Back Matter
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

By reviewing the experiences of Latin American countries with the restructuring of their financial sectors since 1982, this paper derives lessons regarding the most effective ways to deal with banking difficulties in developing countries. It then discusses whether these lessons have been put into practice during the latest crisis. A sample of five countries - Argentina, Chile, Colombia, Mexico, and Peru - is used for this purpose.

Appendix Mechanics of a Speculative Attack on a Sound, Dollarized Banking System

Assume that the authorities impose reserve requirements on the following:

  • domestic-currency-denominated deposits = k = 10 percent

  • foreign-currency-denominated deposits = j = 20 percent

Assume also that transactions that must be effected in domestic currency (payment for taxes, for example) are such that the public needs to hold a minimum of deposits denominated in domestic currency equal to $10. For simplicity, assume that the public holds no cash, so that its entire financial wealth takes the form of bank deposits. The exchange rate between U.S. dollars and domestic currency is assumed to equal 1.

An initial position can be characterized as follows (where bank capital has been netted out in the accounts):

article image

A lack of confidence in the announced exchange rate may lead to a shift away from the domestic currency. Hypothetically, if no other change occurs, the balance sheet may look as follows in the instant immediately after the shift away from domestic deposits.1

article image

Because the monetary authorities will not accommodate a speculative attack on the domestic currency, the interest rate on domestic-currency-denominated loans will rise. The increase will prevent a currency restructuring of domestic currency loans.

In the above balance sheets, banks are not satisfying reserve requirements in U.S. dollars, and, there-fore, that position is a disequilibrium one that could exist for only a brief time. The position also shows a mismatch in the currency composition of banks’ assets and liabilities. As the existing stock of loans de-nominated in domestic currency expires and as the public need to hold a minimum of $10 in domestic-currency-denominated deposits becomes binding, a possible outcome may be:

article image

In this outcome, the dollarization process has strengthened and will remain strong unless the public becomes convinced of the monetary authorities’ commitment to the exchange rate. Also, owing to a reserve requirement on U.S. dollar deposits higher than that on domestic-currency-denominated deposits, the new equilibrium involves a lower level of total loans to the economy. Notice that if k = j, total loans will have remained unchanged.

1

The dynamics toward the final position could take a variety of forms. The example presented here is chosen only for illustrative purposes.

References

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    • Search Google Scholar
    • Export Citation
  • Blommestein, Hans, and Michael Spencer,The Role of Financial Institutions in the Transition to a Market Economyin Building Sound Finance in Emerging Market Economies, ed. by Gerard Caprio, David Folkerts-Landau, and Timothy D. Lane (Washington: International Monetary Fund, 1994).

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A.,The Perils of SterilizationStaff Papers, International Monetary Fund, Vol. 38 (December 1991), pp. 92126.

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart,Capital Inflows to Latin America: The 1970s and the 1990sIMF Working Paper No. 92/85 (Washington: International Monetary Fund, October 1992).

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart, (1993a) “Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External FactorsStaff Papers, International Monetary Fund, Vol. 40 (March), pp. 10851.

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart, (1993b) “The Capital Inflows Problem: Concepts and IssuesIMF Paper on Policy Assessment and Analysis No. 93/10 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., and Carlos A. Végh,Currency Substitution in Developing Countries: An IntroductionRevista de Análisis Económico, Vol. 7 (June 1992), pp. 327.

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., and Carlos A. Végh,Credibility and the Dynamics of Stabilization Policy: A Basic FrameworkIMF Working Paper No. 90/110 (Washington: International Monetary Fund, 1990).

    • Search Google Scholar
    • Export Citation
  • Claessens, Stijn, and Sudarshan Gooptu, eds., Portfolio Investment in Developing Countries, World Bank Discussion Paper No. 228 (Washington: World Bank, 1993).

    • Search Google Scholar
    • Export Citation
  • Corbo, Vittorio, and Leonardo Hernandez,Macroeconomic Adjustment to Portfolio Capital Inflows: Rationale and Some Recent Experiences” in Portfolio Investment in Developing Countries, ed. by Stijn Claessens and Sudarshan Gooptu, World Bank Discussion Paper No. 228 (Washington, December 1993), pp. 35371.

    • Search Google Scholar
    • Export Citation
  • Corbo, Vittorio, and others, El Sistema Bancario Chileno: Desarrollos Recientesy sus Perspectivas, Instituto de Economía, Pontificia Universidad Catolica de Chile (1992).

    • Search Google Scholar
    • Export Citation
  • Corrigan, E. Gerald,Balancing Progressive Change and Caution in Reforming the Financial SystemFederal Reserve Bank of New York, Quarterly Review, Vol. 16 (Summer 1991), pp. 112.

    • Search Google Scholar
    • Export Citation
  • Crabbe, Leland E.,Anatomy of the Medium-Term Note MarketFederal Reserve Bulletin, Vol. 79 (August 1993), pp. 75168.

  • Deutsche Bundesbank, Zahlenubersichten und Methodische Erlauterungen Zur gesamtwirtschaftlichen Finanzierungsrechnung der Deutschen Bundesbank 1960/89 (Frankfurt am Main, 1992).

    • Search Google Scholar
    • Export Citation
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  • Feldman, Robert A., and Manmohan S. Kumar,Emerging Equity Markets: Growth, Benefits, and Policy Concerns,” IMF Paper on Policy Analysis and Assessment No. 94/7 (Washington: International Monetary Fund, March 1994).

    • Search Google Scholar
    • Export Citation
  • Flood, Robert P., and Peter M. Garber (1984a) “Collapsing Exchange Rate Regimes: Some Linear ExamplesJournal of International Economics, Vol. 17 (August), pp. 113.

    • Search Google Scholar
    • Export Citation
  • Flood, Robert P., and Peter M. Garber (1984b), “Gold Monetization and Gold DisciplineJournal of Political Economy, Vol. 92 (February 1984), pp. 90107.

    • Search Google Scholar
    • Export Citation
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  • International Finance Corporation, Emerging Stock Markets: Factbook (Washington: International Finance Corporation), various issues.

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    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, International Capital Markets: Developments, Prospects, and Policy Issues (Washington: International Monetary Fund, September 1992).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, Private Market Financing for Developing Countries (Washington: International Monetary Fund, 1993).

  • International Monetary Fund, World Economic Outlook (Washington), various issues.

  • International Monetary Fund, International Financial Statistics (Washington), various issues.

  • James, Christopher,Some Evidence on the Uniqueness of Bank LoansJournal of Financial Economics, Vol. 19 (1987), pp. 21736.

  • Krugman, Paul,A Model of Balance-of-Payments CrisesJournal of Money, Credit and Banking, Vol. 11 (August 1979), pp. 31125.

  • Mathieson, Donald J., and Liliana Rojas-Suárez, Liberalization of the Capital Account: Experiences and Is-sues, IMF Occasional Paper No. 103 (Washington: International Monetary Fund, 1993).

    • Search Google Scholar
    • Export Citation
  • Mexico, Comisión Nacional Bancaria, Boletín Estadístico de la Banca Múltiple (Mexico City, 1994).

  • Morris, Felip, M. Dorfman, J.P. Ortiz, and M.C. Franco, Latin America’s Banking Systems in the 1980s—A Cross-Country Comparison, World Bank Discussion Paper No. 81 (Washington: World Bank, (1990).

    • Search Google Scholar
    • Export Citation
  • Obstfeld, Morris,Rational and Self-Fulfilling Balance-of-Payments CrisesAmerican Economic Review, Vol. 76 (March 1986), pp. 7281.

    • Search Google Scholar
    • Export Citation
  • Rojas-Suárez, Liliana,Risk and Capital Flight in Developing Countries” in Determinants and Systemic Con-sequences of International Capital Flows, IMF Occasional Paper No. 77 (Washington: International Monetary Fund, 1991).

    • Search Google Scholar
    • Export Citation
  • Rojas-Suárez, Liliana,An Analysis of the Linkages of Macroeconomic Policies in Mexico” in Mexico: The Strategy to Achieve Sustained Economic Growth, ed. by Claudio Loser and Eliot Kalter, IMF Occasional Paper No. 99 (Washington: International Monetary Fund, 1992).

    • Search Google Scholar
    • Export Citation
  • Singh, Ajit, and Javed Hamid, Corporate Financial Structures in Developing Countries, IFC Technical Paper No. 1 (Washington: International Finance Corporation, 1992).

    • Search Google Scholar
    • Export Citation
  • Sundararajan, V., and Tomás J.T. Balifio, eds., Banking Crises: Cases and Issues (Washington: International Monetary Fund, 1991).

  • United States, Board of Governors of the Federal Reserve System, Balance Sheets for the U.S. Economy 1986–91 (Washington, 1992).

  • Velasco, Andrés,Liberalization, Crisis, Intervention: The Chilean Financial System, 1975–85” in Banking Crises: Cases and Issues, ed. by Tomás J.T. Balifio and V. Sundararajan (Washington: International Monetary Fund, 1991).

    • Search Google Scholar
    • Export Citation
  • Weisbrod, Steven R., and Howard Lee,Role of Financial Intermediaries during Asset Deflations: Case Studies of Japan, Korea, and Taiwan” in Portfolio Investment in Developing Countries, ed. by Stijn Claessens and Sudarshan, Gooptu, World Bank Discussion Paper No. 228 (Washington: World Bank, Howard Lee, 1993).

    • Search Google Scholar
    • Export Citation
  • Weisbrod, Steven R., and Howard Lee, Liliana Rojas-Suárez,Bank Risk and the Declining Franchise Value of the Banking Systems in the United States and JapanIMF Working Paper No. 92/45 (Washington: International Monetary Fund, June 1992).

    • Search Google Scholar
    • Export Citation

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  • Baliño, Tomás J.T.,The Argentine Banking Crisis of 1980in Banking Crises: Cases and Issues, ed. by Tomás J.T. Baliño and V. Sundararajan (Washington: International Monetary Fund, 1991).

    • Search Google Scholar
    • Export Citation
  • Blommestein, Hans, and Michael Spencer,The Role of Financial Institutions in the Transition to a Market Economyin Building Sound Finance in Emerging Market Economies, ed. by Gerard Caprio, David Folkerts-Landau, and Timothy D. Lane (Washington: International Monetary Fund, 1994).

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A.,The Perils of SterilizationStaff Papers, International Monetary Fund, Vol. 38 (December 1991), pp. 92126.

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart,Capital Inflows to Latin America: The 1970s and the 1990sIMF Working Paper No. 92/85 (Washington: International Monetary Fund, October 1992).

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart, (1993a) “Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External FactorsStaff Papers, International Monetary Fund, Vol. 40 (March), pp. 10851.

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., Leonardo Leiderman, and Carmen M. Reinhart, (1993b) “The Capital Inflows Problem: Concepts and IssuesIMF Paper on Policy Assessment and Analysis No. 93/10 (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., and Carlos A. Végh,Currency Substitution in Developing Countries: An IntroductionRevista de Análisis Económico, Vol. 7 (June 1992), pp. 327.

    • Search Google Scholar
    • Export Citation
  • Calvo, Guillermo A., and Carlos A. Végh,Credibility and the Dynamics of Stabilization Policy: A Basic FrameworkIMF Working Paper No. 90/110 (Washington: International Monetary Fund, 1990).

    • Search Google Scholar
    • Export Citation
  • Claessens, Stijn, and Sudarshan Gooptu, eds., Portfolio Investment in Developing Countries, World Bank Discussion Paper No. 228 (Washington: World Bank, 1993).

    • Search Google Scholar
    • Export Citation
  • Corbo, Vittorio, and Leonardo Hernandez,Macroeconomic Adjustment to Portfolio Capital Inflows: Rationale and Some Recent Experiences” in Portfolio Investment in Developing Countries, ed. by Stijn Claessens and Sudarshan Gooptu, World Bank Discussion Paper No. 228 (Washington, December 1993), pp. 35371.

    • Search Google Scholar
    • Export Citation
  • Corbo, Vittorio, and others, El Sistema Bancario Chileno: Desarrollos Recientesy sus Perspectivas, Instituto de Economía, Pontificia Universidad Catolica de Chile (1992).

    • Search Google Scholar
    • Export Citation
  • Corrigan, E. Gerald,Balancing Progressive Change and Caution in Reforming the Financial SystemFederal Reserve Bank of New York, Quarterly Review, Vol. 16 (Summer 1991), pp. 112.

    • Search Google Scholar
    • Export Citation
  • Crabbe, Leland E.,Anatomy of the Medium-Term Note MarketFederal Reserve Bulletin, Vol. 79 (August 1993), pp. 75168.

  • Deutsche Bundesbank, Zahlenubersichten und Methodische Erlauterungen Zur gesamtwirtschaftlichen Finanzierungsrechnung der Deutschen Bundesbank 1960/89 (Frankfurt am Main, 1992).

    • Search Google Scholar
    • Export Citation
  • Fama, Eugene,What’s Different About Banks?Journal of Monetary Economics, Vol. 15 (January 1985), pp. 2939.

  • Feldman, Robert A., and Manmohan S. Kumar,Emerging Equity Markets: Growth, Benefits, and Policy Concerns,” IMF Paper on Policy Analysis and Assessment No. 94/7 (Washington: International Monetary Fund, March 1994).

    • Search Google Scholar
    • Export Citation
  • Flood, Robert P., and Peter M. Garber (1984a) “Collapsing Exchange Rate Regimes: Some Linear ExamplesJournal of International Economics, Vol. 17 (August), pp. 113.

    • Search Google Scholar
    • Export Citation
  • Flood, Robert P., and Peter M. Garber (1984b), “Gold Monetization and Gold DisciplineJournal of Political Economy, Vol. 92 (February 1984), pp. 90107.

    • Search Google Scholar
    • Export Citation
  • Garber, Peter M., and Steven R. Weisbrod, The Economics of Banking, Liquidity, and Money (Lexington, Massachusetts: D.C. Heath, 1992).

  • International Finance Corporation, Emerging Stock Markets: Factbook (Washington: International Finance Corporation), various issues.

  • International Finance Corporation, Quarterly Review of Emerging Markets, Fourth Quarter 1993 (Washington: International Finance Corporation, 1993).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, International Capital Markets: Developments, Prospects, and Policy Issues (Washington: International Monetary Fund, September 1992).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund, Private Market Financing for Developing Countries (Washington: International Monetary Fund, 1993).

  • International Monetary Fund, World Economic Outlook (Washington), various issues.

  • International Monetary Fund, International Financial Statistics (Washington), various issues.

  • James, Christopher,Some Evidence on the Uniqueness of Bank LoansJournal of Financial Economics, Vol. 19 (1987), pp. 21736.

  • Krugman, Paul,A Model of Balance-of-Payments CrisesJournal of Money, Credit and Banking, Vol. 11 (August 1979), pp. 31125.

  • Mathieson, Donald J., and Liliana Rojas-Suárez, Liberalization of the Capital Account: Experiences and Is-sues, IMF Occasional Paper No. 103 (Washington: International Monetary Fund, 1993).

    • Search Google Scholar
    • Export Citation
  • Mexico, Comisión Nacional Bancaria, Boletín Estadístico de la Banca Múltiple (Mexico City, 1994).

  • Morris, Felip, M. Dorfman, J.P. Ortiz, and M.C. Franco, Latin America’s Banking Systems in the 1980s—A Cross-Country Comparison, World Bank Discussion Paper No. 81 (Washington: World Bank, (1990).

    • Search Google Scholar
    • Export Citation
  • Obstfeld, Morris,Rational and Self-Fulfilling Balance-of-Payments CrisesAmerican Economic Review, Vol. 76 (March 1986), pp. 7281.

    • Search Google Scholar
    • Export Citation
  • Rojas-Suárez, Liliana,Risk and Capital Flight in Developing Countries” in Determinants and Systemic Con-sequences of International Capital Flows, IMF Occasional Paper No. 77 (Washington: International Monetary Fund, 1991).

    • Search Google Scholar
    • Export Citation
  • Rojas-Suárez, Liliana,An Analysis of the Linkages of Macroeconomic Policies in Mexico” in Mexico: The Strategy to Achieve Sustained Economic Growth, ed. by Claudio Loser and Eliot Kalter, IMF Occasional Paper No. 99 (Washington: International Monetary Fund, 1992).

    • Search Google Scholar
    • Export Citation
  • Singh, Ajit, and Javed Hamid, Corporate Financial Structures in Developing Countries, IFC Technical Paper No. 1 (Washington: International Finance Corporation, 1992).

    • Search Google Scholar
    • Export Citation
  • Sundararajan, V., and Tomás J.T. Balifio, eds., Banking Crises: Cases and Issues (Washington: International Monetary Fund, 1991).

  • United States, Board of Governors of the Federal Reserve System, Balance Sheets for the U.S. Economy 1986–91 (Washington, 1992).

  • Velasco, Andrés,Liberalization, Crisis, Intervention: The Chilean Financial System, 1975–85” in Banking Crises: Cases and Issues, ed. by Tomás J.T. Balifio and V. Sundararajan (Washington: International Monetary Fund, 1991).

    • Search Google Scholar
    • Export Citation
  • Weisbrod, Steven R., and Howard Lee,Role of Financial Intermediaries during Asset Deflations: Case Studies of Japan, Korea, and Taiwan” in Portfolio Investment in Developing Countries, ed. by Stijn Claessens and Sudarshan, Gooptu, World Bank Discussion Paper No. 228 (Washington: World Bank, Howard Lee, 1993).

    • Search Google Scholar
    • Export Citation
  • Weisbrod, Steven R., and Howard Lee, Liliana Rojas-Suárez,Bank Risk and the Declining Franchise Value of the Banking Systems in the United States and JapanIMF Working Paper No. 92/45 (Washington: International Monetary Fund, June 1992).

    • Search Google Scholar
    • Export Citation