Banking crises in Latin America in the 1990s : lessons from Argentina, Paraguay, and Venezuela

This paper reviews three banking crises that took place in Latin America in the 1990s.those of Argentina, Paraguay, and Venezuela.and draws lessons about the factors affecting the macroeconomic impact. The causes of such crises influence their macroeconomic effect. Past experience also plays a role: a tradition of honoring deposits strengthens public confidence in the banking system, reducing the extent of the runs. The exchange rate regime, the degree of dollarization, and the structure of the banking system significantly influence monetary, credit, and macroeconomic variables. A fixed exchange rate regime and a high level of internal foreign currency debt make it more difficult to use inflation to shrink banks. balance sheets in real terms. A high degree of dollarization and a large share of foreign and government-owned banks with implicit government guarantee can reduce the magnitude of deposit outflows. These offer depositors a possibility of keeping part of their funds (temporarily) within the domestic banking system, but in a currency and in banks perceived to be less risky. A well-funded deposit insurance scheme and a flexible lender-of-last-resort facility also help to reduce the negative macroeconomic impact of a banking crisis. In contrast, a poorly regulated offshore banking system and substantial off-balance-sheet operations in the domestic banking system increase the costs of a crisis. Finally, the authorities. rapid, consistent, and comprehensive policy response to a banking crisis reduces its negative macroeconomic impact.