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Central Bank Involvement in Banking Crises in Latin America

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  • Luis Ignacio Jácome

Abstract

This paper reviews the nature of central bank involvement in 26 episodes of financial disturbance and crises in Latin America from the mid-1990s onwards. It finds that, except in a handful of cases, large amounts of central bank money were used to cope with large and small crises alike. Pouring central bank money into the financial system generally derailed monetary policy, fueled further macroeconomic unrest, and contributed to simultaneous currency crises, thereby aggravating financial instability. In contrast, when central bank money issuance was restricted and bank resolution was timely executed, financial disturbances were handled with less economic cost. However, this strategy worked provided appropriate institutional arrangements were in place, which highlights the importance of building a suitable framework for preventing and managing banking crises.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/135.

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Length: 49
Date of creation: 01 May 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/135

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Keywords: Latin America; Banking crisis; banking crises; banking; deposit insurance; bank money; financial crises; financial distress; bank restructuring; banking system; contagion; bank mergers; bank involvement; bank claims; currency crises; bank assistance; deposit guarantee; recapitalization; small bank; financial strength; currency crisis; currency depreciation; interbank market; financial liberalization; systemic crisis; closure of banks; macroeconomic stability; reserve requirements; systemic banking crises; credit boom; bank reform; financial crisis; bank losses; insolvent banks; bank problems; banking crises management; fiscal crisis; debt crisis; capital adequacy; banking authority; debt restructuring; systemic risk; banking practices; systemic financial crises; bank liabilities; financial safety net; bank capital; systemic bank restructuring; regulatory forbearance; banking supervision; bank borrowers; bank finance; banking system liabilities; bank debtors; sovereign debt crisis; financial integration; banks ? assets; subordinated debt; bank depositors; banking authorities; banks ? asset; closed banks; financial deepening; financial restructuring; bank board; bank soundness; bank balance sheet; excess liquidity; financial reforms; bank emergency assistance; bank transactions; bank regulators; early warning system; major banking crisis; bank reserves; bank balance sheets; private bank; borderline financial crises; bank deposits; limited deposit insurance; crises management; bank discretion; foreign exchange; bank failures; present value; bank solvency; bank credit; asian crisis; banking legislation; clearing house; bank law; banks ? balance sheets; liquidation of banks; banks ? liabilities;

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References

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  1. Eichengreen, Barry & Arteta, Carlos, 2000. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research, Working Paper Series qt3pk9t1h2, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Carlos O. Arteta, 2003. "Are financially dollarized countries more prone to costly crises?," International Finance Discussion Papers 763, Board of Governors of the Federal Reserve System (U.S.).
  3. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  4. International Monetary Fund, 2005. "Latin American Central Bank Reform," IMF Working Papers 05/114, International Monetary Fund.
  5. Agustin Carstens & Luis I. Jacome H., 2005. "Latin American Central Bank Reform: Progress and Challenges," Macroeconomics 0509022, EconWPA.
  6. Marco Arena & Carmen Reinhart & Francisco Vázquez, 2006. "The Lending Channel in Emerging Economics: Are Foreign Banks Different?," NBER Working Papers 12340, National Bureau of Economic Research, Inc.
  7. Martinez Peria, Maria Soledad, 2000. "The impact of banking crises on money demand and price stability," Policy Research Working Paper Series 2305, The World Bank.
  8. De la Torre, Augusto, 2000. "Resolving bank failures in Argentina - recent developments and issues," Policy Research Working Paper Series 2295, The World Bank.
  9. Peter Stella, 2008. "Central Bank Financial Strength, Policy Constraints and Inflation," IMF Working Papers 08/49, International Monetary Fund.
  10. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
  11. Francisco F. Vázquez & Carmen Reinhart & Marco Arena, 2007. "The Lending Channel in Emerging Economies," IMF Working Papers 07/48, International Monetary Fund.
  12. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
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Citations

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Cited by:
  1. Nannette Lindenberg & Frank Westermann, 2012. "How strong is the case for dollarization in Central America? An empirical analysis of business cycles, credit market imperfections and the exchange rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(2), pages 147-166, 04.
  2. Bunda, Irina & Ca' Zorzi, Michele, 2010. "Signals from housing and lending booms," Emerging Markets Review, Elsevier, vol. 11(1), pages 1-20, March.
  3. Reza Siregar, 2011. "Macro-Prudential Approaches to Banking Regulation : Perspectives of Selected Asian Central Banks," Finance Working Papers 23211, East Asian Bureau of Economic Research.
  4. Laeven, Luc & Valencia, Fabián, 2012. "The use of blanket guarantees in banking crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1220-1248.
  5. Nicolae Dardac & Adriana Giba, 2010. "Systemic Crisis Management and Central Bank Independence. An Empirical Analysis," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(28), pages 594-605, June.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
  7. Erlend Nier, 2009. "Financial Stability Frameworks and the Role of Central Banks," IMF Working Papers 09/70, International Monetary Fund.
  8. Sanjeev Gupta & Carlos Mulas-Granados & Emanuele Baldacci, 2009. "How Effective is Fiscal Policy Response in Systemic Banking Crises?," IMF Working Papers 09/160, International Monetary Fund.
  9. Nicolae Dardac & Adriana Giba, 2011. "Systemic Financial Crisis: A Cluster Analysis," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 53-64.
  10. Jacome H., Luis I. & Saadi Sedik, Tahsin & Townsend, Simon, 2012. "Can emerging market central banks bail out banks? A cautionary tale from Latin America," Emerging Markets Review, Elsevier, vol. 13(4), pages 424-448.

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