their subordinate goal of facilitating the sound operation of the payments system within the country.

The new legislative provisions tend to characterize the central banks as the institutions that determine and execute monetary and credit policies and also, in most cases, foreign exchange policies, in coordination with the general economic policies of the government. Some of the new laws, while trying to maintain a separate role for monetary and fiscal policies, establish a link between them in the financial regime of the central bank. This is accomplished by providing that the treasury receives the final profits from the central bank’s operations but, whenever losses affect the capital of the central bank, the treasury has the obligation of covering such losses by recapitalizing the bank.3 Finally, the current legislative trend also attempts to provide central banks with flexible monetary management instruments but with limited powers to interfere directly with market forces.4

In the field of financial legislation, laws have been enacted that reform the financial systems (apart from the central banks) in Chile (dating back to the mid-1980s) and more recently in Bolivia, Colombia, El Salvador, Mexico, Peru, and Venezuela.5 Processes of reform are under way in other countries, such as Paraguay and Uruguay. At the same time, the basic laws already issued are being implemented in the countries that have already completely or partially modified their basic texts.

In the reform processes mentioned, there is, among other things, a tendency to reduce the amount of state ownership in the financial sector; to provide greater opportunities for receiving foreign capital; to allow banking institutions greater operational capabilities, as an important means of improving their competitiveness and their ability to respond to new economic conditions; and, finally, to strengthen the supervisory apparatus, institutionally and operationally, considering that only supervisory agencies with adequate technical capability will be able to regulate and control a more dynamic banking system that is endowed with a greater scope of action.

It may be observed that while many of the elements of the current reform processes in Latin America are particular to the region or the specific countries in which they arise, most of the experiences may prove useful to a wider group of countries, where processes of financial system reform are also under way.

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