Shifting to trade for profit: The Andean Development Corporation’s strategy during the crisis of the 1980s

The Andean Development Corporation (CAF), a publicly-owned regional development bank, reduced its leverage and increased its lending commitments and profit margins during the early 1980s and the Lost Decade. In this paper we explore how the CAF reacted to the difficult conditions of the period and the changes it implemented to its lending and funding policies to adapt and succeed. The CAF followed two different strategies. First, it increased its financing of external commercial operations with members of the Andean Group. Second, during and after the Volcker shock, it called on country shareholders to contribute paid-in capital, thus reducing leverage. This lowered the Corporation’s funding costs while higher interest-paying loans increased profitability. As changes in operations were both effective and lucrative, profit reinvestment and balance sheet expansion ensued, facilitating management’s ability to achieve the Bank’s goal of providing finance even when other funding sources were shut down.