During the 1990s, marked by President
Carlos Menem's policies of
liberalization
Liberalization or liberalisation (British English) is a broad term that refers to the practice of making laws, systems, or opinions less severe, usually in the sense of eliminating certain government regulations or restrictions. The term is used m ...
,
Argentina
Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country in the southern half of South America. Argentina covers an area of , making it the second-largest country in South America after Brazil, th ...
's financial system saw a significant consolidation and strengthening, in large part through
foreign investment. In addition to high
reserve
Reserve or reserves may refer to:
Places
* Reserve, Kansas, a US city
* Reserve, Louisiana, a census-designated place in St. John the Baptist Parish
* Reserve, Montana, a census-designated place in Sheridan County
* Reserve, New Mexico, a US vi ...
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
Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include:
* Market liquidity, the ease with which an asset can be sold
* Accounting liquidity, the ability to meet cash obligations when due
* Liq ...
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
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence ...
of the Central Bank stood at nearly $25,000 million in December 1999, or over 9 months of
imports. However, these reserves were used to back the monetary liabilities of the Central Bank and were not available for conducting
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
; by the terms of the
Convertibility Law, each
Argentine peso
The peso (established as the ''peso convertible'') is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using peso or dollar currencies. It is subdivided into 100 ''centavos''. Its ISO 4 ...
in circulation was to be matched by one American dollar in the reserves.
Despite the
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
(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
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
— a much lower ratio than those of
Chile
Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
,
Mexico
Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
, or
Brazil
Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
, 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
In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
, 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
Bond or bonds may refer to:
Common meanings
* Bond (finance), a type of debt security
* Bail bond, a commercial third-party guarantor of surety bonds in the United States
* Chemical bond, the attraction of atoms, ions or molecules to form chemica ...
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 Argentine population still remains extremely distrustful and 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.
The Argentine banking sector is currently dominated by state-owned banks, with 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).
See also
*
Argentine economic crisis (1999-2002)
Argentines (mistakenly translated Argentineans in the past; in Spanish (masculine) or (feminine)) are people identified with the country of Argentina. This connection may be residential, legal, historical or cultural. For most Argentines, ...
*
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 which implicated a limit of cash withdrawals of 250 ARS per week (at that t ...
External links
Central Bank official website
{{South America topic, Banking in
Finance in Argentina