## _wp0412

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---

### Introduction and scope
- Main goal: stress the importance of institutional weaknesses, public finance rigidities, and high financial dollarization in shaping the dynamics of the late-1990s financial crisis in Ecuador.
- Coverage: the crisis period up to the point when the government adopted the U.S. dollar as the legal tender.
- Clarifications:
  - “Institutions” = organizational and regulatory aspects underpinning government decisions relevant to the financial system.
  - “Public finance rigidities” = limited ability to increase revenues, cut expenditures, and access capital markets.
  - “Financial dollarization” = extensive use of a foreign currency (U.S. dollar) to value assets and liabilities in the financial system while real-sector transactions are mostly denominated in domestic currency.

### Crisis dynamics and chronology
- Banking-system collapse was the underlying cause of the upheaval, accompanied by a simultaneous currency and public finance crisis.
- Banking-system impact:
  - Crisis involved 16 banks—out of the 40 existing in 1997.
- Currency and policy milestones:
  - Government adopted the U.S. dollar as legal tender in January 2000.
- Macroeconomic outcomes:
  - The 1999 economic downturn was the steepest; the following year inflation hit record highs.
  - 1999 per capita GDP measured in real sucres fell to 1977 levels.

### Costs, social effects, and externalities
- Estimated cost of the financial crisis:
  - Hoelscher and Quintyn (2003) preliminary estimate: over 20 percent of GDP.
- Emigration and social impact:
  - National Survey (INEC): during 1999–2001, about 300,000 Ecuadorans (mostly workers) left the country.
  - Other studies estimate migration totaled 500,000 persons between 1998 and 2002.
  - Context: significant in a country of less than 13 million inhabitants.
- Political consequences:
  - Accusations of corruption, rising social unrest, and loss of government credibility culminated in replacement of President Jamil Mahuad in January 2000.

### Analytical findings: amplification mechanisms
- Institutional weaknesses:
  - Laid groundwork for increasing fragility of the banking system during the 1990s.
  - Acted as a crisis amplifier by leading to adoption of suboptimal banking-resolution decisions.
- Public finance rigidities:
  - Inhibited adjustment necessary to align fiscal stance with deteriorating banking and currency trends.
  - Taxing financial transactions accelerated the collapse of a number of financial institutions.
- Financial dollarization:
  - Undermined effectiveness of financial safety nets and hastened a currency crisis.
  - Worsened banks’ solvency during periods of financial turbulence.
- Interaction:
  - The three factors reinforced each other, exacerbating crisis costs as the economy experienced simultaneous banking, currency, and fiscal crises.

### Roots of the banking crisis — Relevant macroeconomic trends during the 1990s
- Growth and inflation:
  - Real GDP growth averaged just over 3.5 percent between 1990 and 1997 (less than 1 percent annually in per capita terms).
  - Average annual inflation came close to 40 percent during 1993–95, bottomed out at 22 percent in 1995, climbed back to 30 percent by end-1997, and reached more than 50 percent by end-1999.
- External shocks and oil dependence:
  - Exports doubled between 1990 and 1997.
  - Macroeconomic imbalances in the late 1990s were closely correlated with the evolution of the external oil price.
  - External shocks and political problems triggered a stop and reversal of capital inflows starting in early 1995.

### Reduced fiscal policy margin — Findings
- Revenue and expenditure dynamics:
  - Revenues were highly volatile and trended down in the second half of the 1990s.
  - Revenues from oil exports represented approximately 25 to 30 percent of total revenues.
  - Increasing public debt service and a mounting wage bill pushed total current expenditure up almost three percentage points of GDP between 1994 and 1998.
  - Stock of domestic debt climbed from 2 to close to 20 percent of GDP between 1990 and 1998.
  - Total public debt rose to more than 90 percent of GDP in 1998.
- Earmarking and market access:
  - Total revenues earmarked rose to more than 50 percent.
  - Ecuador accessed international markets only once, in 1997, after very limited access post-1987 debt suspension.

### Monetary policy downfall and increasing dollarization — Findings
- Exchange-rate regime and credibility:
  - Exchange rate stabilization program from late 1992; shift to preannounced crawling band in 1994.
  - Six adjustments to exchange rate band parameters occurred between 1995 and 1998.
  - Credibility eroded, leaving the Central Bank of Ecuador (CBE) without a nominal anchor.
- Financial dollarization and reserve mismatches (by end-1997):
  - Foreign currency deposits had climbed to over one third of total onshore deposits in the banking system.
  - Foreign currency deposits were more than 70 percent of CBE’s net international reserves.
  - Including offshore deposits, total foreign currency deposits made up roughly two thirds of system deposits, exceeding CBE’s net international reserves.
- Regulatory gaps:
  - No regulation prevented banks from granting foreign currency loans to local-currency earners.
  - Borrowing in foreign currency increased from 1995 onwards; foreign-currency lending exceeded sucre lending by mid-1998.

### Financial liberalization and the boom-bust cycle — Findings
- Policy liberalization and outcomes:
  - Financial liberalization (1994 Law of the Financial System Institutions, LFSI) and CBE charter reform in 1992 liberalized interest rate policy and exchange regime flexibility.
  - Reserve requirements were reduced in 1994: from 28 to 10 percent for demand deposits in domestic currency; from 35 to 10 percent for deposits in foreign currency.
  - Number of banks increased from 31 in 1993 to 44 in 1996; finance companies from 9 in 1992 to 45 in 1995.
  - Credit real growth: 40 percent in 1993 and 50 percent in 1994.
  - Real exchange rate appreciated 20 percent during 1993–95.
- Supervision and safety-net shortcomings:
  - LFSI failed to establish effective consolidated supervision, particularly over offshore branches.
  - CBE assigned a LOLR role but could provide emergency assistance only in domestic currency, not dollars.
  - Deposit guarantee protected small depositors up to US$8,000 approximately and relied on central bank funds.

### 1994–1996 liquidity shock and Banco Continental
- CBE actions and outcomes:
  - To cope with stop-and-reversal of capital inflows in 1995, the CBE held the exchange rate stable and drastically contracted money base.
  - CBE interest rates rose to above 50 percent, close to 30 percent in real terms.
- Bank failure:
  - Banco Continental (6.4 percent of onshore bank deposits) failed in 1996; CBE provided subordinated loan support and later took it over.

### Stylized view of the 1998–1999 crisis: exogenous shocks and transmission
- External shocks in 1998:
  - El Niño floods (late 1997–early 1998); Russian and Brazilian crises; oil prices for Ecuadoran crude sinking to less than $10 per barrel.
- Contagion events and policy responses:
  - Closure of Solbanco in April 1998 triggered contagion and deposit runs.
  - Filanbanco (14 percent of the onshore system in deposits) sought CBE assistance in September 1998.
  - Total emergency loans reached close to 30 percent of money base—to assist 11 financial institutions—by end-September 1998.
- Late-1998 indicators:
  - CBE’s short-term paper (Bonos de Estabilización Monetaria, BEMs) volume tripled during September through November 1998.
  - Sucre nominal depreciation ≈ 24 percent during that interval.
  - CBE’s net international reserves shrank 7.6 percent over that interval.
  - A US$300 million slash of banks’ foreign credit lines occurred—17 percent of total and close to 20 percent of CBE’s international reserves.
  - Cumulative inflation reached 15 percent and real GDP grew only 0.1 percent in the last quarter of 1998.

### AGD Law, blanket guarantee, and 1 percent financial transaction tax
- AGD Law actions (approved early December 1998):
  - Established AGD and a blanket guarantee; empowered AGD to conduct bank resolution primarily via purchase and assumption (P&A).
  - Included a 1 percent tax on financial transactions (debits and credits), effective January 1999.
- Adverse effects of the 1 percent tax:
  - Tax was imposed amid a liquidity crunch and accelerated collapse of various financial institutions, including Banco del Progreso.
  - Demand deposits fell 17 percent in January 1999 despite continued growth in currency issue.
  - Economic agents sought to transact outside the banking system to avoid the tax.
- Implementation and fiscal limits:
  - AGD started honoring the blanket guarantee with central bank resources only in April 1999; lagged payments caused depositor losses via accelerating inflation and sucre depreciation.
  - Six impaired banks were closed during December 1998 and January 1999 despite new legislation.

### Currency crisis, deposit freeze, and systemic outcomes (early 1999)
- Early 1999 developments:
  - Money base expanded 18 percent during the first quarter despite sterilization and a 30 percent decline in CBE’s net international reserves.
  - CBE shifted to a clean float in February 1999.
  - Sucre depreciated nearly 50 percent in January and February 1999.
- Deposit freeze (March 1999) provisions:
  - Time deposits and repurchase agreements locked for at least one year.
  - Saving deposits in excess of US$500 and one half of checking account balances frozen for six months.
  - Depositors received Certificates of Reprogrammed Deposits (CDRs) with discounts varying by bank strength.
- Effects of the freeze:
  - Cash preference (cash vs. demand deposits ratio) jumped from less than 0.90 to nearly 1.5 between February and March 1999.
  - Several institutions (including Banco del Progreso) were shut down despite the freeze.
  - Freezing deposits temporarily halted the fall of the sucre and stabilized inflation but impaired the payments system and contributed to more than 7 percent of GDP drop (text indicates continuation).

### Central bank operations and sterilization limits
- CBE’s OMOs and results:
  - Stock of BEMs and BEM interest rates rose sharply in September–November 1998, but OMOs were insufficient to fully sterilize expansionary monetization.
  - During the last quarter of 1998:
    - Sucre nominal depreciation ≈ 24 percent.
    - CBE net international reserves fell 7.6 percent.
    - Banks’ foreign credit lines cut by US$300 million (17 percent of total; close to 20 percent of CBE’s international reserves).

### Unfreezing of deposits and the banking and monetary collapse (mid–late 1999)
- Auditor findings and bank closures:
  - International auditors revealed large divergences from SBS reports, leading to closure of another 4 banks and announcements of a final purge.
  - Gradual unlocking of deposits from mid-1999 proved premature and triggered a new wave of deposit withdrawals.
- Peak monetization and default:
  - CBE’s payment of the blanket guarantee and ongoing liquidity assistance peaked in September 1999 when total monetization associated to the banking crisis mounted to 12 percent of GDP.
  - In September 1999 the government suspended payments on its external commercial and Paris Club debt.
  - Two additional large banks failed in October 1999; AGD and CBE took control to avoid further closures and additional monetization.
  - Base money growth reached annual nominal rates of over 100 percent—real rates above 50 percent—toward the end of 1999.
  - CBE was unable to mop up liquidity: the stock of BEMs tripled during the second half of 1999.
  - A second currency crisis and accelerating inflation prompted official dollarization in January 2000.

### Exacerbating effects of institutional weaknesses, fiscal rigidities, and financial dollarization — Key findings
- Institutional weaknesses constrained policy responses and amplified crisis costs.
- Fiscal rigidities limited timely fiscal tightening and access to external financing.
- High financial dollarization fostered portfolio shifts to dollar assets, pressuring the exchange rate and international reserves.
- Institutional arrangements determined the nature and timing of crisis-management decisions; weak institutions increased systemic crisis costs.

### Institutional weaknesses — Findings and dynamics
- SBS and AGD capacity:
  - Hiring of auditors publicly recognized SBS’s inability to ascertain financial system soundness.
  - AGD lacked expertise to conduct P&A and could not handle failures of six banks occurring during the first two months after AGD creation.
- Political economy constraints:
  - P&A would have implied transfers between Guayaquil-based failing banks and Quito-based banks, provoking regional resistance.
  - Powerful economic groups influenced policies, leading to unequal distribution of crisis costs.
- Deposit freeze consequences:
  - Induced adverse selection and systemic lack of confidence.
  - Long-term confidence damage as financial contracts were perceived as unilaterally broken.
  - Alternative strategy: opening only viable banks at end of bank holiday could have mitigated adverse selection.

### Fiscal policy rigidities and the financial transactions tax — Findings and effects
- Fiscal indicators:
  - Public sector wage bill increase of nearly two percentage points contributed to fiscal deterioration.
  - Fiscal deficit rose to close to 6 percent of GDP (post-September 1998 tightening insufficient).
  - Fiscal deficit fell to less than 5 percent of GDP as oil prices partially recovered in 1999.
  - Total public debt to GDP ratio reached more than 130 percent by end-1999.
- Effects of the 1 percent tax on financial transactions:
  - Boosted fiscal revenues (more than compensating elimination of the income tax) but depressed demand for money.
  - Led to further deposit withdrawals and closures of several small and medium banks.
  - Neutralized effects of the blanket guarantee and activated the fiscal contingency associated with the guarantee.
- IMF negotiations:
  - Ecuador could not obtain external support during 1999; an arrangement with the IMF was worked out in March 2000 after protracted negotiations.

### Role of financial dollarization — Findings and mechanics
- Monetization and dollar constraints:
  - CBE emergency assistance reached 120 and 135 percent of the monetary base by December 1998 and February 1999, respectively.
  - CBE was legally precluded from providing LOLR assistance directly in dollars; it intervened in interbank markets selling dollars.
- Deposit dynamics and asset quality:
  - Excess of foreign currency deposits (not counting offshore) over CBE’s international reserves by late 1998 signaled limitations to provide assistance.
  - Book value of loans denominated in foreign currency ≈ 50 percent of total loans at crisis onset; rose to more than 90 percent towards end-1999 following depreciation.
  - Reported impaired loans increased from 4 to nearly 50 percent of total dollar loans.
- Monetary control undermined:
  - Gradual unlock of deposits from mid-1999 triggered new deposit runs; sucres demand plummeted.
  - Even sharp increases in CBE interest rates failed to sterilize liquidity.
  - Rapid depreciation of the sucre doubled in the last four months of 1999; monthly inflation averaged more than 5 percent in the fourth quarter and climbed to more than 14 percent in January 2000.

### Concluding remarks — Lessons and policy implications
- Institutions matter: strengthen legal and institutional frameworks for prevention and management of banking crises.
- Legal reform during a crisis can be subject to protracted political negotiation; prolonged financial assistance to impaired banks risks broad macroeconomic instability.
- Absence of fiscal adjustment during a financial crisis accelerates macroeconomic deterioration; fiscal tightening is necessary when public finances are weak.
- Imposing a financial transactions tax during a systemic liquidity shortfall risks encouraging deposit withdrawals and circumvention of the banking system.
- Blanket guarantees can fail if markets anticipate government inability to pay due to fiscal shortages; guarantee can boomerang and precipitate fiscal crisis.
- Monetary policy alone cannot sustainably confront a systemic banking crisis; persistent and large money printing can render monetary policy ineffective and lead to currency crash, especially with high financial dollarization.
- Modalities for ending a bank holiday matter:
  - Opening only viable banks at the end of a bank holiday, accompanied by credible macroeconomic policy and international support, can limit need to freeze deposits and help restore confidence.
  - Opening all banks regardless of viability may force a severe deposit freeze, encouraging unrest, legal claims, premature unlocking, and renewed withdrawals.

### Appendix — Institutional weaknesses and political economy context (highlights)
- Political and institutional instability:
  - Five presidents governed between 1995 and 1998; seven finance ministers in the same interval.
  - A new constitution enacted in 1998 (the second in 20 years).
- Regional fragmentation and vested interests:
  - Quito versus Guayaquil polarization constrained crisis-management choices, asset recoveries, and equitable distribution of crisis costs.

_Italic: Source: _wp0412 (IMF working paper content provided in the supplied PDF excerpt)._

### References..............................................................................................................

### _wp0412 - References..............................................................................................................

### Introduction and scope
- Main goal: stress the importance of institutional weaknesses, public finance rigidities, and high financial dollarization in shaping the dynamics of the late-1990s financial crisis in Ecuador.
- Coverage: the crisis period up to the point when the government adopted the U.S. dollar as the legal tender.
- Clarifications from the paper:
  - “Institutions” refers to organizational and regulatory aspects underpinning government decisions relevant to the financial system.
  - “Public finance rigidities” refer to limited ability to increase revenues, cut expenditures, and access capital markets.
  - “Financial dollarization” refers to extensive use of a foreign currency (U.S. dollar) to value assets and liabilities in the financial system while real-sector transactions are mostly denominated in domestic currency.

### Crisis dynamics and chronology
- Collapse of the banking system was the underlying cause of the upheaval, accompanied by a simultaneous currency and public finance crisis.
- Banking-system impact:
  - Crisis involved 16 banks—out of the 40 existing in 1997.
- Currency and policy milestones:
  - Government adopted the U.S. dollar as legal tender in January 2000, marking a turnaround of the financial crisis.
- Macroeconomic outcomes:
  - The 1999 economic downturn was the steepest; the following year inflation hit record highs.
  - 1999 per capita GDP measured in real sucres fell to 1977 levels.

### Costs, social effects, and externalities
- Estimated cost of the financial crisis:
  - Preliminary estimates by Hoelscher and Quintyn (2003) put the cost of the financial crisis at over 20 percent of GDP.
- Emigration and social impact:
  - National Survey (INEC) result: during 1999–2001, about 300,000 Ecuadorans (mostly workers) left the country.
  - Other studies estimate that migration totaled 500,000 persons between 1998 and 2002.
  - Context: these are significant numbers in a country of less than 13 million inhabitants.
- Political consequences:
  - Accusations of corruption, rising social unrest, and loss of government credibility culminated in replacement of President Jamil Mahuad in January 2000.

### Analytical findings: amplification mechanisms
- Institutional weaknesses:
  - Laid groundwork for increasing fragility of the banking system during the 1990s.
  - Acted as a crisis amplifier by leading to adoption of suboptimal banking-resolution decisions.
- Public finance rigidities:
  - Inhibited adjustment necessary to align fiscal stance with deteriorating banking and currency trends.
  - Taxing financial transactions accelerated the collapse of a number of financial institutions.
- Financial dollarization:
  - Undermined effectiveness of financial safety nets and hastened a currency crisis.
  - Worsened banks’ solvency during periods of financial turbulence.
- Interaction:
  - The three factors reinforced each other, exacerbating crisis costs as the economy experienced simultaneous banking, currency, and fiscal crises.

### Literature context and gaps
- Existing literature has focused mainly on financial aspects; limited attention to fiscal issues and the link between institutional setting and crisis management.
- Few country-level studies of institutional constraints in crisis contexts; cited work includes Das and Quintyn (2002), Enoch and others (2001) for Indonesia, Hemming, Kell, and Schimmelpfenning (2003) on fiscal restrictions, and studies on dollarization such as Collyns and Kincaid (2003), Hoelscher and Quintyn (2003), and Ingves and Moretti (2003).
- The paper aims to contribute to understanding of Ecuador’s crisis by emphasizing institutional, fiscal, and dollarization channels that have received relatively little attention.

### Paper structure (as stated)
- Section II: identifies the roots of the financial crisis.
- Section III: provides a snapshot of crisis dynamics up to dollarization.
- Section IV: stresses amplifying role of institutional weaknesses, fiscal rigidities, and financial dollarization.
- Section V: extracts main conclusions and applies them to the current state of play.

*Source: _wp0412 - References..............................................................................................................*

### appendix expands the discussion about the legal and institutional weaknesses featuring the

### _wp0412 - appendix expands the discussion about the legal and institutional weaknesses featuring the

### II. ROOTS OF THE BANKING CRISIS — Relevant Macroeconomic Trends During the 1990s
- Real GDP growth averaged just over 3.5 percent between 1990 and 1997 (less than 1 percent annually in per capita terms).
- Exports doubled between 1990 and 1997.
- Average annual inflation came close to 40 percent during 1993–95, bottomed out at 22 percent in 1995, climbed back to 30 percent by end-1997, and reached more than 50 percent by end-1999.
- External shocks, domestic political problems, and the “tequila” effect triggered a stop and reversal of capital inflows starting in early 1995.
- Macroeconomic imbalances in the late 1990s were closely correlated with the evolution of the external oil price.

### Reduced Margin for Conducting Fiscal Policy — Findings
- Revenues were highly volatile and trended down in the second half of the 1990s, associated with oil price instability.
- Revenues from oil exports represented approximately 25 to 30 percent of total revenues.
- Price increases in domestic oil products were adopted to compensate falling oil export revenues but were insufficient to stabilize total fiscal revenue, notably in 1998 at the onset of the banking crisis.
- Increasing public debt service and a mounting wage bill pushed total current expenditure up almost three percentage points of GDP between 1994 and 1998.
- Most public debt was denominated in dollars, making current expenditure vulnerable to exchange rate performance; interest payments relative to GDP boosted in 1999 following steep real depreciation of the sucre (partially offset by a depressed wage bill share in GDP).
- Earmarking of revenues rose during the oil era and continued through the 1990s, leading to total revenues earmarked up to more than 50 percent; many earmarks were constitutionally established and difficult to reform.
- Ecuador’s access to international capital markets was very limited after the 1987 debt suspension; Ecuador accessed international markets only once, in 1997.
- The stock of domestic debt climbed from 2 to close to 20 percent of GDP between 1990 and 1998.
- Total public debt rose to more than 90 percent of GDP in 1998.

### Monetary Policy Downfall and Increasing Dollarization — Findings
- Ecuador adopted an exchange rate based stabilization program in late 1992; regime shifted from a dirty float to a preannounced crawling band in 1994.
- Six adjustments to exchange rate band parameters occurred between 1995 and 1998, undermining initial commitments and producing time inconsistency problems.
- Credibility in the exchange regime eroded, leaving the Central Bank of Ecuador (CBE) without a nominal anchor for price stability.
- Increasing financial dollarization was driven by higher volatility of inflation vis-à-vis the real exchange rate.
- Offshore branches proliferated, paying higher deposit rates in the absence of reserve requirements and facilitating portfolio shifts from sucres to dollars.
- By end-1997:
  - Foreign currency deposits had climbed to over one third of total onshore deposits in the banking system.
  - Foreign currency deposits were more than 70 percent of CBE’s net international reserves.
  - Including offshore deposits, total foreign currency deposits made up roughly two thirds of system deposits, exceeding CBE’s net international reserves.
- Most transactions and wages remained in sucres, though some contracts had been dollar-indexed (renting, machinery, durable goods, real estate).
- No regulation prevented banks from granting foreign currency loans to local-currency earners, producing currency mismatch and credit risk exposure.
- Borrowing in foreign currency increased from 1995 onwards due to lower dollar-equivalent interest rates compared to sucre rates.
- Foreign-currency lending exceeded sucre lending by mid-1998, prior to the banking crisis and associated real exchange rate depreciation.

### Financial Liberalization and “Boom and Bust” Cycle — Findings
- The late-1990s banking crisis stemmed from a boom-and-bust cycle in the context of financial liberalization, lax surveillance, and bad banking practices.
- Financial liberalization (1994 Law of the Financial System Institutions, LFSI) and reform of the CBE charter in 1992 liberalized interest rate policy and introduced a more flexible exchange regime.
- Despite reforms, incentives remained misaligned; moral hazard persisted due to a culture of bailouts from the 1980s.
- The LFSI failed to establish effective consolidated supervision, particularly over offshore branches; supervisory information was often lagged, allowing circumvention of regulations.
- Financial surveillance emphasized compliance-checking over risk-oriented procedures, failing to monitor exchange rate and credit risks in a liberalized and dollarizing environment.
- The LFSI did not provide adequate instruments for bank resolution; transferring deposits from failing banks to sound institutions was not allowed.
- The financial safety net design created moral hazard and macroeconomic instability:
  - The CBE was legally assigned a LOLR role but could provide emergency assistance only in domestic currency, not dollars.
  - The amount of emergency assistance was almost unlimited, risking large monetization.
  - A deposit guarantee protected small depositors up to US$8,000 approximately and relied on central bank funds, with adverse monetary effects.
- Lax supervision and the regulatory framework allowed risky bank behavior including maturity and currency mismatches, connected lending, and fraudulent operations.
- Example: Banco Continental was seized by the CBE in 1996 after liquidity and solvency problems.

### Credit Boom and Its Reversal — Findings
- Financial liberalization coincided with foreign capital inflows to emerging markets in the early 1990s.
- Net international reserves in the CBE doubled between 1993 and 1995 as capital inflows multiplied.
- Interest rates trended down as international reserves increased.
- A rapid monetization of the economy produced a sizable credit boom:
  - Credit real growth: 40 percent in 1993 and 50 percent in 1994.
- Reserve requirements were significantly reduced in 1994:
  - From 28 to 10 percent for demand deposits in domestic currency.
  - From 35 to 10 percent for deposits in foreign currency.
- The number of banks increased from 31 in 1993 to 44 in 1996.
- The number of finance companies increased from 9 in 1992 to 45 in 1995.
- The real exchange rate appreciated 20 percent during 1993–95.
- Fiscal tightening produced a 0.3 percent of GDP fiscal surplus in 1993 and 1994.

*Source: _wp0412 - appendix expands the discussion about the legal and institutional weaknesses featuring the (PDF).*

### 2.4 percent of GDP and to more than total equity of the beneficiary institutions.

### _wp0412 - 2.4 percent of GDP and to more than total equity of the beneficiary institutions.

### Background: 1994–1996 liquidity shock and Banco Continental
- Some banks funded longer-maturity lending by borrowing overnight in the money market; these maturity mismatches generated high pay-offs in liquid periods but became problematic during sudden liquidity shortages.
- To cope with stop-and-reversal of capital inflows in 1995 (Tequila crisis, border conflict with Peru, and other shocks), the CBE held the exchange rate stable and drastically contracted money base via stepped-up open market operations in early 1995.
- CBE interest rates rose to above 50 percent, close to 30 percent in real terms.
- Banco Continental (6.4 percent of onshore bank deposits) succumbed to a liquidity crisis and failed in 1996.
- The CBE provided subordinated loan support to Banco Continental, later taking it over, and assisted other banks with ample liquidity support.
- Despite these actions, CBE interest rates did not return to 1994 levels even though inflation continued its slight downward trend throughout 1995.
- By 1996–1997 liquidity conditions at the systemic level were restored and interest rates trended down, but poor asset quality and equity shortages likely remained, leaving the banking system fragile.

### Stylized view of the 1998–1999 financial crisis: exogenous shocks and transmission
- External shocks in 1998 included: El Niño floods (late 1997–early 1998), Russian financial crisis, Brazilian crisis, and oil prices for Ecuadoran crude sinking to less than $10 per barrel.
- These shocks reduced exports, impaired coastal-region bank assets, and made foreign currency scarcer; market sentiment deteriorated and the financial system weakened.
- The closure of Solbanco in April 1998 triggered contagion and deposit runs; depositors’ losses in the closed bank, especially medium and large depositors, contributed to contagion.
- By mid-1998 additional bank closures and requests for liquidity support escalated the crisis; Filanbanco (14 percent of the onshore system in deposits) sought CBE assistance in September 1998.
- Total emergency loans reached close to 30 percent of money base—to assist 11 financial institutions—by end-September 1998.
- In the last quarter of 1998:
  - CBE’s short-term paper (Bonos de Estabilización Monetaria, BEMs) volume tripled during September through November 1998.
  - The sucre experienced a nominal depreciation of about 24 percent while CBE’s net international reserves shrank 7.6 percent over that interval.
  - A US$300 million slash of banks’ foreign credit lines occurred—17 percent of total and close to 20 percent of CBE’s international reserves.
  - Cumulative inflation reached 15 percent and real GDP grew only 0.1 percent in the last quarter of 1998.

### AGD Law, blanket guarantee, and financial transaction tax
- The government introduced the “AGD Law” establishing a blanket guarantee through the Agencia de Garantía de Depósitos (AGD) and legally empowering the AGD to conduct bank resolution mainly via “purchase and assumption operations” (P&A).
- The law also included a 1 percent tax on financial transactions (debits and credits) to substitute the income tax and shore up public finances; the “AGD law” was approved in early December 1998.
- The 1 percent financial transactions tax, effective January 1999, had severe adverse effects:
  - It was imposed in the midst of a liquidity crunch and accelerated collapse of various financial institutions, including Banco del Progreso (the largest bank by deposits).
  - Demand deposits fell 17 percent in January 1999 despite continued growth in currency issue.
  - Economic agents sought to transact outside the banking system to avoid the tax; storing money in foreign currency outside the financial system became easier and more secure given domestic bill denominations.
- Implementation of the blanket guarantee was impaired by lack of fiscal funds:
  - Deposits were to be paid by the CBE in exchange for long-term AGD securities (AGD bonds).
  - In practice, the AGD started honoring the blanket guarantee with central bank resources only in April 1999, so deposit withdrawals continued and lagged payments caused losses to depositors through accelerating inflation and sucre depreciation.
- Despite the new legislation, six impaired banks were closed during December 1998 and January 1999; Filanbanco was taken over by the AGD under too-big-to-fail considerations.

### Currency crisis, deposit freeze, and systemic outcomes
- By early 1999:
  - Money base expanded 18 percent during the first quarter despite sterilization and a 30 percent decline in CBE’s net international reserves.
  - The CBE shifted to a clean float in February 1999 as it could not defend the exchange rate band.
  - The sucre depreciated nearly 50 percent in January and February 1999, severely affecting banks’ unhedged foreign-currency debtors and eroding banks’ equity.
- In March 1999 the government declared a bank holiday and then imposed a widespread freeze of bank deposits:
  - Time deposits and repurchase agreements were locked for at least one year.
  - Saving deposits in excess of US$500 and one half of checking account balances were frozen for six months.
  - Depositors received negotiable claims on their banks (Certificates of Reprogrammed Deposits, CDRs) with discounts varying by perceived bank strength.
- The deposit freeze and bank holiday effects:
  - The cash preference (cash vs. demand deposits ratio) jumped from less than 0.90 to nearly 1.5 between February and March 1999.
  - Several institutions (including Banco del Progreso) were shut down despite the freeze as deposit runs continued.
  - Freezing deposits temporarily halted the fall of the sucre and stabilized inflation but impaired the payments system, contributing to more than 7 percent of GDP drop in (text ends here).

### Central bank operations and sterilization limits
- The CBE increased open market operations (OMOs) to mop up liquidity; the stock of BEMs and BEM interest rates rose sharply in September–November 1998, but OMOs proved insufficient to fully sterilize expansionary monetization.
- During the last quarter of 1998:
  - Sucre nominal depreciation ≈ 24 percent.
  - CBE net international reserves fell 7.6 percent.
  - Banks’ foreign credit lines were cut by US$300 million (17 percent of total; close to 20 percent of CBE’s international reserves).

_Italic: Source: _wp0412 - 2.4 percent of GDP and to more than total equity of the beneficiary institutions._

### 1999. In practice, by imposing a freeze of deposits, the government “bought time” to clean

### _wp0412 - 1999. In practice, by imposing a freeze of deposits, the government “bought time” to clean

### D. Unfreezing of Deposits and the Banking and Monetary Collapse
- Hiring of international auditors revealed large divergences from SBS reports, leading to closure of another 4 banks and announcements of a final purge of the banking system.
- Gradual unlocking of deposits from mid-1999 onward proved premature and triggered a new wave of deposit withdrawals.
- Renewed withdrawals increased demand for dollars and intensified depreciation of the sucre.
- CBE’s payment of the blanket guarantee and ongoing liquidity assistance peaked in September 1999 when total monetization associated to the banking crisis mounted to 12 percent of GDP.
- In September 1999 the Ecuadoran government suspended payments on its external commercial and Paris Club debt; this default:
  - Impacted foreign creditors and domestic banks holding government securities.
  - Further eroded bank asset values and solvency, accelerating deposit withdrawals.
- Two additional large banks failed in October 1999; AGD and CBE took control to avoid further closures and additional monetization.
- Base money growth reached annual nominal rates of over 100 percent—real rates above 50 percent—toward the end of 1999.
- CBE was unable to mop up liquidity: the stock of BEMs tripled during the second half of 1999.
- A second currency crisis and accelerating inflation prompted the government to officially dollarize the economy.

### IV. Exacerbating Effects of Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization — Key Findings
- Institutional weaknesses constrained policy responses and amplified crisis costs.
- Fiscal rigidities limited timely fiscal tightening and access to external financing.
- High financial dollarization fostered portfolio shifts to dollar assets, pressuring the exchange rate and international reserves.
- Institutional arrangements determined the nature and timing of crisis-management decisions; weak institutions increased systemic crisis costs.

### A. Restrictive Institutional Weaknesses — Findings and dynamics
- The hiring of auditors publicly recognized SBS’s inability to ascertain financial system soundness.
- Before AGD Law enactment, government options were: print money (extensive central bank assistance) or traumatic bank closures—both with large costs.
- The “AGD Law”:
  - Created the Deposit Guarantee Agency (AGD) and authorized blanket guarantee covering bank deposits and external credit lines.
  - Authorized the CBE to engage in open-bank assistance to systemically important institutions (requiring massive money printing).
- Institutional timing: the AGD Law was approved six months after the first bank closure, when accumulated CBE liquidity support had reached nearly 90 percent of money base or 3.6 percent of GDP by of end-November 1998.
- Despite new resolution instruments (P&A), they were not exercised; government continued closing banks without restoring depositor confidence.
- Weaknesses of the AGD:
  - Lacked expertise to conduct P&A; could not handle failures of six banks occurring during the first two months after AGD creation.
- Political economy constraints:
  - P&A would have transferred assets/liabilities from Guayaquil-based failing banks to Quito-based banks, provoking regional wealth/power transfers and resistance.
  - Only Banco Popular (a Quito-based failing bank) was partially absorbed by another Quito-based bank.
  - Powerful economic groups influenced policies, leading to unequal distribution of crisis costs.
- Recovery of assets from closed banks was limited by powerful debtors avoiding payment; by end-2003 AGD had limited success collecting loans.
- The government authorized CDRs transactions that impaired solvency of government-owned financial institutions.
- The bank holiday and deposit freeze:
  - Induced adverse selection and systemic lack of confidence.
  - Freeze of deposits produced long-term confidence damage as financial contracts were perceived as unilaterally broken.
  - Alternative (opening only viable banks at end of bank holiday) could have mitigated adverse selection and stabilized deposits.

### B. Impact of Fiscal Policy Rigidities and Financial Transaction Tax — Findings and effects
- Public finances were weak; fiscal adjustment space was small entering the crisis.
- Fiscal events and numbers:
  - Public sector wage bill increase of nearly two percentage points contributed to fiscal deterioration.
  - Fiscal deficit rose to close to 6 percent of GDP (post-September 1998 fiscal tightening proved insufficient).
  - CBE deposit drawdowns reached 5 percent of money base in November (year unspecified in source).
  - Fiscal deficit fell to less than 5 percent of GDP as oil prices recovered partially in 1999.
  - Total public debt to GDP ratio reached more than 130 percent by end-1999.
- Restrictions on access to capital markets were severe: mid-1998 public debt had reached nearly 100 percent of GDP; voluntary external financing dried in 1999.
- A 1 percent tax on financial transactions was imposed in the middle of the banking crisis:
  - The tax boosted fiscal revenues (more than compensating elimination of the income tax) but depressed demand for money by heightening public preference for cash.
  - It led to further deposit withdrawals and closures of several small and medium banks.
  - The tax neutralized effects of the blanket guarantee and activated the fiscal contingency associated with the guarantee.
- Protracted IMF negotiations: Ecuador could not obtain external support during 1999; an arrangement with the IMF was worked out in March 2000 after protracted negotiations, by which time the economy had already collapsed.

### C. Role of Financial Dollarization — Findings and mechanics
- CBE emergency assistance reached 120 and 135 percent of the monetary base by December 1998 and February 1999, respectively; monetization was only partially sterilized.
- CBE was legally precluded from providing LOLR assistance directly in dollars; it intervened in interbank markets selling dollars.
- Excessive monetization spurred deposit dollarization as depositors sought higher returns and safe assets.
- Deposit dollarization amplified as sucre-equivalent rates turned increasingly negative; trends interrupted by the financial transaction tax, deposit freeze, and public debt default.
- The excess of dollar deposits vis-à-vis CBE’s international reserves raised doubts about CBE’s ability to act as LOLR:
  - Excess of foreign currency deposits (not counting offshore) over CBE’s international reserves by late 1998 signaled limitations to provide assistance.
- Banking system shifts:
  - Banks shifted to dollar assets, particularly highly liquid ones, to confront withdrawals and in anticipation of currency crises.
  - Book value of loans denominated in foreign currency was approximately 50 percent of total loans at crisis onset, then rose to more than 90 percent towards end-1999 following depreciation.
  - Reported impaired loans (non-performing and foreclosed assets) increased from 4 to nearly 50 percent of total dollar loans.
- Increasing dollarization undermined monetary control:
  - Gradual unlock of deposits from mid-1999 triggered new deposit runs; sucres demand plummeted.
  - Even sharp increases in CBE interest rates failed to sterilize liquidity.
  - CBE’s open-market operations did not sufficiently offset interest payments on existing CBE paper; CBE lost control of monetary policy.
- Rapid depreciation of the sucre doubled in the last four months of 1999; monthly inflation averaged more than 5 percent in the fourth quarter and climbed to more than 14 percent in January 2000, in a run-up to hyperinflation that was halted by official dollarization in January 2000.

### V. Concluding Remarks — Lessons and policy implications
- Primary lesson: Institutions matter — strengthening legal and institutional frameworks for prevention and management of banking crises should be a top priority.
- Passing legal reform in the middle of a crisis can be subject to protracted political negotiation; prolonged financial assistance to impaired banks risks broad macroeconomic instability.
- Absence of fiscal adjustment during a financial crisis accelerates macroeconomic deterioration; fiscal tightening is necessary especially when public finances are weak.
- Imposing a financial transactions tax during a systemic liquidity shortfall risks encouraging deposit withdrawals and circumvention of the banking system.
- Blanket guarantees can fail to restore deposit stability if markets anticipate government inability to pay due to fiscal shortages; the guarantee can boomerang and precipitate fiscal crisis.
- Monetary policy alone cannot sustainably confront a systemic banking crisis; persistent and large money printing can render monetary policy ineffective and lead to currency crash, especially with high financial dollarization.
- Financial dollarization is a vulnerability when institutions are weak and fundamentals are poor: it accelerates depositor shifts to foreign currency, erodes asset quality on depreciation, and undermines credibility of safety nets.
- The modality of ending a bank holiday is crucial:
  - Opening only viable banks at the end of a bank holiday, accompanied by credible macroeconomic policy and international support, can limit the need to freeze deposits and help restore confidence.
  - Opening all banks regardless of viability may force a severe deposit freeze, encouraging unrest, legal claims, premature unlocking, and renewed withdrawals.

### Appendix — Institutional weaknesses and political economy context (summarized insights)
- Ecuador exhibited chronic institutional weakness and political instability:
  - Five presidents governed between 1995 and 1998; seven finance ministers in the same interval.
  - A new constitution was enacted in 1998 (the second in 20 years).
- Strong regional fragmentation (Quito versus Guayaquil) produced polarized stakes and rent-seeking by regional elites.
- Social organizations (private enterprise associations, local governments in the Coast; public sector unions and indigenous groups in the Sierra) channeled demands and influenced policy, often at the expense of broader governance reform.
- Polarization and vested interests constrained crisis-management choices, asset recoveries, and the equitable distribution of crisis costs.

*Source: IMF working paper content provided in the supplied PDF excerpt.*

### Box 1. Ecuador’s Geographic, Ethnic, Political, and Economic Fragmentation

### Box 1. Ecuador’s Geographic, Ethnic, Political, and Economic Fragmentation

### Geographic and Demographic Fragmentation
- Natural features divide Ecuador into three regions: the Pacific Coast, the Andean highlands (Sierra), and the Eastern region.
- The Sierra and the Coast is where over 95% of the country’s population lives.
- Quito (Sierra) and Guayaquil (Coast) are the drivers of political and economic activity; those two cities and their metropolitan areas absorb more than 50 percent of the nation’s population.
- The Eastern region has progressed less despite harboring the country’s greatest wealth—oil.
- Ethnic differences: a large indigenous population lives exclusively in the Sierra and the Eastern region and has exerted increasing influence on political and economic decisions over the 1990s.
- Linguistic variance is small; differences are most notable in racial makeup.

### Political Fragmentation
- Coastal and Sierra regions exhibit different political views reflected in voting records.
- During the 1990s:
  - The Coast coalesced around two populist parties with a liberal (in the economic sense) approach representing business, private organizations, and regional interests.
  - The Sierra was dominated by two other parties with a more ideological root advocating more intensive State involvement in the economy.
- Ecuadoran political parties have predominantly a regional rather than a national range.
- Since return to democracy in 1979, with a single exception, Ecuador’s ten presidents have come alternately from the Coast and from the Sierra.
- 1998 legislative elections regional polarization:
  - In the Coast, the two representative parties captured close to 90 percent of the seats.
  - In the Sierra, representative political parties of the same region won 76 percent of the seats.

### Regional Economic Patterns and Shocks
- The Coast predominantly produces commodities for the world market: bananas, coffee, cacao, and shrimp.
- The Sierra produces mostly for domestic consumption with exceptions such as fresh flowers.
- Terms of trade deterioration (via a drop in commodity prices) has affected the Coast most.
- The Coast has been harder hit by natural disasters (El Niño floods in 1982–83 and 1997–98).
- The late 1990s financial crisis was set in motion in part by destruction that impacted chiefly banks in the Coast region.
- Policy impacts differ by region:
  - Real depreciation benefits the Coast’s larger export base; real appreciation favors the Sierra.
  - Outward-oriented growth strategies benefit the Coast more.
  - Inward-oriented policies and more intensive State involvement have been more beneficial for the Sierra through expansion of employment.
- The Coast held the majority of foreign lines of credit; its banks were generally more exposed to financial external shocks.

### Institutional weaknesses in the financial sector
- Institutional weaknesses were particularly relevant in the financial sector, leaving Ecuador reliant on fragile institutions for market regulation and stabilization.
- Legislation approved during the first half of the 1990s severely restricted the government’s ability to respond timely and efficiently to the banking crisis of the late 1990s.

#### A. Prudential Supervision and Bank-Resolution Instruments
- Prior to the financial crisis, the SBS’s powers were primarily aimed at demanding corrections when capital deficiencies arose; corrective actions were often triggered when balance sheet damage was already irreversible.
- Supervision emphasized compliance-checking rather than risk-oriented procedures; no early-stage corrective measures curtailed excessive risk-taking (e.g., currency or maturity mismatches, deposit interest rates far in excess of market returns).
- Enforcement of laws and regulations was feeble, in part due to SBS lack of political independence—five superintendent of banks were in functions between 1995 and 1998.
- International audit firms found a number of institutions severely insolvent after the March 1999 deposit freeze; these situations had not been reported by the SBS beforehand.
- The legal framework (LFSI) did not provide efficient handling of bank distress and crises and hindered governments’ capacity to confront banking crises.
- Under the law, once bank illiquidity or insolvency was irreversible, two basic avenues existed:
  - (i) Continuous provision of financial assistance from the CBE—until the troubled bank exhausted assets eligible as collateral to the CBE.
  - (ii) Grant a subordinated loan from the CBE or other commercial banks.
- Reliance on CBE assistance or subordinated loans raised moral hazard and risked monetary policy disarticulation and broader macroeconomic instability.
- There was no legal basis to transfer deposits from a failing bank to a sound institution or to split off assets/liabilities for purchase & assumption (P&A); governments had no legal basis to inject funds to facilitate P&A.
- Closure of failing banks was generally limited to very small institutions and risked contagion because payments to guaranteed depositors were slow and medium/large depositors lacked coverage.

#### B. The Central Bank
- The 1992 reform to the central bank charter granted operational autonomy for the conduct of monetary policy, allowing the CBE to focus on abating inflation; operational autonomy relied on:
  - (i) independence to choose policy instruments (instruments independence);
  - (ii) ruling out fiscal deficit financing, not even to cope with seasonal shortages.
- The reform failed to provide political autonomy: private sector dominance at the CBE Board level remained until 1998.
  - Two of the seven Monetary Board members were appointed by private business associations (one from each main region).
  - Another member was appointed by the commercial bankers association.
  - The Monetary Board chairman was a direct presidential appointee and was often an active commercial banker.
  - Two other representatives were appointed by the government and could also be bank administrators or shareholders.
  - The seventh member was the Minister of Finance with voting rights.
- Potential conflicts of interest arose in critical monetary, exchange rate, and financial policy decisions.
- Institutional instability signaled lack of political autonomy: during the 1990s, the average turnover of central bank governors was one per year, and was the highest in Latin America together with Brazil.
- The 1998 Constitution excluded private sector and government representatives from the Central Bank Board and replaced them with directors nominated by the President and appointed by Congress; however, this reform entered into effect while the banking crisis was unfolding, and the monetization of the banking crisis overrode the CBE’s scope to conduct an autonomous monetary policy and to build up credibility.

#### C. Financial Safety Net
- The 1992 CBE Law entrusted the CBE with broad powers to provide assistance to illiquid and insolvent banks, creating conditions for large monetary expansion.
- Liquidity assistance:
  - Authorized up to two times the bank’s equity.
  - Lent at market rates up to 180 days in exchange for real or financial assets.
  - Provided under market conditions in exchange for collateral valued by the CBE in excess of the emergency loan amount.
- “Stabilization loans” (practically solvency loans) were provided at softer terms (slightly lower interest rates and longer maturity up to 270 days) conditional on a stabilization plan by the SBS and approved by the CBE.
- The CBE could recycle liquidity in the interbank market via an automatic liquidity window; loans were intermediated overnight and borrower banks had access using government securities as collateral marked to market by the CBE.
- Legal provisions governing LOLR facilities undermined financial market discipline and encouraged deep CBE involvement in banking crises.
- The CBE was entitled to honor a limited guarantee of deposits in the event of bank closure, creating another source of monetization.
  - Depositors stood to receive payments in sucres roughly equivalent to US$8,000 for both domestic and foreign currency deposits.
  - The payout process was generally very slow, requiring cumbersome formalities; large depositors could not recover balances in excess of that amount until bank assets were liquidated according to legal seniority.
  - Slow liquidation and limited coverage implied closures would trigger contagion and runs on other institutions.
- A deposit insurance mechanism had been approved by Congress but was still waiting enactment by the executive branch when the banking crisis erupted.
- The deposit guarantee coverage varied as it was tied to an inflation-indexed unit; expressed in dollars, that value depended on real exchange rate performance.

### Box 2 — Recent History of Private Sector and Bank Bailouts Using Public Funds
- Early 1980s: external debt service pressures and devaluation of the sucre led the Monetary Board to authorize the CBE to convert banks’ foreign currency obligations into sucres (“sucretization”).
  - The CBE assumed banks’ foreign currency debt and lent sucres at long term and preferential interest rates, charging a fee to cover future exchange rate adjustment.
  - Commercial banks were required to pass this benefit to their debtors, restructuring borrower liabilities and restoring asset quality and equity.
  - The exchange risk fee was fixed in 1984 under a fixed exchange rate regime and its flexibility was not reestablished in 1986 when the exchange rate floated and the sucre dramatically fell, causing the CBE to amass huge losses and widen quasi fiscal deficits.
  - Despite support, a number of small financial institutions were liquidated in the latter half of the 1980s.
- 1988: the Monetary Board authorized commercial banks to buy external public debt in the secondary market at a steep discount, which the CBE then bought at face value; profits were expected to cover liabilities to the CBE and bolster bank equity.
  - Samaniego and Villafuerte (1997) calculate the cost of this assistance at over 100 percent of the borrowing institutions’ equity, an amount equivalent to 2.4 percent of GDP.
  - Additional CBE support included assuming real assets to pay back CBE borrowings and extraordinary loans (one-year repayment term with six months’ grace) to cancel overdrafts, pay obligations, and restructure non-performing loans.
- Significant CBE money injections boosted macroeconomic instability and triggered inflationary pressures:
  - In 1988, high monetization led to rapid depreciation of the sucre and inflation reached a 50 percent annual rate persisting up to 1992.
  - Society at large bore the subsidy costs; CBE capital eroded with no initial government compensation despite the quasi fiscal nature of operations.
- After the 1992 central bank charter, the CBE continued to have broad LOLR powers and authority to pay out a limited deposit guarantee calculated using an indexed unit of account.
- Repeated CBE-funded bailouts generated moral hazard: banks had no incentive to carefully gauge risks, depositors lacked incentives to limit exposure, and the government treated CBE resources as available to finance banking problems without fiscal compensation.

*Source: Box 1. Ecuador’s Geographic, Ethnic, Political, and Economic Fragmentation (from the supplied IMF PDF content).*

### REFERENCES

### _wp0412 - REFERENCES

### Institutional causes, governance, and political economy
- Acemoglu, D., S. Johnson, J. Robinson, and Y. Thaicharoen, 2002, “Institutional Causes, Macroeconomic Symptoms: Volatility, Crises, and Growth. Mimeo (August).”
- Rodrik, D., A. Subramanian, and F. Trebbi, 2002, “Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development,” NBER Working Paper 9305 (October)
- Haber, S., 2002, Crony Capitalism and Economic Growth in Latin America: Theory and Evidence, Hoover Institution Press, Stanford, California.
- Rajan, R., and L. Zingales, 2003, “The Great Reversals: The Politics of Financial Development in the Twentieth Century,” Journal of Financial Economics, No 69, pp. 5–50.
- Hurtado, O., 1997, El Poder Político en el Ecuador, Editorial Planeta, Quito.
- Arteta, G., and O. Hurtado, 2002, “Political Economy of Ecuador: The Quandary of Governance and Economic Development,” unpublished (May).

### Fractionalization, polarization, and social aspects
- Alesina, A., A. Devleeschauwer, W. Easterly, S. Kurlat, and R. Wacziarg, 2003, “Fractionalization,” NBER Working Paper No. 9411, Cambridge, Massachusetts, (June).
- García-Montalvo, J., and M. Reynal-Querol, 2002, “Why Ethnic Fractionalization? Polarization, Ethnic Conflict, and Growth.” PRPES No. 17 Working Paper, Harvard University.

### Dollarization and financial dollarization
- Arteta, C., 2003, “Are Financially Dollarized Countries More Prone to Costly Crises?,” International Finance Discussion Papers, No. 763 (Washington: Board of Governors of the Federal Reserve System).
- De Nicoló, G., P. Honohan, and A. Ize, 2003, “Dollarization of the Banking System: Good or Bad?, IMF Working Paper WP/03/146 (Washington: International Monetary Fund).”
- Ize, A., and E. Levy-Yeyati, 2003, “Financial Dollarization,” Journal of International Economics, Vol. 59, pp. 323–47.
- Beckerman, P., 2002, “Longer-Term Origins of Ecuador’s “Predollarization” Crisis,” in P. Beckerman and A. Solimano Eds., Crisis and Dollarization in Ecuador. (Washington: The World Bank).
- Fischer, S., 2001, “Ecuador and the International Monetary Fund,” in A. Alesina and R. Barro Eds., Currency Unions, Hoover Institution Press, Stanford, California.
- Ingves, S., and M. Moretti, 2003, “Banking Failures in Countries Dependent on a Foreign Currency,” Paper presented at the workshop on Individual Failures of Large Banks—How to Avoid Systemic Crises?, Stockholm, September 11-12, 2003.

### Banking crises, crisis management, and restructuring
- Dress, B., and C. Pazarbaşioğlu, 1998, “The Nordic Banking Crises: Pitfalls in Financial Liberalization? Occasional Paper No. 161 (Washington: International Monetary Fund).”
- Sundararajan, V., and T. Baliño, eds, 1991, Banking Crises: Cases and Issues (Washington: International Monetary Fund).
- Lindgren, C-J., T. Baliño, C. Enoch, A-M. Gulde, M. Quintyn, and L. Teo, 1999, “Financial Sector Crisis and Restructuring: Lessons from Asia,” Occasional Paper No. 188 (Washington: International Monetary Fund).
- Hoelscher, D., and M. Quintyn, 2003, “Managing Banking Crises,” Occasional Paper No. 224 (Washington: International Monetary Fund).
- Collyns, C., and R. Kincaid, 2003, “Managing Financial Crises: Recent Experiences and Lessons from Latin America,” Occasional Paper No. 217 (Washington: International Monetary Fund).
- Enoch, C., B. Baldwin, O. Frécaut, and A. Kovanen, 2001, “Indonesia: Anatomy of a Banking Crisis. Two Years of Living Dangerously 1997–99,” IMF Working Paper WP/01/52 (Washington: International Monetary Fund).
- Ingves, S., and G. Lind, 1996, “The Management of the Bank Crisis in Retrospect,” Quarterly Review Sveriges Riksbank (Sweden), No. 1.
- De la Torre, A., 1997, “El Manejo de Crisis Bancarias: El Marco Legal Ecuatoriano y Posibles Reformas,” Serie: Temas de Economía y Política, No. 3, Corporación de Estudios para el Desarrollo, CORDES, Quito, Ecuador.
- De la Torre, A., R. García, and Y. Mascaró, 2002, “Financial Meltdown: Ecuador’s Banking and Currency Crises of the Late 1990s, unpublished.
- Patiño, M.L., 2001, “Lessons from the Financial Crisis in Ecuador in 1999,” Journal of International Banking Regulation, Vol. 3 No. 1, pp. 37–70.
- Cardoso, E., and R. Rigobon, 1999, “The Macroeconomics of Undoing a Deposit Freeze: What Ecuador Can Learn from Argentina and Brazil,” unpublished (July).

### Regulatory governance, deposit insurance, and bank closure procedures
- Das, U., and M. Quintyn, 2002, “Crisis Prevention and Crisis Management: The Role of Regulatory Governance,” IMF Working Paper WP/02/163 (Washington: International Monetary Fund).
- He, D., and S. Seelig, 2000, “Deposit Transfer and Payoff in Bank Closures,” MAE Technical Note TN/00/3, (Washington: International Monetary Fund).
- Garcia, G., 2000, “Deposit Insurance: Actual and Good Practices,” Occasional Paper No. 197 (Washington: International Monetary Fund).
- Kirilenko, A., and V. Perry, 2003, “Bank Debit Taxes: Productivity vs. Financial Disintermediation,” unpublished.

### Ecuador-focused institutional and central bank analyses
- Banco Central del Ecuador, 1996, “El Caso del Grupo Conticorp: Aumento de Capital Cuestionado y Presunto Beneficio a Empresas Relacionadas y a Accionistas, a Expensas de los Depositantes.”
- Samaniego, P., and M. Villafuerte, 1997, “Los Bancos Centrales y la Administración de Crisis Financieras: Teoría, Experiencia Internacional y el Caso Ecuatoriano,” Cuestiones Ecoómincas, No. 32, Banco Central del Ecuador, Quito, Ecuador.
- Jácome, L.I., 2003, “Independencia Legal de la Banca Central en América Latina e Inflación,” El Trimestre Económico, No. 280, Octubre-Diciembre, México D.F.

*Source: _wp0412 - REFERENCES*

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