Banking in Argentina
Encyclopedia
During the 1990s, marked by President Carlos Menem
's policies of liberalization
, Argentina
's financial system saw a significant consolidation and strengthening, in large part through foreign investment. In addition to high reserve
and capital-adequacy requirements, the Central Bank of Argentina
maintained a repurchase agreement with a consortium of international banks to provide a $6,000 million safety net in the event of a liquidity squeeze.
Mergers and acquisitions, which decreased the number of Argentine banks from nearly 300 in 1990 to fewer than 100 at the end of 1999, were expected to continue and lead to improvements in management and efficiency. The foreign currency reserves
of the Central Bank stood at nearly $25,000 million in December 1999, or over 9 months of import
s. However, these reserves were used to back the monetary liabilities of the Central Bank and were not available for conducting monetary policy
; by the terms of the Convertibility Law
, each Argentine peso
in circulation was to be matched by one American dollar in the reserves.
Despite the recession
(started in 1998 after the international economic shock due to the 1998 Russian financial crisis), bank deposits continued to grow until 2001
, although at a much slower rate than in previous years. Total deposits in the banking system stood at nearly $80,000 million by mid-2001 — more than twice that of June 1995, when deposits hit a low of $37,000 million. Foreign-controlled banks held over 40% of total deposits, and six of the top 10 commercial banks were in the hands of American and European financial institutions.
Still, the level of bank utilization in Argentina remained relatively low, and bank intermediation represented only about 30% of the GDP
— a much lower ratio than those of Chile
, Mexico
, or Brazil
, for example.
Nevertheless the banking system suffered a fatal flaw: it lent dollars and took deposits in Argentine pesos (nominally argendollars). By early 2001, deposits had reached $87,000 million, but when the economy took a second dip, capital started flowing out
of Argentina, and deposits started to move away from the weaker players of the financial system, namely provincial banks and large local banks.
This eventually led to a run on all banks in the system, a freeze in deposits
, and a currency devaluation
, which included an asymmetric devaluation of loans and deposits. Banks were forced to collect their dollar loans at a conversion rate much lower than the rate applied to its dollar deposits. This made many banks technically bankrupt and destroyed the confidence of the public in the financial system, which was held responsible for many of the economic ills of the country.
Deposits fell to less than $40,000 million by the end of 2002
. Foreign banks fled the country during 2002 and 2003
, selling their operations to smaller local banks at a fraction of their original investments. Only a few large foreign banks decided to stay.
In 2004
, the government compensated the banks for the impact of the asymmetric devaluation of deposits and loans through a series of "compensation bond
s".
Currently banks are again gaining deposits, which amounted to more than $44,000 million by February 2006, and have been increasing their lending portfolios. Their operations are leaner, due to the massive layoffs of 2002, that reduced their working force by more than 30%. However, the public still remains wary of taking long term loans, and rates are high in real terms given Argentina's low rates of inflation. Banking penetration remains low and banking costs high.
Nowadays the Argentine banking sector is dominated by state-owned banks (the largest being the Banco de la Nación Argentina
). In 2005
, for the first time since the 2001 collapse, the banking system made a profit, according to a Central Bank report released in February 2006. The total profits amounted to 1,958 million pesos (more than $650 million).
Carlos Menem
Carlos Saúl Menem is an Argentine politician who was President of Argentina from 1989 to 1999. He is currently an Argentine National Senator for La Rioja Province.-Early life:...
's policies of liberalization
Liberalization
In general, liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation...
, Argentina
Argentina
Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...
's financial system saw a significant consolidation and strengthening, in large part through foreign investment. In addition to high reserve
Bank reserves
Bank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in the bank's vault . The central banks of some nations set minimum reserve requirements...
and capital-adequacy requirements, the Central Bank of Argentina
Banco Central de la República Argentina
-Overview:Established by six Acts of Congress enacted on May 28, 1935, the bank replaced Argentina's Currency board, which had been in operation since 1890...
maintained a repurchase agreement with a consortium of international banks to provide a $6,000 million safety net in the event of a liquidity squeeze.
Mergers and acquisitions, which decreased the number of Argentine banks from nearly 300 in 1990 to fewer than 100 at the end of 1999, were expected to continue and lead to improvements in management and efficiency. The foreign currency reserves
Reserve currency
A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves...
of the Central Bank stood at nearly $25,000 million in December 1999, or over 9 months of import
Import
The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...
s. However, these reserves were used to back the monetary liabilities of the Central Bank and were not available for conducting monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
; by the terms of the Convertibility Law
Argentine Currency Board
The Argentine Currency Board pegged the Argentine peso to the U.S. dollar between 1991 and 2002 in an attempt to eliminate hyperinflation and stimulate economic growth. While it initially met with considerable success, the board's actions ultimately failed. In contrast of what most people think,...
, each Argentine peso
Argentine peso
The peso is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using dollar currencies. It is subdivided into 100 centavos. Its ISO 4217 code is ARS...
in circulation was to be matched by one American dollar in the reserves.
Despite the recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
(started in 1998 after the international economic shock due to the 1998 Russian financial crisis), bank deposits continued to grow until 2001
2001 in Argentina
-December:December 2001 riots in Argentina:* 16 December: Unemployed activists and protestors demanding food from supermarkets cause several incidents in Greater Buenos Aires....
, although at a much slower rate than in previous years. Total deposits in the banking system stood at nearly $80,000 million by mid-2001 — more than twice that of June 1995, when deposits hit a low of $37,000 million. Foreign-controlled banks held over 40% of total deposits, and six of the top 10 commercial banks were in the hands of American and European financial institutions.
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
— a much lower ratio than those of Chile
Chile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
, Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
, or Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
, for example.
Nevertheless the banking system suffered a fatal flaw: it lent dollars and took deposits in Argentine pesos (nominally argendollars). By early 2001, deposits had reached $87,000 million, but when the economy took a second dip, capital started flowing out
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...
of Argentina, and deposits started to move away from the weaker players of the financial system, namely provincial banks and large local banks.
This eventually led to a run on all banks in the system, a freeze in deposits
Corralito
Corralito was the informal name for the economic measures taken in Argentina at the end of 2001 by Minister of Economy Domingo Cavallo in order to stop a bank run, and which were fully in force for one year. The corralito almost completely froze bank accounts and forbade withdrawals from U.S...
, and a currency devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
, which included an asymmetric devaluation of loans and deposits. Banks were forced to collect their dollar loans at a conversion rate much lower than the rate applied to its dollar deposits. This made many banks technically bankrupt and destroyed the confidence of the public in the financial system, which was held responsible for many of the economic ills of the country.
Deposits fell to less than $40,000 million by the end of 2002
2002 in Argentina
-January:* January 1: The Legislative Assembly gathers and chooses senator Eduardo Duhalde as interim president.* January 2: President Duhalde announces the end of the 1:1 peso-dollar fixed exchange rate after almost 11 years.-June:...
. Foreign banks fled the country during 2002 and 2003
2003 in Argentina
-January:* 3 January: The Assembly of the Justicialist Party, with three presidential candidates, proposes using the Ley de Lemas in the main election instead of selecting one candidate in primaries. The opposition is outraged.-February:...
, selling their operations to smaller local banks at a fraction of their original investments. Only a few large foreign banks decided to stay.
In 2004
2004 in Argentina
-January:* 7 January: Roger Noriega, U.S. Sub-Secretary for the Western Hemisphere, criticizes Argentina's position on Cuba, and Minister of Foreign Affairs Rafael Bielsa says he feels affected and offended, starting a minor diplomatic crisis....
, the government compensated the banks for the impact of the asymmetric devaluation of deposits and loans through a series of "compensation bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
s".
Currently banks are again gaining deposits, which amounted to more than $44,000 million by February 2006, and have been increasing their lending portfolios. Their operations are leaner, due to the massive layoffs of 2002, that reduced their working force by more than 30%. However, the public still remains wary of taking long term loans, and rates are high in real terms given Argentina's low rates of inflation. Banking penetration remains low and banking costs high.
Nowadays the Argentine banking sector is dominated by state-owned banks (the largest being the Banco de la Nación Argentina
Banco de la Nación Argentina
Banco de la Nación Argentina is a state-owned bank in Argentina, and the largest in the country's banking sector.-Overview:The bank was founded on October 18, 1891, by President Carlos Pellegrini by way of stabilizing the nation's finances following the Panic of 1890; its first director was...
). In 2005
2005 in Argentina
-January:* January 11: The state fines power distribution companies and national water company on grounds of bad quality service, and reclaims unpaid fines and unfulfilled investment goals, for a total of more $50 million....
, for the first time since the 2001 collapse, the banking system made a profit, according to a Central Bank report released in February 2006. The total profits amounted to 1,958 million pesos (more than $650 million).