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Chilean Banking Crisis of the 1980s: Solutions and estimation of the costs

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  • Gonzalo I. Sanhueza

Abstract

This paper reviews the solutions to the Chilean banking crisis of the 1980s and analyzes their effects on banks, deriving policy lessons from this analysis. This paper also estimates the cost of the rescue of each institution. The three main solutions to the crisis were the following: (i) foreclosure of insolvent institutions or transfer of their assets and liabilities to the solvent institutions; (ii) acquisition of high-risk portfolio (bad loans) under condition of repurchase without provision of fresh funds; and (iii) acquisition of high-risk portfolio under condition of repurchase through future profits with provision of fresh funds. The results showed that the third alternative as the most efficient for the recovery of a significant number of financial institutions with solvency problems. Supporting bank re-capitalization and creating incentives for recovering bad loans helped to accelerate the recovery of the banking industry. The total cost was significant. The cost of foreclosure of insolvent institutions was 10.6 % of the GDP and the cost of portfolio purchase under conditions of repurchase reached 6.7 % of the GDP.

Suggested Citation

  • Gonzalo I. Sanhueza, 2001. "Chilean Banking Crisis of the 1980s: Solutions and estimation of the costs," Working Papers Central Bank of Chile 104, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:104
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    Cited by:

    1. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
    2. Davide Furceri & Aleksandra Zdzienicka, 2012. "The Consequences of Banking Crises for Public Debt," International Finance, Wiley Blackwell, vol. 15(3), pages 289-307, December.
    3. Yudaeva, Ksenia & Godunova, Maria & Kozlov, Konstantin & Ivanova, Nadezhda, 2009. "Exit strategies from the banking crisis: international experience," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 3, pages 98-149, June.

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