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Tunneling when Regulation is Lax: The Colombian Banking Crisis of the 1980s

Author

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  • Hernandez, Carlos Eduardo
  • Tovar, Jorge
  • Caballero/Argáez, Carlos

Abstract

The resilience of firms to industry-wide shocks has positive externalities in industries with systemic risk, such as banking. We study the resilience of banks to macroeconomic slowdowns in a context of lax microprudential regulations: Colombia during the 1980s. Multiple banks performed poorly during the crisis due to practices that tunneled resources from depositors to shareholders and board members. Such practices —related lending for company acquisitions, loan concentration, and accounting fraud— were enabled by power concentration and links with political power among local banks. In contrast, foreign-owned banks performed relatively well during the crisis due to three factors: (i) foreign-owned banks imported governance institutions and lending procedures from their headquarters, (ii) foreign-owned banks were not part of local business groups with concentrated ownership, and (iii) foreign-owned banks were ex-ante less likely to receive a bailout from the government. These factors continued to be relevant into the 1980s, even though the Colombian government had forced foreign banks to become minority stakeholders of their subsidiaries in 1975.

Suggested Citation

  • Hernandez, Carlos Eduardo & Tovar, Jorge & Caballero/Argáez, Carlos, 2022. "Tunneling when Regulation is Lax: The Colombian Banking Crisis of the 1980s," MPRA Paper 115662, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:115662
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    File URL: https://mpra.ub.uni-muenchen.de/115662/1/MPRA_paper_115662.pdf
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    References listed on IDEAS

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    2. Alvarez Sebastian, 2023. "Latin American Banks and Euromarkets: A View on the Process of Early Bank Globalization from the Periphery," Jahrbuch für Wirtschaftsgeschichte / Economic History Yearbook, De Gruyter, vol. 64(2), pages 489-527, November.

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    More about this item

    Keywords

    Banking; Tunneling; Related Lending; Financial Crises; Foreign Banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • N26 - Economic History - - Financial Markets and Institutions - - - Latin America; Caribbean

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