an Eldis Resource
Determining the causes of bank runs in Argentina during the crisis of 2001
Exchange rate crisis as an explanation for explaining the run on the banks in Argentina
Authors:
F. Gabrielli; G. McCandless; M. J. Rouillet
Publisher:
Banco Central de la Republica Argentina, Argentina, 2003
What explains the run on the banks during the 2001 crisis in Argentina? This paper uses monthly panel data information on Argentine banks to try to explain the variation in deposits during the 2001 crisis.
Theories on what causes bank runs are first introduced. The paper describes the two competing theories to explain bank runs:
- panics come primarily from the lack of confidence on the bank sector, which itself could be caused by the bankruptcy of a big bank or in the lost of confidence in the local currency, panic is focused in the banking system and ends in a generalized withdrawal of deposits
- crises are part of a cycle that affects both the financial and real sector of the economy - the financial sector extends credit to the real sector, based on expectations of sustained future growth, however with the passage of time, the financial sector become highly leveraged, and when a downturn occurs, the creditors can not repay their loans and a financial crisis takes place
The macro-financial situation in Argentina during 2001 is analysed. The variables used are defined and the econometrics methods used are described. The paper uses panel data for the period January-November 2001 and individual monthly cross-section regressions for the critical period after July. The results are then presented.
The paper finds that:
- in all panels several bank fundamentals, including interest rate, non performing loans, loans, exposition to sovereign risk, net financial income and dummies allowing differentiation by type of bank, have statistically significant coefficients
- in the monthly cross-section estimations, bank fundamentals are jointly significant in every month, although which variables are individually significant vary from month to month
- activity is only relevant for peso deposits, however in the case of exchange risk, devaluation expectations are negative and significant both for peso and dollar deposits
The paper concludes that the Argentine banking crisis was really an exchange rate crisis.
Summary originally provided by GDNet, an Eldis content partner
