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Mr. Basco and Mr. Quarracino are at the Central Bank and Ministry of Finance of Argentina, respectively. The paper’s views do not necessarily represent those of these institutions or (as noted in the box on this page) of the IMF. We thank Eduardo Levy-Yeyati, Miguel Messmacher, Hemant Shah, Rodolfo Luzio, Ernesto Ramírez, and IMF Institute seminar participants for their helpful comments, and to Takayuki Tsuruga and Wolfgang Harten for outstanding research assistance.
During 1991–97, Argentina was one of the fastest-growing economies in Latin America, with an average growth rate of 6.7 percent.
Argentina is less open than most Latin American countries; during 1990–95 total trade represented 16 percent of GDP, compared to 37 percent in Mexico and 46 percent in Chile. Moreover, as pointed out by the Independent Evaluation Office of the IMF (2004), the differences in Argentina’s degree of openness in relation to other hard peg economies are even more pronounced; for a sample of eight hard peg economies throughout the world, total trade averaged 96 percent of GDP.
Analysts as well as the government agreed that the exchange rate was overvalued, although there was no consensus on the degree of overvaluation. As the study by the Independent Evaluation Office (2004) reports, by spring of 2000 overvaluation was estimated at 7 percent by Goldman Sachs, 13 percent by JP Morgan, and 17 percent by Deutsche Bank. Ex post, Perry and Servén (2002) estimated the Argentine peso to be overvalued by 55 percent by 2001.
There is an extensive literature linking bank capital to a more prudent behavior toward risk in general.
However, it is worth noting that the conversion of loans at par may have had a positive—and therefore partially offsetting—effect on net worth by reducing the rate of default by imperfectly hedged bank borrowers.
Acronym standing for Bonds, Auditing, Supervision, Information, and Credit Rating. The BASIC approach was introduced following the Tequila Crisis of 1994–95, and relied heavily on providing timely and relevant information on individual banks to both private markets and regulators. In turn, regulators and markets would then use this information to punish banks for excess risk-taking; regulators, by imposing higher capital requirements, and markets, by pricing down banks’ subordinated debt.
For example, the capital-to-asset ratio was 10.5 percent and capital to risk-weighted assets was 21.2 percent. Provisioning had been well above 100 percent of nonperforming loans during 1997–99, but an increase in nonperforming loans owing to the recession brought the provisioning ratio to 77.1 percent in 2000 (Perry and Servén, 2002, based on data from the Central Bank of Argentina).
For example, in Figure 11 in de la Torre, et al. (2003), voluntary domestic financing of the central government is shown to increase steadily between 1994 and 2001, with banks and pension funds being the major contributors.
Barajas and Steiner (2002) analyze recent credit slowdowns in eight Latin American countries, including Argentina. Using a breakdown of major changes in banks’ balance sheets, the authors rank the relative importance of different factors, such as deposit growth or alternative uses of funds raised. It is interesting to note that, up until 2000, government financing did not appear to be a major factor causing the slowdown in Argentina. However, if the analysis were to be repeated including 2001, this factor would most likely enter the picture significantly.
Because of the severe recession which began in 1999, the credit-GDP ratio understates the magnitude of the credit decline up to 2001.
This includes demand, time, savings, and foreign-currency-denominated deposits held by the private sector.
In order to avoid double counting, we excluded from FPL foreign currency loans to the government, since these are already included in our measure of financing to the government, NGOVB.
Measured as total interest paid divided by the stock of deposits, then deflated by the change in the CPI.
In earlier drafts we used a country risk indicator, CRISK, measured as the EMBI spread for Argentina. Following comments received, and in order to isolate the currency risk component, not directly captured by the other two macroeconomic controls, we opted to use CURISK instead. The results were similar in all regressions except in those for government financing, where CURISK had a more intuitively reasonable effect than CRISK. We now report only the regressions with CURISK.
Similarly, we also used the headline MERVAL Argentine stock market index in earlier drafts of the paper. However, in order to rule out the possibility that overall banking sector performance—through the stock price—was driving the relationship between MERVAL and individual bank behavior, we constructed our own nonbanking stock market index, MERVALNB, by excluding banking institutions. We found that the degree of correlation between the two indices, while high throughout the sample period, declined appreciably from the third quarter of 1999 onward. Furthermore, both MERVAL and MERVALNB performed well in our regressions, with consistently significant coefficients in virtually of the equations. We now report only the regressions using the nonbanking index.
In all regressions, we eliminate observations containing unrealistically high liquidity, loan-asset, government financing, nonperforming loan, or dollarization ratios, as well as those containing negative capitalization ratios.
In fact, when we estimated this equation using an alternative measure for nonperforming loans, the “broad nonperforming loan ratio,” this effect disappeared.
In Table 6—as well as in Tables 7 and 9—we only report the OLS coefficients for the three non-fundamental bank characteristics, although all fundamental and macro variables were also included. The OLS results on these variables did not differ substantially from those obtained in the FE estimations shown in the upper panel.
Similarly, as imperfectly hedged borrowers perceived an increase in the risk of a devaluation, their demand for foreign currency loans may have declined as well.
The dependent variable NGOVB is defined as the broad measure of financing to the government, as in Table 5. It includes both government bonds and loans to the government.
For this comparison we use a simple specification which includes the three macroeconomic controls (CRISK, FISCAL, and MERVAL) and the real deposit interest rate.
As Table 9 shows, we found the effect of currency risk (CURISK) on deposit growth to be negative. Thus, a positive coefficient on the interaction terms SIZE*CURISK and TIMEDEP*CURISK implies that larger and more time deposit-oriented banks were less likely to suffer deposit withdrawals from an increase in currency risk. Perhaps depositors perceived that these banks were managing their currency risk more effectively; at the same time, depositors may have felt that there was little these banks could do in the face of other deteriorating macroeconomic conditions.
We preferred this ending date over December 2001 because the latter contained the effect of a regulation in November 2001 requiring private pension funds to increase their holdings of government bonds. As this caused an additional and somewhat indiscriminate deposit run in December, the significance of bank-specific variables was higher when using November 2001 as the ending date.
These results are available upon request.
Note that when we used longer lag lengths, this tradeoff became weaker.
Although we do recognize the counterintuitive negative coefficient on capitalization in the panel data regressions at relatively short lags.