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The Banking System Crisis In Latin America

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  • THOMAS J. TREBAT

Abstract

A major “bootstraps” challenge lies ahead for Latin America: finding enough savings capacity at home to finance needed increases in investment during the 1990s. The banking system throughout the region cannot carry out its role in this process, however, due to a ruinous process of internal debt accumulation and corporate bankruptcy—the domestic analog of the external debt crisis of the 1980s. This paper briefly reviews recent financial liberalization experiences in Latin America. It identifies three factors as contributing to the undermining of the banking system and the failure of liberalization in the region: (i) foreign exchange risks that the banking system has assumed, (ii) unsound lending and borrowing practices, and (Hi) inadequate regulatory and supervisory frameworks. A case study of Chile illustrates the dynamics of frustrated reform and privatization in the financial markets. The paper concludes that Latin America has no real choice but to pursue liberalization and to rely more on the private sector in the financial markets. The path to deeper financial markets is extremely complex, however, and Latin America must continue seeking the proper balance between state sector supervision and intervention and an increased role for the private sector. An agenda for research points to some thorny issues awaiting empirical investigation.

Suggested Citation

  • Thomas J. Trebat, 1991. "The Banking System Crisis In Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 9(1), pages 54-66, January.
    • Handle: RePEc:bla:coecpo:v:9:y:1991:i:1:p:54-66
    DOI: 10.1111/j.1465-7287.1991.tb00315.x
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    References listed on IDEAS

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    1. Dornbusch, Rudiger & Reynoso, Alejandro, 1989. "Financial Factors in Economic Development," American Economic Review, American Economic Association, vol. 79(2), pages 204-209, May.
    2. Joseph E. Stiglitz, 1989. "Markets and Development," NBER Working Papers 2961, National Bureau of Economic Research, Inc.
    3. Stiglitz, Joseph E, 1989. "Markets, Market Failures, and Development," American Economic Review, American Economic Association, vol. 79(2), pages 197-203, May.
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    Cited by:

    1. Molina, Carlos A., 2002. "Predicting bank failures using a hazard model: the Venezuelan banking crisis," Emerging Markets Review, Elsevier, vol. 3(1), pages 31-50, March.
    2. Visser, Hans & Herpt, Ingmar van, 1994. "Financial liberalization and financial fragility : the experiences of Chile and Indonesia compared," Serie Research Memoranda 0056, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    3. Patricia Fernández-Kelly & Douglas S. Massey, 2007. "Borders for Whom? The Role of NAFTA in Mexico-U.S. Migration," The ANNALS of the American Academy of Political and Social Science, , vol. 610(1), pages 98-118, March.

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