Paraguay: Selected Issues and Statistical Appendix

This Selected Issues paper analyzes the background, stages and developments, and estimation of the direct costs of Paraguay's banking crisis. The paper provides the estimates on the size and evolution of the informal sector, and examines the extent to which the national accounts capture informal activity. The study also estimates the potential output and total factor productivity by examining trends in output, investment, and population growth as well as the direction and size of fiscal impulse on its economy. The paper also provides a statistical appendix report of Paraguay.


This Selected Issues paper analyzes the background, stages and developments, and estimation of the direct costs of Paraguay's banking crisis. The paper provides the estimates on the size and evolution of the informal sector, and examines the extent to which the national accounts capture informal activity. The study also estimates the potential output and total factor productivity by examining trends in output, investment, and population growth as well as the direction and size of fiscal impulse on its economy. The paper also provides a statistical appendix report of Paraguay.

I. Overview of Paraguay’s banking crisis1

A. Introduction

A major banking crisis erupted in Paraguay in mid 1995. During the subsequent four years, 15 of the 19 locally owned banks were either closed or absorbed by stronger institutions. Unlike many other banking crises, Paraguay’s was not triggered by a recession. However, the uncertainty and repeated disruptions of the payments system caused by the crisis adversely affected economic activity, and GDP growth declined from an average 3 percent per annum during 1990-94, to half that rate during 1995-99. Losses attributable to the crisis are estimated at about 10 percentage points of GDP2, borne mainly by the public sector in the form of lost deposits of public sector entities and the cost of honoring deposit guarantees. By end 1999 bank ownership had become predominantly foreign and, overall, the system seemed to be in a less fragile position than it was in 1995. Nevertheless, weaknesses remain that, if not addressed, could lead to renewed instability.

B. Background3

The Paraguayan financial system began to weaken in the late 1980s. Relatively lax entry requirements led to the proliferation of new banks and finance companies. Many of these were undercapitalized and, given the size of the financial market, frequently operated at levels that did not permit them to take advantage of scale economies ([5,1995] pp.58–59). By March 1995, ten of the system’s thirty-four banks presented capital deficiencies under existing regulations ([5,1996] p.13). Lobbying by bank-owners defeated attempts by the Banking Superintendency to curb the number of intermediaries and to impose stricter capital requirements. Subsequently, the central bank adopted schemes that provided greater flexibility to intermediaries to comply with existing rules, which ultimately implied lowering effective capitalization standards ([5,1995] pp.59–61).

Inadequate banking practices, particularly (but not exclusively) among locally owned banks, were common. Risk evaluation was poor and credit to related enterprises widespread and difficult to curb. Existing legislation did not require registered (as opposed to bearer) shares in bank ownership, effectively precluding the identification of related parties ([5,1995] p.61). The deregulation of interest rates and bank lending, and the elimination of rediscounts and directed credit mechanisms at the beginning of the decade, was not generally accompanied by improvements in liquidity management ([6,1991] p.44). Losses were not readily acknowledged and were often deferred or deliberately hidden from supervisors. Furthermore, as discussed below, to circumvent both prudential and macroeconomic regulations, some intermediaries resorted to off-the-books transactions, with and without the knowledge of clients creating, in fact, a parallel financial system ([2] p.30). Poor banking practices were partly the result of the rapid growth of the sector that did not encounter a commensurate increase in qualified managerial and financial capacities ([7] p.24). To a large extent, the developments were tolerated through lax supervisory practices.

Financial supervision was weak. The banking superintendency lacked sufficient personnel to oversee an excessive number of financial institutions. Furthermore, political considerations frequently played a role in shaping the final outcome of the superintendency’s decisions. The legal and regulatory frameworks were poor ([3] pp.32–33) and, during the first half of the 1990s, the authorities postponed their overhaul. Banks resisted external audits, and existing legislation did not allow the banking superintendency to make them compulsory ([5,1995] p.60). The authorities were aware of the precarious financial condition of many intermediaries, as a result of both their own analyses4, and of reports prepared by international organizations5.

C. Stages and Development of the Crisis

The first wave of bank closures (1995)

Given the circumstances described above, the intervention in May 1995 of Paraguay’s second and third largest private banks, when they failed to meet their clearing obligations, did not come as a surprise. Liquidity had deteriorated in the two failed banks to an extent that could no longer be handled through regulatory forbearance. Their negative cash flow impeded their continued operation, and the authorities refused to provide further financial assistance because their owners repeatedly failed to live up to their capitalization commitments. In the course of the next few weeks, two other banks (and several minor financial institutions), also were intervened. The four failed banks held about 15 percent of the system’s total assets.

To avoid a panic-induced bank-run, and prevent the collapse of the payments system, the Government decided to honor deposits in the intervened banks. There was no deposit guarantee scheme in place, but the Central Bank of Paraguay (BCP) extended credit as needed to meet depositor’s withdrawal demands from intervened, and some nonintervened, banks. In the process, the central bank spent approximately 4.7 percent of that year’s GDP, providing loans in an attempt to avoid a larger financial collapse6. A special credit facility was created within the BCP to provide longer term resources to banks in what were denominated ‘rehabilitation programs’, with a view of providing time to ailing institutions to restructure and capitalize. By March 1998 loans within this program reached G.337 billion (about US$120 million). Despite its cost, the effectiveness of this program would prove to be almost nil, as most of the banks that made use of it subsequently lost these resources and were eventually closed.

The behavior of depositors was affected by the authorities’ and Congress’ initial handling of the crisis. Throughout the first wave some local banks, at the time generally perceived as the most vulnerable segment of the system, surprisingly increased their deposit market share relative to sounder banks (mostly foreign owned) by raising interest rates. The authorities’ attempt to bestow calm on the markets by announcing that all deposits would be honored, granted a de-facto guarantee to deposits held in the intervened institutions. This reinforced the widespread perception that deposits in the financial system were risk free7. In this context, there was no flight to quality and it was possible for risky banks to continue attracting deposits by raising interest rates.

The bank interventions disclosed the widespread practice of parallel accounting. The authorities uncovered the existence of unreported loans, particularly to related enterprises, as well as the presence of large volumes of undisclosed liabilities. It soon became evident that many financial institutions were handling large volumes of off-the-record accounts to circumvent regulations ([5,1996] p.13). Many depositors were unaware that their claims were not duly recorded in the bank’s official books. Off the books deposits whose authenticity could be backed by bank documents and correspondence were dubbed ‘gray deposits’, while those lacking such proof were referred to as ‘black deposits’. The holders of both types insisted that their claims were as legitimate as formal deposits8. The authorities agreed to honor only the claims of ‘gray’ depositors, but Congress initiated passage of a law (Ley 814/96) ordering the restitution of ‘black’ deposits as well. A veto by the Executive was overridden, and finally the Supreme Court ruled against the Executive’s appeal. The law established that the Government should reimburse black and gray deposits up to about the equivalent of US$15,000 per depositor. A total of G.41 billion (0.2 percent of GDP) were eventually reimbursed.

Despite the large costs incurred during the first wave of bank closures, and notwithstanding improvements in supervision, the financial system remained weak. Extremely fragile institutions were permitted to continue operating. Throughout 1995 and 1996, the system’s capital base deteriorated further, the proportion of impaired loans increased sharply, and although provisions grew at a stepped-up pace, their coverage of doubtful loans did not keep up, particularly during 1996 (Table 1 and Figure 1). To some extent this reflected more transparent accounting, including the normalization of off-the-books accounts, but, as events would later prove, many problems remained unresolved. During the second half of 1995 and during 1996, several small finance houses were either intervened or voluntarily liquidated, but no major institution would be closed again until 1997.

Table 1.

Paraguay: Indicators of Bank Soundness

(In percent)

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Sources: Paraguayan authorities and Fund staff estimates.

Net assets: assets minus provisions. Net equity: equity minus provisions

Impaired loans: non-performing plus restructured loans.

Figure 1.
Figure 1.

Paraguay: Indicators of Bank Soundness

(In Percent)

Citation: IMF Staff Country Reports 2000, 051; 10.5089/9781451832365.002.A001

1/ Net assets: assets minus provisions. Net equity: equity minus provisions2/ Impaired loans: non-performing plus restructured loans.Source: Paraguayan authorities and Fund staff estimates.

The Second Wave (1997)

In May 1996 Congress approved a new banking law. Drafts of this legislation had been before Congress since 1994, but legislators only considered them in earnest after the first wave of bank closures. The law granted increased powers to the banking superintendency to intervene and close financial institutions, to require annual external audits, and to restrict operations of institutions in noncompliance with limits on lending to related parties or with minimum capital requirements. It fixed limits on lending to any single borrower, and required disclosure of share ownership so that bank owners could be fully identified. It also provided for the creation of a centralized credit bureau. Finally, the Law limited deposit insurance to the equivalent of ten minimum wages (about US$ 2,200 per account). Although the new legislation enhanced the instruments at its disposal, the Superintendency’s capacity to carry out its duties remained impaired by its lack of adequate resources. Also, the new law did not distinguish between institutions where liquidity and solvency problems were due to normal adverse developments in their portfolios, from those where the cause was the noncompliance with the regulatory framework or even outright fraud ([5,1997] p.7).

In 1996 and the first half of 1997, as a result of the Executive’s reluctance to intervene any more banks, there were no major bank closings, but the crisis lingered on with the central bank providing ample financial assistance to troubled institutions. The Government’s stance forced concerned parties (regulators, depositors, shareholders), to consider options for keeping ailing banks alive. During this period, the plight of four medium-to-small sized banks—Desarrollo, CORFAN, BUSAIF and BIPSA—became the center of attention in Paraguay’s financial markets. All four were medium sized banks with extremely high levels of nonperforming loans. They entered into highly publicized ‘rehabilitation programs’ with the BCP, whose financial assistance rapidly became the major source of their funding. The Social Security Institute (IPS) was then induced to provide financial support by increasing its deposit holdings in these banks, especially in Desarrollo and BIPSA9. In January 1997 IPS was persuaded to capitalize Banco de Desarrollo by transforming G.26 billion of its deposits into equity, supposedly to avoid the bank’s failure. This support notwithstanding, the bank continued to falter and was finally closed in September 1998. IPS did not recover its deposits, nor its equity investment. CORFAN avoided closure in 1996 through a merger with Banco Nacional de los Trabajadores (BNT), a publicly owned bank, capitalized periodically with contributions from workers10. However, as noted below, BNT would in turn be closed in 1998. In the same vein, the bank employees pension fund decided to capitalize BUSAIF, creating a potential moral hazard situation in which the owners of one bank were the employees of competitive banks. In any event, BUSAIF would also be closed in the second half of 1998. Despite continued efforts through 1996, BIPSA found no buyer and was intervened and closed in 1997 at the time of the collapse of Banco Union (see below).

In 1997 bank closures were re-ignited with the intervention of Banco Union, the country’s largest private local bank. Union had received loans from the central bank since 1995 to attend deposit withdrawals associated with the contagion effect of the closures of other institutions. Assistance reached G.36 billion by May 1997, despite which the bank and its affiliates continued to falter, while potential buyers pondered a possible acquisition. When the bank’s savings and loan affiliate—Ahorros Paraguayos—was intervened by the government, Banco Union had to enter into a “rehabilitation program” with the central bank, and received G.85 billion in fresh resources. Even with this assistance, the bank failed to meet its obligations and was intervened in June. Attempts by the authorities to induce recapitalization by existing or new shareholders, failed during the second half of the year, and in early 1998 it was finally decided to liquidate Banco Union ([2] p.37). As noted, BIPSA, which had also been in search of a buyer failed to obtain fresh capital and depositors withdrew their deposits. It was intervened by the banking Superintendency soon after Banco Union, and was subsequently closed. CORFAN ceased as a separate entity when it was absorbed by BNT.

During the second wave of bank closures, the BCP became less eager to provide unlimited financial assistance to intervened banks than it had been in 1995. The new banking law limited to ten monthly minimum wages the guarantee on financial sector deposits, but pressure soon mounted to increase the coverage of deposit insurance. The new wave of bank closures, which had not been met with full guarantee of deposits, drew enormous protests and led Congress to consider legislation to increase deposit coverage in failed banks. Although full deposit coverage had backers, it did not gain widespread support. However, proposals to increase the deposit insurance coverage from the Banking Law’s 10 monthly minimum wages, to 20, 50 or 100 monthly minimum wages did receive serious consideration, based on the argument the Government shared the blame for bank closures. In the end Congress passed Law 1186 of 1997 increasing the limit to 100 monthly minimum wages, (approximately US$24,000)11. Whatever the merits of the arguments favoring the fairness of the new limit, the debate served to underscore within public opinion that, in the future, the availability of full deposit insurance would no longer exist. To an extent, this eliminated an element of moral hazard by reminding depositors that their holdings in the financial system were not without risk.12

The new wave of bank closings triggered a systemic run on deposits. In contrast to what was observed during the first wave, on this occasion depositors’ behavior was governed by ‘flight to quality’ considerations. The limit imposed on implicit deposit insurance, as well as the extended debate over its level, contributed to this outcome. During this process, foreign owned banks, which were perceived as less risky than locally owned banks, increased their share of deposits by almost 12 percentage points. Interestingly, the flight to quality was not entirely ‘nationality’ blind: the more solid locally owned banks, —the ones which in time would survive the crisis—did not see their market share significantly affected: it dropped by less than 1 percentage point. In contrast, those local banks that were eventually closed, suffered the brunt of the run on deposits, with their share declining by over 12 percentage points. Increased transparency of banking statistics, as evidenced, for example, by the publication of CAMEL rating exercises, most likely contributed to depositor’s more discriminating behavior.

The third wave (1998)

Political resistance to deal forcefully with the still insolvent institutions remained strong. Rather than decidedly taking action to force the restructuring of viable institutions, or to close insolvent ones, the authorities chose further regulatory forbearance and accounting flexibility, coupled by central bank support, ‘rehabilitation programs’, and the transfer of public sector deposits to weak banks. Under these conditions, the banking system lingered-on, but the fragility of several of its banks—some with a negative net worth—would not be overcome. Moreover, the delay in taking action increased the total cost of the financial sector clean-up, and concentrated these costs in the public sector. In August 1997, the Banco de los Trabajadores entered into a rehabilitation program with the Central Bank, an omen of things to come. By May 1998, total financial assistance provided by the BCP to BNT reached G.92 billion, while IPS deposits in the bank surpassed G.230 billion (1.1 percent of GDP).

In June 1998 the banking superintendency intervened BNT. This was the country’s fourth largest bank at the time, with 6.4 percent of the system’s assets. Although over 90 percent of the bank’s loan portfolio was overdue, BNT claimed cumulative losses of only G. 16 billion and a capital base of G. 91 billion. However, examination of the bank by auditors from the superintendency revealed an alarming lack of liquidity, an almost complete dependency on public sector deposits, and actual losses of almost G. 220 billion. Under the circumstances, the superintendency decided it had no option but to close the bank and criminal charges were brought against the bank’s administrators, the outcome of which is still pending before the Courts ([2], p.44).

Among the measures adopted to support ailing banks was the massive transfer of public sector deposits to weak institutions. The largest holder of deposits in the system, the Social Security Institute (IPS), was seen as instrumental in this approach. By October 1997, IPS held 15 percent of the banking system’s deposits. Of these, almost 60 percent were either in intervened banks (Union, BIPSA, Corfan, Mercantil), or in banks that would close their doors within the following 12 months, including, as discussed above, Banco Desarrollo and BNT. In all, the Social Security Institute lost in excess of G. 620 billion (US$ 265 million or 3 percent of GDP) to banks that were liquidated between 1997 and 1998. The government agreed to absorb G. 525 billion of these losses through a long term bond yielding a 1 percent annual real interest rate13. Recovery by IPS of the remaining G. 94 billion is, at best, unclear. Furthermore, by end September 1999, an additional G.188 billion of IPS deposits were being held at the financially fragile National Development Bank (BNF), currently the only remaining public bank in Paraguay.

D. An Estimation of the Direct Costs of the Crisis

Progress towards the final liquidation of closed banks, as well as new information, permits an improved estimation of the cost of the crisis. The cumulative fiscal cost, from 1995 to 1998, was previously estimated at a maximum of 13 percent of annual GDP.14 Since then, there has been significant progress towards the final liquidation of the closed financial institutions: loans have been collected, assets have been sold or otherwise negotiated by the intervention officials, liabilities have been reduced and better valuation of existing assets have been made. On the basis of more recent numbers, a new tentative loss calculation is presented in this section.

New estimates of the components of the losses, presented in Table 2, suggest that the probable value of direct losses associated with the banking crisis may be in the vicinity of G.2,000 billion (US$ 900 million calculated at each year’s exchange rate, or about 10 percent of GDP). The losses were distributed over the four years during which the crisis took place. The date of closure of each financial institution was chosen as the criterion for assigning the losses of that institution to a particular year. Losses associated with first wave of bank closures were imputed to 1995, those of the second wave to 1997 and finally, those of the third wave to 1998. Ratios of the costs of the crisis to GDP and costs expressed in U.S. dollar terms used the GDP and exchange rate corresponding to each year. Using this methodology yields the loss distribution presented in Table 3.

Table 2.

Paraguay: Components of the Direct Costs of the Financial Crisis 1/

(In billions of Guaranies)

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(E): estimatedSource: Central Bank of Paraguay, Banking Superintendency and Fund staff estimates.

With no further assets to liquidate in the four banks closed in 1995, and with almost all depositors paid-off, the negative net worth of these banks may be approximated by their outstanding loans with BCP, which at end September 1999 stood at G.628 billion. Furthermore, according to valuations made by the banking superintendency, as of September 1999, liabilities of banks and finance houses closed during the second and third waves of the crisis, exceeded their corresponding assets by G.762 billion, and the central bank and the government incurred jointly in 343 billion in losses on loans advanced to failed banks and finance houses in 1995 and 1996. Together, these figures provide a lower bound of the loss estimate, assuming full recovery of the assets still carried in the books as of September 1999: G. 1,732 billion. However, full recovery of assets seems optimistic. Consequently making some assumptions about a reasonable recovery of assets results in a most probable loss estimate of G. 1,973 billion. Finally if it is assumed that the only assets to be recovered were currently held cash, deposits and government securities, total losses would be in the vicinity of to G.2,450.

Table 3.

Paraguay: Estimates of the Direct Costs of the Financial Crisis

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Source: Table 2.

The cost of Paraguay’s banking crisis is at an intermediate level compared with those in other countries. Venezuela’s crisis in the early 1990’s cost some 18 percent of GDP; estimates of the recent banking crisis in Ecuador reach as high as 15 percent of GDP, and probably rising; Colombia’s recent crisis might cost as much as 6-7 percent of GDP; losses in the Nordic countries in 1991-92 were around 6 percent of GDP; the costs associated with the savings and loan crisis in the late 1980’s in the United States were about 3-4 percent of GDP.

The losses in Paraguay will, by and large, be borne by the public sector, while private depositors will loose relatively small amounts. Noncovered private deposits are about G.278 billion (US$ 84 million). This would represent about 15 percent of total losses. The remaining 85 percent of the costs would be absorbed by the public sector (Government and the Central Bank)15.

E. Remaining Weaknesses

By end 1999, the financial system had finally overcome the series of bank crises that began in 1995, although fragility persists. Currently all remaining private banks in the system are deemed viable by the Banking Superintendency. Foreign owned banks, which held about 40 percent of the market before the onset of the crisis, increased their share to 80 percent. No new bank interventions have taken place over the past 15 months and no new banks have entered into ‘rehabilitation programs. However, given the sharp downturn in economic activity, indicators of bank soundness have deteriorated since 1998, and it is probable that a few smaller size banks and finance houses may have to merge with larger institutions. Impaired loans rose rapidly throughout 1999 as a result of the recession, although it is likely that initiatives to grant relief to debtors being discussed by both Congress and the executive branch may have induced borrowers to delay the servicing of their obligations16. The authorities’ practice of relaxing regulations to assist particular sectors or solve particular problems is perhaps the single most important weakness in the system and provides an unfortunate signal at a moment when the need to strengthen confidence in the system requires otherwise.

The only remaining public bank, the (BNF), still is in financial distress. By end September 1999, past due loans at BNF had reached over 63 percent of its loan portfolio, in contrast with less than 9 percent for the rest of the banking system. Although expectations of generalized debt restructuring and write-offs most likely had some bearing on this result, the bank’s loan portfolio had been deteriorating already since 1996. It is estimated that BNF has lost its capital several times over, and schemes currently being considered by the Government to refinance and subsidize farmers and small entrepreneurs will surely generate additional losses. The Government intends to re-capitalize and fully restructure the bank and, according to proposed legislation on the reform of the public banks, BNF is to be combined with several other financial entities into a new development finance institution. The proposed legislation would remove nonperforming assets from the BNF and pass them to a trust that would manage their liquidation. It would also provide the new bank with the double role of a first and second tier institution, and would grant it several prerogatives, such as a monopoly on deposits of the public sector.

The Banking Superintendency remains weak and subject to political interference. Despite noteworthy improvements implemented since the crisis erupted in 1995, the Banking Superintendency’s human resources are still over-stretched. The size of its staff is not commensurate with the increased innovations in banking operations and products and with the number of financial institutions it must oversee. Bank closures, which are politically difficult in many countries, are an extremely charged issue in Paraguay17. Had the decisions related to the final wave of closures come earlier, central bank losses, and those associated with the Social Security Institute would have been much smaller. Consequently, it seems safe to say that if more autonomy is provided to the Banking Superintendency, especially to apply its sanctioning powers, and more weight is given to technical considerations in the Superintendency’s decisions, the probability of a new crisis will be significantly lower in the future.

The crisis increased the perceived risk of bank lending in Paraguay which contributes to explain the high domestic interest rates. During 1998-99, despite the recession, nominal interest rates on Guarani denominated loans remained unchanged in the face of a sharp decline in the inflation rate. This led to very high ex-post real interest rates on loans. In turn, the persistence of such high rates for long periods of time can weaken the financial sector and impair efficient allocation of financial resources (adverse selection).

Finally, there is the issue of macro-financial stability. No matter how adequate regulations and the supervisory agencies may be, and irrespective of the quality of risk management, and overall banking practices, banks will become more vulnerable if the economy becomes more unstable. As noted, Paraguay has recently confronted a deep recession that led the economy to contract for two years in a row, which has again put strains on the system. Furthermore, investors have been weary of holding Guarani denominated assets, and as a result international reserves have steadily declined. Only the disbursement of an extraordinary loan from Taiwan Province of China temporarily changed this trend and replenished the central bank’s external asset holdings. However, over the past few months reserves have again declined. If this trend continues, it will increase the perception of risk by depositors and will accentuate the vulnerabilities of the still ailing financial sector.


  • Garcia-Herrero, Alicia, “Banking Crisis in Latin America in the 1990s: Lessons from Argentina, Paraguay and Venezuela”, IMF Working Paper WP/97/140, Washington, D.C., October 1997.

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  • Gonzalez A., Marta and Madelin Otazo, “Porque Quebraron los Bancos-Analisis de la Crisis Financiera en el Paraguay”, Imprenta Salesiana, Asunción, 1999.

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  • International Monetary Fund, “Programa de Reforma para el sector Financiero”, Washington, D.C., May 1990.

  • International Monetary Fund, “Paraguay - Staff Report for the 1994 Article IV Consultation”, Washington, D.C., April 1994.

  • International Monetary Fund, “Paraguay: Recent Economic Developments”, Washington, D.C., 1994, 1 95,1 96,1997 and 1998.

  • World Bank, “Paraguay: Country Economic Memorandum”, Washington D.C., 1991, 1994, 1998 (draft).

  • World Bank, “Paraguay: Macroeconomic Policies to Reactivate Growth”, Washington, D.C., October 1998.


Prepared by Juan Carlos Jaramillo.


Not including those associated with the slowdown of economic activity. See Section IV below.


For more details on the origins of Paraguay’s banking crisis, see [1], [2], [5] and [6].


As noted in [5,1996] p.13, “Already in 1989 the Bank Superintendency had assessed that about a third of the banking system was insolvent”.


As far back as 1991 the World Bank’s CEM for Paraguay noted that “some private banks are clearly bankrupt...three...have a negative net worth, but others may also be in trouble” ([6,1991] p.46). It then added that “ of end 1990, at least 15 of 23 banks [are] in noncompliance [with minimum capital requirements] ([6,1991] p. 46). In the same vein, the 1994 Fund RED noted that “...institutions representing over ten percent of the banking system...remain in financial distress and may face intervention, merging or liquidation.” ([5, 1994] p.17). That same year’s Article IV Staff Report noted that “...the re-capitalization of banks with solvency problems is a priority...” ([4,1994] p.7). It then recommended that “The authorities ... should ... vigorously enforce adequate minimum capital, loan classification, and provisioning rules on the banks” ([4,1994] p.9).


During 1995 alone, the Central Bank of Paraguay spent close to G.700 billion (US$ 360 million - 4 percent of GDP) in its efforts to avoid the propagation of the crisis, an amount about equal to currency in circulation at the outset of the first wave.


This perception stemmed, by and large, from the fact that only two institutions had ever been intervened and closed in Paraguay despite banking practices such as those mentioned in the previous section.


The practice of parallel accounting also was widespread in nonintervened institutions. The publicity surrounding the discovery of parallel accounts, as well as pressure from regulators, led both depositors and managers of nonintervened institutions to formalize deposit holdings. To some extent this explains the increase in deposits observed during the second half of 1995 in several banks.


In both these banks IPS soon became the most important depositor. By end 1996 ninety eight percent of deposits at Banco de Desarrollo belonged to IPS.


Since IPS also held a large portion of its deposits at BNT, after the merger, BNT’s holdings of IPS deposits reached G. 230 billion, almost half of the Institute’s liquid assets at the time.


BCP was authorized to space payments beyond the first 20 monthly minimum wages for up to one year, as needed for monetary stability.


Elements of moral hazard remained, as bank owners were not forced to pay for the deposit insurance scheme.


This yield, according to IPS administrators, is well below the average yield on IPS’s other financial holdings.


See [5,1998] p.l 8 and p.44. The estimate, G.2,859 billion, provided a an upper bound to possible losses, as it explicitly did not include forecasts of asset recuperation in failed banks.


The imbalance is in fact even larger, because an unidentified portion of the uncovered deposits belong to public entities at different levels of government.


Central Bank officials have publicly referred to this issue as fact.


See ([1], [2], [4], [5] and [6].