Prepared by Fernando Delgado, Antonio Pancorbo and WHD staff.
Out of the 24 banks remaining under private control, four banks are foreign owned.
Out of which, 12 institutions have been closed.
Those aspects of the banking strategy most directly linked to dollarization are discussed in the next chapter.
Filanbanco acquired Banco de los Andes in 1994.
67 percent of total on-shore credit portfolio of the banking sector was dollar denominated by end-March 1999. It has been estimated that less than 25 percent of the borrowers have dollar-denominated income and, therefore, banks were overexposed to the exchange rate risk of their customers in over 50 percent of their portfolio.
Intervention of Filanbanco was delayed until passage of the law creating the AGD and extending a blanket deposit guarantee, thus effectively increasing the State share in the cost of the banking crisis.
A one percent tax was charged on any bank transaction, including both credits and debits, and in any kind of account.
Fund staff advised against passing the deposit insurance law extending a blanket guarantee to off-shore subsidiaries and without first closing the insolvent institutions.
The bank closed its doors unilaterally immediately after the banking holiday ended, but the existing owner and management were left in control until a new Superintendent of Banks took office four months after the bank suspended operations.
To maintain Filanbanco’s operation after take over by the AGD required over US$800 million, most of it in liquidity assistance through rediscount of government bonds at the CBE.
Congress passed banking legislation the day before the announcement of the international audits results was due, but in a manner that changed substantially the original intent of the law that had been submitted, forcing the authorities to veto the law and improvise resolution techniques within the pre-existing legal framework that placed the burden of recapitalization on the State, and provided a temporary bail-out of bank owners at a higher fiscal cost.
Banco del Pacífico and Banco la Previsora. The insolvency of both banks eventually surfaced and both institutions were taken over in October 1999.
These measures are still incomplete, as existing interest rate caps and banking fee restrictions are strong disincentives for private investment in the banking sector, and draft legislation to allow existing shareholders and management to retain ownership and control of their banks when they are complying with a recapitalization program remains to be approved within the Law for Promoting Citizens’ Investment and Participation (“Trole II”) that was submitted to congress in July 2000.
Up to US$ 50,000, including some 800,000 debtors (over 92 percent of total loans in the system) representing around 12 percent of the total bank credit portfolio.
An important piece of this framework is still missing. Private banks should be allowed exceptional access to enhanced foreclosure procedures (coactiva) for those borrowers failing to regularize their situation before the restructuring deadline.
The first and more important of these decisions was the approval of the blanket deposit guarantee in December 1998, including all solvent and insolvent banks.
Congress decided to extend the blanket deposit guarantee to Banco de Préstamos’ depositors, even though the bank had been closed before passage of the blanket guarantee law and its depositors had already received up to US$2,000 per customer, which was the limited deposit guarantee existing a the time of the banks’ closure. The fiscal cost of this decision was estimated at about US$200 million.
Solbanco’s main depositor was a public employees’ pension fund. The bank showed acute solvency problems early in 1998 and the pension fund decided to capitalize part of its deposits to reestablish compliance with the minimum capital adequacy ratio. However, the problems of Solbanco ran deeper than expected and the international audit process showed that the bank had a negative capital position. According to the bank restructuring strategy, owners of insolvent banks would loose their stakes and the banks would be taken over by the AGD for resolution. However, the authorities decided to reverse the 1998’s deposit capitalization in order to prevent the new shareholders (former depositors) from losing their capital stakes and their deposits (as related parties deposits were not covered by the deposit guarantee). The fiscal cost of this measure was estimated at about US$75 million.
Despite efforts of the two State-owned banks which were in charge of guaranteed deposits cash payments to retain these funds, the results were relatively modest (averaging 60 percent of the funds in Filanbanco an 15 percent in Banco Continental). As a result, a larger proportion of guaranteed deposits left the banking system in the last few months of the year.
Instead of swapping frozen time deposit balances above US$4,000 for 3 to 7 year government bonds, banks were instructed to issue their own bonds but, de facto, were given ample leeway to pay the full balances in cash. Also, mutual funds’ investments, for an amount of about US$500 million, were fully unfrozen in cash on March 13, 2000. Fortunately, an aggressive policy by most banks, helped by the high cost of changing banks introduced by the financial transactions tax, succeeded in maintaining most deposits within the banks.
However, several Constitutional Court rulings since November 1999, establishing the immediate unfreezing of any remained frozen deposit balances, are bound to create problems for the more liquidity-squeezed banks, although the risk of a systemic liquidity crisis has substantially decreased since March 2000.
The banks could then use these CDRs to cancel the CFN lines.
A partial restructuring of domestic public debt in October 1999 added to these pressures. Maturities on debt falling due through end-2000 were extended and interest rate reduced.
Due to existing provisions regulating the computation of arrears’ interest rate, linking them to the original interest rate of the loan, penalty rates resulted lower than current interest rates, thus prompting non-payment by borrowers.
Mainly, no fee could be charged in a loan or in substitution of an interest rate.
The provisioning scale for loans bearing interest rates above 18 percent is due to expire at end-March, 2001.
By comparison, the latest estimates of the fiscal costs of other banking crisis are 56 percent of GDP in Indonesia, 21 percent in Korea, 19 percent in Mexico, 17 percent in Finland, 14 percent in Malaysia, 6 percent in Sweden, 3 percent in Norway, 1 percent in Denmark, and negligible in Russia (very few direct fiscal cost were associated with the banking crisis).
Also, about US$100 million guaranteed deposits were paid in cash (obtained through bond rediscount at the CBE) during 1999.