## _wp08135 — Banking Crises and Monetary Policy

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### I. Introduction — Scope and purpose
- Assesses 26 events of central bank involvement in episodes of financial turmoil and crises in Latin America since the mid-1990s.
- Examines idiosyncratic and systemic events, including episodes that did not turn into full-fledged banking crises due to early government responses.
- Focuses on the role played by central banks in managing financial market turmoil and sets the stage for future empirical work.

### II. Key empirical findings on central bank involvement
- Central banks provided limited and extended liquidity assistance as lender-of-last-resort (LLR), and financed bank resolution in several episodes.
- Large amounts of central bank money were an empirical regularity across the sample, with a handful of exceptions.
- Macroeconomic and microeconomic consequences of large central bank injections:
  - Derailed monetary policy and fueled further macroeconomic unrest.
  - Exacerbated banks’ instability and, on many occasions, triggered simultaneous currency crises.
  - Bailed out both small and large depositors, inducing moral hazard and relaxing market discipline.
- Cases that limited central bank monetization succeeded when adequate institutional arrangements existed or were timely introduced (examples cited: Argentina (1995), Peru (1999), and Colombia (1999)).

### III. Institutional and fiscal drivers
- Intensive use of central bank money mainly reflected institutional weaknesses that prevented early-stage government-led crisis resolution.
- Governments sometimes used central bank financing to avoid or postpone using taxpayers’ money.
- Central banks that financed crisis costs sometimes incurred large losses that wiped out their capital without government compensation.
- Operational autonomy was undermined when central banks could not credibly commit to tighten liquidity.
- Restricting central bank money use avoided major macroeconomic instability in some cases but required:
  - Appropriate institutional arrangements,
  - Strong macroeconomic position (particularly solid public finances),
  - A sound financial system.

### IV. Defining and sampling banking crises
- Broad definition: events where at least one institution was intervened and/or closed, or was subject to resolution.
- Sample: 26 episodes in Latin America between the mid-1990s and 2007.
- Size classification:
  - Two groups: large and systemic crises vs. minor and moderate crises.
  - Working threshold: 15 percent market share of the troubled banks distinguishes the two groups.
  - Troubled banks include intervened institutions plus those receiving government support or emergency central bank assistance exceeding their individual equity.
- Uses an ex-ante approach to include events tackled early and averted from becoming full crises.

### V. Roots and triggers of crises — micro and macro factors
- Primary drivers:
  - “Boom and bust cycle” explains most large/systemic crises.
  - Micro: “bad banking practices” and weak supervision.
  - Financial liberalization often not matched by stronger surveillance; growth of foreign currency products increased vulnerability.
  - Capital inflows, real exchange rate appreciations, and interest rate declines fostered credit booms; external shocks triggered outflows and liquidity crunches.
- Triggers:
  - External shocks (frequent), contagion, policy-induced shocks, political events.
- Examples:
  - Solvency-underlying crises with limited external shocks: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras.
  - Contagion/external-triggered crises: Argentina (1995) linked to the Mexican crisis; Paraguay and Uruguay in 2002 hit by Argentina; Andean countries affected by Russian and Brazilian crises.

### VI. Stylized macroeconomic facts accompanying crises
- Vulnerability factors:
  - Exchange rate regime: systemic crises generally associated with “soft” pegs and mid-crisis abandonment of pegs (Argentina (2002), Ecuador (1999), Mexico, Uruguay).
  - Financial dollarization: defined as banks’ foreign currency deposits > 50 percent of total deposits in text; Table 1 footnote cites a banking-system threshold of > 40 percent of deposits denominated in foreign currency.
  - Weak fiscal position: public debt burden > 50 percent of GDP at crisis time.
  - Emerging market status: inclusion in the Emerging Market Bond Index (EMBI) at crisis time.
- Interactions:
  - Emerging markets with “soft” pegs and high dollarization were more exposed to capital flow reversals and deposit runs.
  - Dollarization restricts authorities’ ability to respond: sudden depreciation raises real value of foreign-currency liabilities and central banks cannot print foreign currency.
  - Weak public finances accelerate outflows and limit non-inflationary crisis financing, sometimes forcing fiscal tightening.
  - Triple crisis (banking, currency, sovereign debt) examples: Argentina (2002), Ecuador (1999), Uruguay (2002).

### VII. Alternatives central banks employed to manage banking crises

- A. Intensive Use of Central Bank Money
  - Objectives and instruments:
    - Increase liquidity provision, expand eligible collateral, reduce discount rate.
    - Emergency loans with collateral and sometimes stabilization program conditions.
  - Escalation measures:
    - Extended LLR provisions requiring qualified-majority or executive validation.
    - Issuance of central bank securities swapped for non-performing assets; direct capitalization of absorbed banks (example: Ecuador 1996).
  - Financing deposit guarantees and withdrawals:
    - Direct payment of insured deposits or financing deposit-insurance institutions (Ecuador 1999, Venezuela, Honduras, Bolivia 1994, Costa Rica, Dominican Republic 2003, Guatemala 2001, Paraguay 1995).
  - Quantitative examples:
    - Argentina: Banco Nación and Banco Provincia de Buenos Aires received about 4.5 and almost 3 times their net worth respectively; Banco Galicia received more than 3 times its net worth.
    - Dominican Republic (2003): extended LLR to three private banks reaching nearly 20 percent of GDP; assistance to Baninter exceeded 10 times its net worth or close to 15 percent of GDP.
    - Ecuador (1999): central bank financial assistance about 12 percent of GDP by late-1999.
    - Venezuela: resources to FOGADE close to 10 percent of GDP by end-1995.
  - Alternative approaches that limited monetary expansion:
    - Colombia and Peru sterilized excess liquidity and relied primarily on fiscal resources and bank resolution/restructuring.
    - Argentina (1995) used government funds for P&A operations instead of large central bank injections.
    - Guatemala (2006) used deposit insurance funds for P&A without central bank cash.
  - Minor/moderate crises:
    - Central bank money used to honor deposits upfront to avoid contagion; in many small crises central banks succeeded in mopping up liquidity expansion.

- B. The Role of the Institutional Framework
  - Four mutually consistent pillars for prevention and management:
    - (i) Early corrective actions with undisputed legal support.
    - (ii) Instruments to conduct bank resolution and restructuring (notably P&A operations).
    - (iii) Deposit insurance.
    - (iv) Central bank LLR provisions.
  - Empirical assessment (FSAP-based) findings:
    - Most countries lacked legal authority for early remedial actions (Basel Core Principle No. 22 non-observance).
    - P&A and non-inflationary resolution instruments were unavailable in a majority of countries at crisis time.
    - Deposit insurance institutions existed in about one half of crises but many were underfunded or had moral hazard problems (example: FOPA in Guatemala had no money in 2001).
    - LLR existed everywhere, often open-ended; only six countries had legally limited LLR scope in amount and maturity: Argentina (1995), Colombia, Dominican Republic (2003), Guatemala (2006), Nicaragua, and Peru (though Dominican Republic exceeded legal caps in 2003).
  - Institutional failures forced choices that often led to contagion and escalated central bank assistance (examples: Venezuela mid-1990s; Ecuador 1998–1999; Uruguay 2002).
  - Successful containment when frameworks or rapid reforms existed:
    - Argentina (1995), Colombia (1999), Peru (1999), Guatemala (2006) used LLR within broader safety nets and legal powers for P&A.
    - Brazil and Nicaragua also relied heavily on bank resolution measures.
    - Peru passed rapid law empowering bank resolution and restructuring during the crisis.
  - Table 3 (summary): many countries lacked P&A authorization or adequate deposit insurance; most allowed broad LLR in practice.

### VIII. Box 1 — Large “Monetization” of Banking Crises (selected country episodes)
- Ecuador
  - Small bank closure April 1998 → contagion → nearly 60 percent market share affected.
  - Institutional choice: provide extensive BCE assistance or close banks without paying depositors (except small depositors).
  - Blanket guarantee initially delivered using BCE money.
  - Monetization reached 12 percent of GDP by September 1999.
  - Outcome: deposit freezes, abandonment of monetary control, eventual dollarization.
- Dominican Republic (2003)
  - Intervention of a bank with 10 percent market share triggered contagion to two other banks (additional 10 percent).
  - Crisis managed exclusively with Central Bank resources (cash then central bank certificates).
  - Legal emergency loan cap was 1.5 times capital, but the largest bank received > 10 times its capital; others received 8 and 6 times their capital.
- Venezuela (1994)
  - Banco Latino failure triggered contagion; BCV and FOGADE provided assistance.
  - International reserves almost halved in six months; bolívar depreciated nearly 70 percent by end-1994.
  - Inflation > 70 percent by end-1994 and three-digit rates during 1996; economy contracted > 2 percent.
- Uruguay (2002)
  - Contagion from Argentine collapse; initial private resources exhausted → central bank money used.
  - Legislation insufficient for resolution; bank holiday declared; new legislation empowered BCU for bank resolution and restructuring.
- Comparative lessons:
  - Heavy reliance on central bank balance sheets correlated with greater macro instability.
  - Legal instruments such as P&A, privately funded deposit insurance, and alternative financing reduced monetization and facilitated restructurings (examples: Mexico/Argentina post-Tequila reforms, Colombia, Peru, Guatemala 2006).

### IX. Box 3 — Monetary policy responses and empirical findings
- Monetary policy response options during crises:
  - Tight stance with full sterilization: mops up liquidity but risks accelerating failures of illiquid banks.
  - Full accommodation with no sterilization: lowers rates but pressures currency and reserves, depreciations harm unhedged borrowers.
  - Partial sterilization: temporarily helpful but unsustainable without fiscal adjustment, foreign financing, or efficient bank resolution.
  - Conclusion: relying exclusively on monetary policy and prolonged financial assistance weakens monetary effectiveness and risks macro instability.
- Constraints under financial dollarization:
  - Dollarization forces trade-offs between preserving bank liabilities and preventing currency crashes.
  - Central banks cannot print foreign currency; raising interest rates may accelerate bank failures; currency depreciation worsens unhedged borrowers’ net wealth and bank solvency.
- Central bank balance sheet effects:
  - Losses occur if realized collateral revenues do not cover loans plus interest or if deposit insurance resources are not repaid.
  - Result: impaired central bank balance sheets and potential exhaustion of capital.
  - Empirical note: average central bank losses from a sample of 10 Western Hemisphere countries were 1 percent of GDP in 2005.
  - Recommendation: governments should restore central bank financial strength to resume monetary policy function.
- Empirical correlations (sample: 25 countries, excluding Brazil):
  - Size of the crisis correlated with ∆ in central bank claims on banks: 0.627 *.
  - Size of the crisis correlated with ∆ in reserve money: 0.439 *.
  - Nominal devaluation correlated with Size of the crisis: 0.816 *; with ∆ in central bank claims: 0.535 *; with ∆ in reserve money: 0.408 *.
  - ∆ in international reserves correlated with Size of the crisis: 0.567 *; with ∆ in central bank claims: -0.587 *; with ∆ in reserve money: -0.480 *.
  - */ Coefficients are statistically significant at the 5 percent level.
- Quantitative dynamics and thresholds:
  - Money multiplier: initially increased, later fell as cash holdings rose; sometimes collapsed with dollar appetite or deposit freezes.
  - When central bank claims on the financial system multiplied by a factor of 2 or more:
    - Local currencies depreciated more than 30 percent in most cases (examples: Dominican Republic, Ecuador 1996 and 1999, Mexico, Uruguay, Venezuela, Argentina 2002 where peso depreciation was almost 140 percent in a three-month period).
    - International reserves drained by 15 percent or more; drains exceeded 50 percent in Dominican Republic (2003), Mexico, and Uruguay.
    - Inflation generally accelerated by more than 5 percentage points in a one year period (t +12).
    - Economic growth often declined; “major impact on growth” defined as growth declined 3 percent or more during the first or second year of the crisis.
- Policy recommendations and lessons:
  - Avoid substantial injection of central bank money beyond LLR functions; prefer limited central bank assistance plus timely government bank resolution.
  - Correct institutional weaknesses: legal provisions for early corrective actions, adequately funded deposit insurance, legal support for bank restructuring.
  - Governments, not central banks, should assume direct crisis costs; central banks bearing initial costs should be compensated to restore their financial strength and autonomy.
  - Strengthen regulation and supervision, monitor structured and off-balance-sheet instruments, and align regulation with financial innovation.
  - Support regulatory improvements with strong macro fundamentals: flexible exchange rates, strong public finances, developed money and capital markets, and reduced financial dollarization where necessary.

### X. Appendix I — Stylized facts and policy responses (selected numeric facts)
- Range of crisis impacts and policy measures:
  - Argentina (1995): peso deposits fell more than 15%; about 40 small/medium banks failed or were acquired/merged from December 1994 to late 1996 (~one third of total banks), representing about 12% of the system.
  - Dominican Republic (1996): central bank claims on the financial system increased by about 52% in six months.
  - El Salvador (1998): IGD deposit coverage US$6,250.
  - Guatemala (2001): FOPA intended to cover first US$2,500 of saving deposits (not operational).
  - Honduras (1999): foreign exchange auction demand rose from US$6.5 million to US$8.3 million (daily average); interbank rates rose from 13 percent to 17 percent; initial fiscal cost about 0.8% of GDP.
  - Paraguay (1995): central bank assistance exceeded 4% of GDP in 1995; deposit recognition up to US$21,500; off-balance sheet coverage up to US$15,000.
  - Ecuador (1998-1999): monetization reached 12% of GDP by September 1999; 60% of the banking system intervened/taken-over/closed.
  - Mexico (1995): a group of banks covering 80% of the system received government support.
  - Nicaragua (2000-2001): 4 out of 11 banks ≈ 21% market share by end-1999.
  - Paraguay (1997-1998): six banks ≈ 22% market share; IPS lost about 3% of GDP in deposits.
  - Peru (1999): Banco Wiese market share 15.1%; Banco Latino market share 3.2%; six small banks 6.5% of deposits; FSD increased depositor coverage to US$18,500 and had a government contingency line up to US$200 million.
  - Uruguay (2002): about 60% market share affected.
  - Venezuela (1994-95): 56% market share affected; direct disbursements ≈ 17% of GDP during 1994-95.

*Source: IMF Working Paper — 3. Banking Crises and Monetary Policy (chapter text provided in the content unit)._wp08135*

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

### _wp08135 - References..............................................................................................................

### Tables
- 1. Banking Crises in Latin America and Relevant Macro-Financial Features ........................13
- 2. Modalities of Monetization of Banking Crises ....................................................................16
- 3. Institutional Framework behind Banking Crises in Latin America .....................................23
- 4. Pair-Wise Correlations Between Selected Variables ...........................................................33
- 5. Monetization of Banking Crises, Inflation, and Economic Growth ....................................36

### Figures
- 1. Capital Flows and Banking Crises in Latin America.............................................................7
- 2. Financial Reform and Banking Crises in Latin America.......................................................8
- 3. Real Effective Exchange Rate and Banking Crises in Latin America...................................9
- 4. Banking Crises and Real Credit Growth..............................................................................11
- 5. Large Banking Crises in Latin America—Selected Episodes .............................................19
- 6. Minor and Moderate Banking Crises in Latin America—Selected Episodes......................21
- 7. Performance of the Money Multiplier in the Midst of Banking Crises in Latin America...31
- 8. Banking Crises and Central Bank Money............................................................................34
- 9. Central Bank Money in Banking Crises and Currency Depreciation ..................................34
- 10. Central Bank Money in Banking Crises and Fall in International Reserves .....................35

### Boxes
- 1. Large "Monetization" of Banking Crises in Selected Countries .........................................26
- 2. Effective Episodes of Bank Restructuring and Resolution in Selected Countries...............27

*Source: _wp08135 - References..............................................................................................................*

### 3. Banking Crises and Monetary Policy ..................................................................................

### 3. Banking Crises and Monetary Policy

### I. Introduction — Scope and purpose
- Assesses 26 events of central bank involvement in episodes of financial turmoil and crises in Latin America since the mid-1990s.
- Examines idiosyncratic and systemic events, including episodes that did not turn into full-fledged banking crises due to early government responses.
- Focuses on the role played by central banks in managing financial market turmoil and sets the stage for future empirical work.

### Key empirical findings on central bank involvement
- Central banks participated by providing limited and extended liquidity assistance as lender-of-last-resort (LLR), and by financing bank resolution.
- In several events, central banks were required to inject money beyond limited LLR assistance to avoid systemic collapse of the payments system (Argentina and Uruguay in 2002 cited).
- Large amounts of central bank money were an empirical regularity across the sample, with a handful of exceptions.
- Pouring central bank money into the financial system:
  - Derailed monetary policy and fueled further macroeconomic unrest.
  - Exacerbated banks’ instability and, on many occasions, triggered simultaneous currency crises.
  - Created microeconomic distortions by bailing out both small and large depositors, inducing moral hazard and relaxing market discipline.
- A small number of cases managed market turmoil without resorting to large amounts of central bank money, limiting escalation of financial instability — possible when adequate institutional arrangements existed or were timely introduced (examples: Argentina (1995), Peru (1999), and Colombia (1999)).

### Institutional and fiscal drivers
- Intensive use of central bank money was mainly the result of institutional weaknesses that did not allow governments to address banking problems at an early stage.
- Governments sometimes used central bank financing to avoid or postpone using taxpayers’ money to resolve crises.
- When central banks financed crisis costs they sometimes incurred large losses that wiped out their capital without government compensation.
- Central banks’ operational autonomy became undermined because they were unable to credibly commit to successfully tighten liquidity as needed.
- When central bank money was banned or limited, major macroeconomic instability was often avoided, but such a strategy required appropriate institutional arrangements and a strong macroeconomic position—particularly solid public finances—and a sound financial system.

### II. Defining and sampling banking crises
- The paper defines banking crises broadly to include full-fledged financial crises and idiosyncratic events: events where at least one institution was intervened and/or closed, or was subject to resolution.
- Based on this definition, the paper assesses 26 episodes of banking crises in Latin America between the mid-1990s and 2007.
- Crises are clustered into two groups by size: large and systemic crises, and minor and moderate ones.
  - Size classification is based on the market share of the failing banks (measured by assets or deposits before the crises).
  - Working assumption: threshold of 15 percent market share of the troubled banks distinguishes the two groups.
  - Troubled banks include institutions intervened or subject to resolution, plus other institutions that received government support or extended emergency assistance from the central bank—in an amount that exceeded their individual equity.
- The analysis uses an ex-ante approach, incorporating events that were tackled at an early stage and did not turn into full-fledged crises.

### III. Roots and triggers of crises — micro and macro factors
- No single reason explains recent crises; the “boom and bust cycle” explains most, especially the large and systemic ones.
- From a microeconomic perspective, “bad banking practices” in an environment of weak supervision fueled many episodes.
- Financial liberalization in the late-1980s and early-1990s was often not accompanied by stronger financial surveillance; banks developed new, sometimes risky, products (many in foreign currency), increasing vulnerability to stops and reversals of capital flows.
- Capital inflows, real exchange rate appreciations, and interest rate declines created conditions for credit booms; subsequent external shocks triggered capital outflows and liquidity crunches, exposing asset-quality weaknesses and leading to solvency problems.
- Triggers included external shocks (frequent), contagion from within and outside the region, economic policy-induced shocks, and political events.
- Examples where solvency problems underlay crises (with limited external shocks): Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras.
- Examples of contagion and external-triggered crises: Argentina (1995) and the Mexican crisis; Paraguay and Uruguay in 2002 hit by Argentina; Andean countries in the late 1990s affected by Russian and Brazilian currency crises.

### IV. Stylized macroeconomic facts accompanying crises
- Macroeconomic features that increased vulnerability to systemic banking crises included:
  - Exchange rate regime: countries that suffered systemic banking crises generally had “soft” pegs and often abandoned the peg mid-crisis, exacerbating turmoil (Argentina (2002), Ecuador (1999), Mexico, Uruguay).
  - Financial dollarization: defined in text as whenever banks’ foreign currency deposits account for more than 50 percent of total deposits; Table 1 footnote also cites a banking-system threshold of more than 40 percent of deposits denominated in foreign currency (offshore deposits not considered).
  - Weak fiscal position: defined as public debt burden exceeding 50 percent of GDP at the time of the crisis.
  - Emerging market status: countries included in the Emerging Market Bond Index (EMBI) at the time of the crisis.
- Observations from Table 1 and discussion:
  - Systemic crises were more common among emerging markets, often with “soft” pegs and high degrees of financial dollarization.
  - Emerging markets were more exposed to changes in capital flows and recurrent external shocks, facilitating rapid deterioration of country risk indicators, deposit runs, depreciation, and amplified financial instability.
  - Financial dollarization can restrict governments’ and central banks’ ability to confront banking crises: sudden depreciation raises the real value of foreign-currency liabilities, and central banks cannot print foreign currency to support dollar deposits, potentially fueling simultaneous currency crises. However, empirical evidence that dollarized economies suffer more costly crises is not definitive.
  - Weak public finances interact with other macro-financial features and can accelerate capital outflows and currency crises; high debt burdens limit governments’ ability to finance crisis resolution by non-inflationary means, sometimes forcing fiscal tightening during crises.
  - The triple crisis (banking, currency, and sovereign debt) occurred in Argentina (2002), Ecuador (1999), and Uruguay (2002).

### V. Lessons emphasized in the paper
- Excessive use of central bank money to contain banking crises—rather than timely bank resolution—entails significant perils for macroeconomic stability and central bank autonomy.
- Building suitable institutional bases to prevent and manage financial crises is critical; successful avoidance of large central bank liquidity injections was possible only when appropriate institutions existed or were quickly established.
- The paper does not provide a detailed set of recommendations; it highlights the need for stronger institutional arrangements and recognizes constraints and caveats:
  - The analysis does not factor in countries’ macroeconomic strength and the multilateral international support at the time of crises.
  - The role played by foreign banks and the soundness of domestic banking systems (relevant for crises triggered by exogenous shocks) are not addressed in detail.

*Source: IMF Working Paper — 3. Banking Crises and Monetary Policy (chapter text provided in the content unit)._wp08135*

### section identifies the various alternatives central banks employed to manage banking crises,

### _wp08135 - section identifies the various alternatives central banks employed to manage banking crises

### A. Intensive Use of Central Bank Money
- Central bank actions during financial distress (when commercial banks remain solvent) aimed to restore money market functioning and prevent broader crises by:
  - Increasing liquidity provision.
  - Expanding eligible collateral (central bank, government, or other pre-qualified securities).
  - Reducing the discount rate relative to normal times.17
- First-line responses:
  - Emergency loans to banks unable to raise funds in the interbank market; borrowers required to post collateral (government bonds, eligible private loans, or real assets) and sometimes accept stabilization programs.
- Escalation of support:
  - Extended Lender-of-Last-Resort (LLR) provisions to assist deeper liquidity and solvency problems; often required qualified-majority approval in central bank governing bodies or executive-branch validation.
  - Central banks issued securities and swapped them for non-performing assets or used securities in P&A operations; in extreme cases central banks directly capitalized absorbed banks (Ecuador 1996).19
- Central banks paid insured deposits or financed deposit insurance/guarantee institutions:
  - Direct payment of deposit insurance/blanket guarantees (Ecuador 1999, Venezuela).
  - Advanced money to deposit insurers (Honduras).
  - Financed all deposit withdrawals from troubled banks (Bolivia 1994, Costa Rica, Dominican Republic 2003, Guatemala 2001, Paraguay 1995).
- Quantitative examples and outcomes:
  - Argentina: Banco Nación and Banco Provincia de Buenos Aires received about 4.5 and almost 3 times their net worth respectively; Banco Galicia received more than 3 times its net worth.
  - Dominican Republic (2003): extended LLR to three private banks reaching nearly 20 percent of GDP; assistance to Baninter exceeded 10 times its net worth or close to 15 percent of GDP.
  - Ecuador (1999): blanket guarantee delivered by discounting government bonds at the central bank, driving total central bank financial assistance to about 12 percent of GDP by late-1999.
  - Venezuela: resources to FOGADE amounted to close to 10 percent of GDP by end-1995.
  - Consequence: large injections of central bank money made mopping up liquidity difficult; reserve money expanded markedly (see Figure 5).  
- Alternative approaches that limited monetary expansion:
  - Colombia and Peru did not pump money extensively into failing banks; they sterilized excess liquidity and kept reserve money under control by relying primarily on fiscal resources and bank resolution/restructuring.
  - Argentina (1995) averted a full-blown crisis using government funds to execute P&A operations; Bank of Guatemala (2006) did not provide central bank cash in the 2006 crisis and used deposit insurance institution funds for P&A.
- Minor and moderate crises:
  - Central bank money was often used beyond limited LLR to honor deposits upfront to avoid contagion; because crises were relatively small, central banks often succeeded in mopping up liquidity expansion and limiting money base effects.
  - Case examples:
    - Ecuador (1996): central bank took over a failing bank (8.5 percent market share), restored capital, and paid deposit withdrawals.
    - Guatemala (2001): extended an open line of credit to three small banks (7 percent market share) to honor deposit withdrawals.
    - Paraguay (1995): government extended an implicit deposit guarantee and required the central bank to honor deposits in four intervened banks (nearly 13 percent market share).
  - Other cases combined central bank action with private and government resources (Bolivia 1995; Honduras 1999 and 2001; El Salvador 1998-99).

### B. The Role of the Institutional Framework
- Effective crisis prevention and management should rest on four mutually consistent pillars:
  - (i) Early corrective actions with undisputed legal support.
  - (ii) Instruments to conduct bank resolution and restructuring (notably P&A operations).
  - (iii) Deposit insurance.
  - (iv) Central bank LLR provisions.
- Empirical assessment (FSAP-based) of Latin American crises showed widespread institutional weaknesses:
  - Most countries were not legally equipped to adopt early remedial actions (Basel Core Principle No. 22 non-observance).
  - Bank-resolution instruments using non-inflationary means (notably P&A) were unavailable in the majority of countries at crisis time.
  - Argentina pioneered P&A-based resolution, serving as a model for Nicaragua and Guatemala (2002); some countries with resolution instruments could not use them due to missing bylaws (Dominican Republic 2003).
- Deposit insurance coverage and design:
  - Deposit insurance institutions existed in about one half of the crises but many were inadequately funded or had moral hazard problems (e.g., FOPA in Guatemala had no money in 2001).
  - Some countries introduced explicit blanket guarantees during crises (Ecuador 1999, Honduras, Mexico) or implicit full guarantees (Dominican Republic 2003, Venezuela 1994).
  - Costa Rica and Uruguay lacked deposit insurance but state-owned banks (over 50 percent of the system) effectively provided full deposit coverage.
- LLR provisions across countries:
  - LLR existed in all countries, often including an open-ended component for special circumstances.
  - Only six countries had LLR provisions featuring a limited scope in amount and maturity: Argentina (1995), Colombia, Dominican Republic (2003), Guatemala (2006), Nicaragua, and Peru. (In practice the Dominican Republic exceeded legal caps in 2003.)
  - In several countries, extraordinary LLR needed qualified-majority central bank board approval or executive-branch validation.
- Institutional failures and crisis dynamics:
  - Weak institutional frameworks forced countries to choose between closing failing banks (paying only small depositors) or injecting large amounts of central bank money; both approaches often led to contagion and escalated central bank assistance.
  - Venezuela mid-1990s: closure of Banco Latino in January 1994 led to scaled-up central bank assistance, international reserves almost halved in six months, and the bolívar depreciated nearly 70 percent by end 1994; dozens of banks failed thereafter.
  - Ecuador 1998–1999: closure of Solbanco (1 percent market share) in April 1998 triggered loss of depositor confidence, closure/takeover of larger banks, more than 50 percent of the system closed or taken over by the state, the economy fell more than 6 percent and inflation reached about 100 percent year-on-year in 1999; the government adopted the US dollar as legal tender.
  - Uruguay 2002: crisis originated with closure of an Argentinean bank that received no central bank assistance; contagion prompted increasing central bank assistance until international reserves reached a minimum threshold and the government declared a bank holiday followed by banking system restructuring.
- Successful crisis containment where institutional frameworks or rapid reforms existed:
  - Argentina (1995), Colombia (1999), Peru (1999), and Guatemala (2006) managed financial turbulence without full-fledged crises by using LLR as a first line of defense within broader safety nets that included legal powers for bank resolution and P&A operations.
  - Brazil and Nicaragua also relied heavily on bank resolution measures.
  - In Peru the government rapidly passed a law empowering bank resolution and restructuring during the crisis.
- Table 3 summary points (institutional status at time of crises):
  - Bank resolution (P&A), deposit insurance, and LLR status varied across cases; many countries lacked P&A authorization or adequate deposit insurance, and most allowed broad LLR in practice.
  - Deposit insurance institutions frequently were underfunded or ineffective, and LLR often became open-ended in crisis response.

*Italic: Source: _wp08135 - section identifies the various alternatives central banks employed to manage banking crises*

### Box 1. Large “Monetization” of Banking Crises in Selected Countries

### Box 1. Large “Monetization” of Banking Crises in Selected Countries

### Country episodes and policy responses
- Ecuador
  - The traumatic closure of a small bank in April 1998 sparked the crisis as medium and large depositors could not recover their savings, triggering contagion and a run on other banks.
  - By August a second medium size bank was closed; subsequently, several other institutions fell apart representing nearly 60 percent market share.
  - Institutional framework comprised two corner solutions: provide extensive financial assistance through the Central Bank of Ecuador (BCE) or close banks without paying depositors, except small depositors under a protracted procedure, with BCE money.
  - Legal provisions supporting BCE’s role as LLR allowed it to grant large amounts of money; a deposit guarantee to protect small depositors relied on BCE resources.
  - The government offered a blanket guarantee, which initially was delivered using BCE money.
  - The excessive reliance of financial safety nets on BCE’s resources produced a large “monetization” of the banking crisis, which reached 12 percent of GDP by September 1999.
  - As the crisis escalated the government “froze” deposits; when controls were lifted the crisis regained momentum until the BCE loosened monetary policy control and the government adopted the dollar as the country’s legal tender.

- Dominican Republic (2003)
  - Crisis started with intervention of the third largest bank—with a market share of 10 percent—after deposit withdrawals began by mid-2002 following allegations of fraud from discovery of hidden liabilities in a “parallel bank.”
  - Contagion extended to two other institutions—with an additional 10 percent market share—featuring similar inappropriate accounting practices.
  - The crisis of these three banks was managed exclusively using resources from the Central Bank of the Dominican Republic (BCRD), initially cash and later central bank certificates to pay depositors.
  - While the Law of the BCRD established a limit to emergency loans of 1.5 times the capital of the impaired bank, the largest bank received more than 10 times its capital in financial assistance and the other two banks received 8 and 6 times their capital.

- Venezuela (1994)
  - Crisis started when Banco Latino did not meet its clearing house obligations in early-1994; closure triggered contagion to other institutions.
  - Central Bank of Venezuela (BCV) provided financial assistance directly and indirectly via FOGADE to avoid additional closures.
  - As assistance mounted, ailing banks ran out of adequate collateral, and another 12 institutions were nationalized or closed by end 1994.
  - Pressures on the domestic currency led the government to impose capital account controls and fix the exchange rate following a nominal depreciation of about 70 percent.
  - Inflation soared to more than 70 percent by end-1994 and reached three digit rates during 1996; the economy contracted more than 2 percent.

- Uruguay (2002)
  - Crisis followed collapse of the Argentine banking system and the “corralito financiero”; began with runs on Argentine Banco Galicia, which was closed without receiving Central Bank of Uruguay (BCU) assistance.
  - Contagion deepened; domestic banks initially used own resources but eventually resorted to central bank money.
  - Legislation did not envisage bank resolution and allowed BCU to provide financial assistance mostly against government paper and high quality commercial paper up to the impaired bank’s capital.
  - Measures failed to contain the crisis; government declared a bank holiday and Congress approved new legislation empowering the BCU to conduct bank resolution and restructuring.
  - Eventually, three local commercial banks were closed, time deposits were reprogrammed to longer periods, and the government extended a deposit guarantee to checking and saving deposits in public banks.

### Observations on central bank “monetization” and macroeconomic linkages
- Excessive reliance on central bank resources to finance banking crisis responses produced large monetization episodes (example: Ecuador reached 12 percent of GDP by September 1999).
- Large central bank assistance to problem banks:
  - Disturbs the conduct of monetary policy and may compromise central banks’ operational autonomy in the long-run.
  - Relegates fighting inflation to a secondary objective and prioritizes preventing escalation of financial distress.
  - In the short-run, injecting large amounts of money makes opaque the relationship between monetary instruments and operating/intermediate targets and their links to policy goals.
  - If collateral received is not recovered over time, the central bank’s capital may be exhausted, restricting its ability to tighten monetary policy because of adverse impacts on the central bank balance sheet.

### Comparative lessons from selected crises and institutional arrangements
- Where financial safety nets and crisis resolution relied heavily on central bank balance sheets, macroeconomic instability tended to be greater.
- Legal and institutional frameworks that allowed purchase-and-assumption (P&A) operations, deposit insurance funded from private sources, and alternative financing (for example, deposit insurance funds rather than central bank money) helped contain monetization:
  - Mexico/Argentina/post-Tequila reforms enabled central bank involvement in bank resolution, creation of a temporary Capitalization Trust Fund, and a deposit insurance system fully funded from the private sector, facilitating restructurings and reducing outright liquidation.
  - Colombia: Bank of the Republic provided limited liquidity facilities while the Government and FOGAFIN provided the bulk of official support including debt relief, takeovers, P&A operations, and recapitalization plans.
  - Peru: Government-led restructuring with minimum central bank involvement; tools included capitalization of banks, issuance of bonds to facilitate P&A, swaps to restructure assets, issuance of negotiable US dollar bonds with repurchase commitments, and a government contingency line of credit of up to US$200 million to support deposit insurance (FSD) efforts; FSD increased coverage per depositor to US$18,500 indexed to the wholesale price index.
  - Guatemala (2006): Under 2002 legislation, P&A operations were implemented without central bank injection of money, using resources from the deposit insurance fund.

*Source: Box 1, _wp08135*

### Box 3. Banking Crises and Monetary Policy

### Box 3. Banking Crises and Monetary Policy

### Monetary policy responses during banking crises
- Central banks may shift short-run objectives toward financial stability while trying to preserve price stability.
- Two extreme responses:
  - Tight stance with full sterilization: mop up liquidity assistance, raise interest rates to preserve banking system liabilities. Risk: accelerates failure of illiquid banks borrowing in the interbank market.
  - Full accommodation with no sterilization: downward trend in interest rates. Risk: pressures on domestic currency and international reserves, exchange rate depreciation harms banks’ asset portfolios and solvency (especially unhedged debtors).
- Intermediate route: partial sterilization may temporarily help but is unsustainable without fiscal adjustment, foreign financing, or efficient bank resolution.
- Conclusion: coping with banking crises exclusively through monetary policy, especially with prolonged financial assistance, makes monetary policy ineffective and prone to macroeconomic instability.

### Constraints under financial dollarization
- High financial dollarization raises policy restrictions: central banks must both preserve value of bank liabilities and prevent a damaging currency crash.
- Market participants reallocate toward dollar assets under uncertainty; interest rates must rise sufficiently to discourage foreign currency demand.
- Central banks cannot print foreign currency; therefore, a sizable increase in interest rates:
  - May accelerate failure of illiquid banks.
  - Is less effective where financial safety nets are weak.
- Currency depreciation in dollarized economies immediately reduces net wealth of unhedged borrowers and worsens bank solvency.

### Central bank balance sheet effects and long-term policy impacts
- Central banks providing credit receive collateral; losses may arise if:
  - Present value of revenues from realized collateral does not cover loans plus interest.
  - Resources used for deposit insurance are not repaid by the government or future industry contributions.
- Resulting impaired central bank balance sheets: interest-bearing assets < interest-bearing liabilities; central bank capital may be depleted.
- Implication: reduced room for monetary maneuver as central banks fear further erosion of weak financial positions if governments do not promptly restore capital.
- Empirical note: average central bank losses from a sample of 10 Western Hemisphere countries were 1 percent of GDP in 2005.
- Recommendation: governments should effectively restore central bank financial strength to enable full resumption of monetary policy function.

### Empirical findings from Latin America (sample and measures)
- Sample considerations:
  - Analysis focuses on 25 episodes in the sample, excluding the Brazilian banking crisis.
- Correlations (Table 4) — sample: 25 Countries (excluding Brazil):
  - Size of the crisis correlated with ∆ in central bank claims on banks: 0.627 *.
  - Size of the crisis correlated with ∆ in reserve money: 0.439 *.
  - Nominal devaluation correlated with Size of the crisis: 0.816 *; with ∆ in central bank claims: 0.535 *; with ∆ in reserve money: 0.408 *.
  - ∆ in international reserves correlated with Size of the crisis: 0.567 *; with ∆ in central bank claims: -0.587 *; with ∆ in reserve money: -0.480 *.
  - */ Coefficients are statistically significant at the 5 percent level.
- Definitions used:
  - a/ Measured by the ratio of the average change in central bank claims to financial institutions during the first year of the crisis relative to the previous 12 months.
  - b/ Measured by the ratio of the average change in base money during the first year of the crisis relative to the previous 12 months.
  - c/ Largest percentage depreciation of the domestic currency accumulated over a 3-month period during the crisis.
  - d/ Largest percentage fall in international reserves accumulated over a 3-month period during the crisis.

### Quantitative dynamics and thresholds observed
- Money multiplier behavior during crises:
  - Initially increased (pressures on banks’ liquidity or reduction in reserve requirements).
  - Later fell as cash holdings rose in reaction to perceived bank unsoundness; sometimes collapsed with increased appetite for dollars or deposit freezes.
- Relationship between central bank money injection and currency depreciation:
  - When central bank claims on the financial system multiplied by a factor of 2 or more, local currencies depreciated more than 30 percent in most cases, triggering currency crashes (examples: Dominican Republic, Ecuador 1996 and 1999, Mexico, Uruguay, Venezuela, and Argentina 2002 where the peso depreciation was almost 140 percent in a three-month period).
- Relationship between central bank money injection and international reserves:
  - Increasing central bank claims on banks by a factor of 2 or more induced a drain in international reserves of 15 percent or more, and in excess of 50 percent in Dominican Republic (2003), Mexico, and Uruguay.
- Inflation and growth impacts when central bank claims rose by factor of 2 or more:
  - Inflation generally accelerated by more than 5 percentage points in a one year period (t +12).
  - Economic growth often declined; a “major impact on growth” is defined as economic growth declined 3 percent or more during the first or second year of the crisis.
- Classification thresholds used in Table 5:
  - Small use of central bank money: central bank claims on financial institutions increased by less than 200 percent.
  - Significant increase in inflation **/: Inflation accelerated more than 5 percentage points in t +12.
  - Major impact on growth ***/: Economic growth declined 3 percent or more during the first or second year of the crisis.

### Macroeconomic effects documented
- Large injections of central bank money during banking crises encouraged demand for foreign currency, becoming self-fulfilling by:
  - Putting pressure on the domestic currency and international reserves.
  - Inducing rapid currency depreciation and, in some cases, forced exit from a peg.
  - Raising inflation and decelerating or collapsing economic growth.
- Transmission mechanism distortions:
  - Short-term interest rates increased for illiquid banks; interbank market segmented between solvent and perceived-insolvent banks.
  - Connection between central bank monetary impulses and the real sector weakened; monetary policy lost effectiveness.
- Central bank involvement often resulted in unproductive or low-performing assets, financial losses, and eventual exhaustion of capital—hindering future monetary operations (examples cited: Dominican Republic, Guatemala, Nicaragua, Paraguay, Venezuela).

### Policy recommendations and lessons
- Primary lesson: substantial injection of central bank money beyond lender-of-last-resort (LLR) functions exacerbated macro-financial instability and could trigger currency crashes; limited central bank assistance, combined with timely government bank resolution measures, helped contain systemic crises.
- Institutional weaknesses that exacerbated monetization:
  - Lack of legal provisions for early corrective actions.
  - Deposit insurance mechanisms often nonexistent or poorly funded.
  - Limited legal support for bank restructuring measures.
- Forward-looking guidance:
  - Tackle financial distress and banking crises at an early stage with limited central bank money.
  - Impose corrective actions before liquidity and capital shortages become chronic.
  - Implement bank resolution measures before crises unfold.
  - Governments, not central banks, should assume direct costs of crises; where central banks bear initial costs they should be compensated by governments to restore financial strength and preserve operational autonomy.
  - Strengthen financial regulation and supervision, monitor structured and off-balance-sheet instruments, and keep pace with financial innovation.
  - Support regulatory improvements with strong macroeconomic fundamentals: maintain flexible exchange rates, strong public finances, develop money and capital markets, and reduce financial dollarization where necessary.

*Source: Box 3. Banking Crises and Monetary Policy, IMF Working Paper (extracted content).*

### Appendix I. Sample of Episodes of Banking Crises in Lati

### Appendix I. Sample of Episodes of Banking Crises in Latin America from 1990 to 2006—Stylized Facts and Policy Response

### Stylized facts — overview
- Crises ranged from minor and moderate bank failures to ex-ante large and systemic crises.
- Common triggers included:
  - Exchange rate shocks and devaluations (e.g., end-1994 Mexican devaluation).
  - Capital outflows following loss of confidence.
  - Liquidity shocks amplified by maturity mismatches.
  - Lax supervision and inappropriate accounting practices.
  - Macroeconomic shocks: falling growth, rising interest rates, terms-of-trade deterioration.
- Typical banking outcomes:
  - Widespread deposit runs (e.g., peso deposits fell more than 15% in Argentina from end-December to January 1995).
  - Large shares of system affected in severe episodes (e.g., 60% of the banking system in Ecuador 1998-1999; about 60% market share affected in Uruguay 2002).
  - Monetary and fiscal costs varied from small percentages to double-digit shares of GDP (see country entries).

### Policy response — recurring instrument set
- Central bank liquidity assistance and lender-of-last-resort (LLR) support:
  - Used frequently but sometimes constrained by institutional rules (e.g., currency boards limiting central bank assistance in Argentina 1995).
  - Large injections in some cases (e.g., central bank claims on the financial system increased by about 52% in six months in the Dominican Republic 1996).
- Deposit guarantees and deposit insurance:
  - Creation or expansion of deposit insurance systems (e.g., Argentina April 1995; El Salvador IGD coverage of US$6,250).
  - Blanket guarantees in major episodes (e.g., Ecuador 1998-1999; Nicaragua 2000 guarantee with central bank money).
- Purchase-and-assume (P&A), mergers, and private-sector acquisitions:
  - Widely used where legal frameworks allowed (e.g., Argentina May 1995 law enabling P&A; Guatemala 2006 P&A operations executed without central bank injection).
- Capital injections, subordinated loans, and trust funds:
  - Temporary Capitalization Trust Fund in Argentina (May 1995) funded by international and government resources to inject capital via subordinated loans or buy non-liquid assets.
  - Use of rescue funds (e.g., Bolivia’s FONDESIF supporting BBA since 1995).
- Asset swaps and use of government/central bank securities:
  - Swap undesired assets with central bank medium-term bonds (e.g., BBA sale to Banco de Crédito in Bolivia 1999).
  - Issuance of long-term securities at below-market rates to compensate central bank support (e.g., Costa Rica BCCR support partially compensated by TUDES paying below market interest rates).
- Legal and supervisory reforms:
  - Laws granting central banks resolution powers, enabling mergers, acquisitions, P&A operations, write-downs, and removal of administrators (e.g., Argentina May 1995; Guatemala FOPA law provisions).
  - Fast-track congressional reforms to permit supervisory authorities to execute P&A and expand deposit insurance (e.g., Peru 1999).
- Monetary policy and stabilization measures:
  - Reprogramming of time deposits and limits on deposit movements (e.g., Argentina 2002 “corralito” and “corralón”).
  - Central banks scaling up repo operations and rediscount facilities (e.g., Colombia 1999).

### Minor and moderate crises — country cases and policy actions
- Argentina (1995)
  - Stylized facts:
    - Peso deposits fell more than 15% from end-December to January 1995.
    - About 40 small and medium banks failed or were acquired/merged from December 1994 to late 1996 (almost one third of total banks), representing about 12% of the system.
  - Policy response:
    - May 1995 law empowered the central bank to resolve distressed banks (mergers, acquisitions, P&A).
    - Temporary Capitalization Trust Fund created to inject capital via subordinated loans or buy non-liquid assets.
    - Deposit insurance system created in April 1995 to be fully funded from the private sector.
    - Central bank provided limited monetary assistance as allowed by the currency board.
- Bolivia (1994)
  - Stylized facts:
    - Two banks with a market share of 11% of assets were closed in late-1994.
  - Policy response:
    - CBB initially provided LLR support then ceased fully guaranteeing deposits.
    - CBB paid cash to small depositors and gave non-interest bearing certificates to partially compensate large depositors (maturities 3 to 18 months).
- Bolivia (1999)
  - Stylized facts:
    - Banco Boliviano Americano (BBA) had a market share of 4.5% of deposits; intervened and resolved May 1999.
  - Policy response:
    - BBA had been supported by FONDESIF since 1995; sold to Banco de Crédito with provision to swap undesired assets with CBB medium term bonds paying slightly below market interest rates.
- Ecuador (1994)
  - Stylized facts:
    - Banco de los Andes (market share 6% of deposits) intervened for money laundering charges.
  - Policy response:
    - Administration removed; bank purchased by another private bank.
- Ecuador (1996)
  - Stylized facts:
    - Banco Continental (market share 8.5% of deposits) intervened and taken over by central bank after liquidity assistance and consolidation revealed insolvency.
  - Policy response:
    - BCE provided subordinated loan, acquired failing bank, and provided open-bank assistance until deposits stabilized.
- Dominican Republic (1996)
  - Stylized facts:
    - Banco del Comercio (market share 7% of assets) intervened.
  - Policy response:
    - Central bank provided sizable pre- and post-intervention financial support; central bank claims on the financial system rose about 52% in six months.
- El Salvador (1998)
  - Stylized facts:
    - Banco Credisa (5% market share) closed amid system stress from 1997.
  - Policy response:
    - Limited government participation in immediate resolution.
    - Comprehensive reform of financial system law including creation of IGD deposit insurance with coverage of US$6,250; IGD initially funded by the BCR then by commercial banks and entitled to recapitalize/restructure insolvent banks after writing down shareholders’ capital.
- Guatemala (2001)
  - Stylized facts:
    - Three small banks with 7% of deposits intervened and later closed for not observing solvency requirements.
  - Policy response:
    - Banguat monetized the crisis providing ample emergency assistance since 1998.
    - LLR provisions in Law of the Bank of Guatemala included liquidity loans, emergency loans, and loans to facilitate restructuring.
    - Savings Protection Fund (FOPA) existed to cover first US$2,500 of saving deposits but was not operational due to lack of funding; law authorized write-offs and restructuring but did not envisage P&A.
- Guatemala (2006)
  - Stylized facts:
    - Bancafe (9% of deposits) closed, followed by Banco del Comercio (1% of deposits).
  - Policy response:
    - Under 2002 legislation, P&A operations executed without central bank money, financed by deposit insurance fund and a trust.
- Honduras (1999)
  - Stylized facts:
    - Bancorp (3% of deposits) closed in September 1999.
    - Demand for foreign exchange in BCH auctions rose from a daily average of US$6.5 million in July to US$8.3 million in September; interbank interest rates rose from 13 percent to 17 percent since early September.
    - Initial fiscal cost estimated about 0.8% of GDP.
  - Policy response:
    - BCH injected liquidity until closure.
    - Emergency law “Ley Temporal de Estabilización Financiera” established a blanket guarantee for three years and partial guarantee for Bancorp trust funds; BCH empowered to guarantee deposits.
- Honduras (2001)
  - Stylized facts:
    - Banhcreser (3% market share) closed.
  - Policy response:
    - Fiscal costs incurred; limited asset purchases while deposits fully transferred to other banks due to lack of CNBS expertise in P&A.
- Honduras (2002)
  - Stylized facts:
    - Banco Sogerin and Banco Capital (together 5% market share) intervened and taken over by deposit insurance institution.
  - Policy response:
    - FOSEDE took over under “extraordinary mechanism”; banks capitalized with government bonds which BCH discounted; FOSEDE repaid BCH with privatization proceeds and later insurance premiums.
- Paraguay (1995)
  - Stylized facts:
    - Four banks with about 14% of total assets intervened and closed.
  - Policy response:
    - Central Bank of Paraguay provided financial assistance amounting to more than 4% of GDP in 1995.
    - Government recognized payments to depositors up to US$21,500; Congress expanded coverage to benefit off-balance sheet deposits up to US$15,000; deposit guarantee delivered with BCP money.
- Paraguay (2002)
  - Stylized facts:
    - Banco Alemán (almost 10% market share) intervened and closed.
  - Policy response:
    - Crisis resolved with little money from BCP; deposit base stabilized shortly after closure.

### Ex-ante large and systemic crises — country cases and policy actions
- Argentina (2002)
  - Stylized facts:
    - 12 private and public banks (40% of deposits) received liquidity assistance; bank resolution applied to three foreign banks that exited the market.
    - Economic activity declined more than 10% and inflation surged to more than 25% year-on-year in 2002.
  - Policy response:
    - “Corralito” and “corralón” imposed to limit deposit flows and payments; time deposits reprogrammed.
- Brazil (1994-95)
  - Stylized facts:
    - Remonetization ended hyperinflation; in 1993 inflation-protected revenue exceeded 4 percent of GDP.
    - 18 financial institutions with about 35% market share were intervened, liquidated, or placed under temporary administration during 1994–1995.
  - Policy response:
    - PROER (1995) to protect depositors and restructure banking system including a deposit insurance agency and differentiated treatment for large and small banks.
    - PROES aimed to reduce state participation; number of state-owned banks fell from 35 in 1996 to 12 in 2002.
    - PROEF strengthened federal public banks with stricter-than-Basel capital requirements.
- Colombia (1999)
  - Stylized facts:
    - Adverse international environment led to interventions, closures, and FOGAFIN control of 7 medium institutions; mortgage banks hit.
  - Policy response:
    - Bank of the Republic provided rediscount facilities, repo operations, and longer-term liquidity.
    - Government approved debt relief programs, used FOGAFIN for liquidity support, took over large private banks, conducted P&A, and introduced recapitalization via shareholder credit lines.
    - Temporary regulatory forbearance and suspension of traditional bankruptcy procedures for five years.
- Costa Rica (1994)
  - Stylized facts:
    - Banco Anglo Costarricense (BAC) state-owned with 17% market share intervened and closed; deposits shrunk one third during first three months of intervention.
  - Policy response:
    - Government announced full coverage of deposits; BCCR extended financial assistance equivalent to 3.5% of GDP by end-1994 and was partially compensated nearly 50% by government TUDES paying below market interest rates.
    - BCCR increased reserve requirements and scaled up open market operations.
- Dominican Republic (2003)
  - Stylized facts:
    - Crisis began with intervention of the third largest bank (10% market share); extended to two other institutions adding another 10% market share due to hidden liabilities in a “parallel bank.”
  - Policy response:
    - Crisis managed exclusively using Central Bank of the Dominican Republic resources (cash early, later central bank certificates); largest bank received more than 10 times its capital in assistance despite legal limit of 1.5 times capital; other banks received 8 and 6 times their capital.
- Ecuador (1998-1999)
  - Stylized facts:
    - Lax supervision and liberalization led to intervention/takeover/closure of 60% of the banking system.
    - Monetization of the crisis reached 12% of GDP by September 1999.
    - Government eventually adopted the dollar as legal tender.
  - Policy response:
    - BCE provided extensive financial assistance and a blanket guarantee using BCE resources; deposit guarantee relied on BCE; deposits reprogrammed to avoid meltdown.
- Mexico (1995)
  - Stylized facts:
    - 12 small and medium banks intervened during 1995-1997 and a group of banks covering 80% of the system received government support.
  - Policy response:
    - Existing mechanisms (FOBAPROA, CNBV) used; PROCAPTE recapitalization program where FOBAPROA bought subordinated debt; government program to buy nonperforming loans (2 pesos of NPLs for every 1 peso of new capital); liberalized foreign ownership; restructuring of NPLs into UDIs and debtor-support ADE program.
- Nicaragua (2000-2001)
  - Stylized facts:
    - 4 out of 11 banks (about 21% market share by end-1999) intervened and sold (Interbank and Bancafe in 2000; Bamer and Bainc in 2001).
  - Policy response:
    - No deposit insurance in 2000; government guaranteed deposits to be paid with central bank money.
    - P&A applied; BCN issued securities (CENI) to match value of assets acquired by purchasing banks.
    - New deposit insurance institution (FOGADE) later created.
- Paraguay (1997-1998)
  - Stylized facts:
    - Six banks with about 22% market share were intervened and closed.
    - IPS lost about 3% of GDP in deposits at closed banks.
  - Policy response:
    - Rehabilitation programs financed by Central Bank of Paraguay and IPS deposits failed; six banks closed between 1997 and 1998.
    - Congress increased deposit guarantee from 10 to 100 minimum wages; deposits covered with BCP money spaced over time; “flight to quality” benefited foreign banks.
- Peru (1999)
  - Stylized facts:
    - Capital outflows triggered domestic credit crunch unveiling solvency problems in banks including Banco Wiese (15.1% market share) and Banco Latino (3.2% market share); instability affected another 6 small banks (6.5% of deposits).
  - Policy response:
    - Government-led response with minimum central bank involvement emphasizing restructuring and consolidation.
    - Congress fast-tracked reform allowing supervisory authority to execute P&A and the Deposit Insurance Fund (FSD) to capitalize and take-over impaired banks.
    - Measures included capitalization to favor mergers; issuance of bonds to facilitate P&A; swaps issuing non-interest bearing treasury bonds for troubled loans to be repurchased over four years; negotiable US dollar bonds for performing loans repurchased over five years; debt rescheduling programs; FSD increased coverage per depositor to US$18,500 and indexed it to the wholesale price index with a government contingency line of credit up to US$200 million.
- Uruguay (2002)
  - Stylized facts:
    - Collapse of Argentinean banking system and enforcement of “corralito financiero” caused deposit runs; about 60% market share affected (temporary interventions, closures, merges; two large public banks received assistance; one large foreign branch closed).
  - Policy response:
    - Legal framework did not envisage bank restructuring but allowed BCU to provide financial assistance with specified characteristics: discount of excess securities to constitute reserve requirements; advances in pesos up to 90 days based on adequate collateral not exceeding total equity; rediscounting or purchase of high quality commercial paper and securities up to bank’s capital.
- Venezuela (1994-1995)
  - Stylized facts:
    - Banco Latino collapsed early 1994; 12 banks closed or taken over by the State in 1994 and another 4 in 1995, totaling 56% market share (measured by deposits).
    - Direct disbursements for financial crises were approximately 17% of GDP during 1994-95.
  - Policy response:
    - FOGADE quadrupled deposit insurance coverage two months after Latino crisis and provided substantial financial assistance.
    - Government nationalized several banks and issued bonds to pay deposits transferred to nationalized banks.
    - New banking legislation upgraded problem-handling procedures but was approved when crises had already gained momentum.

### Key numeric figures and fiscal/monetary impacts (selected)
- Argentina (1995): peso deposits fell more than 15%.
- Argentina (1995–1996): about 40 banks failed or were acquired/merged (~one third of total banks), representing about 12% of the system.
- Dominican Republic (1996): central bank claims on the financial system increased by about 52% in six months.
- El Salvador (1998): IGD deposit coverage US$6,250.
- Guatemala (2001): FOPA intended to cover first US$2,500 of saving deposits (not operational).
- Honduras (1999): foreign exchange auction demand rose from US$6.5 million to US$8.3 million (daily average); interbank rates rose from 13 percent to 17 percent; initial fiscal cost about 0.8% of GDP.
- Paraguay (1995): central bank assistance exceeded 4% of GDP in 1995; deposit recognition up to US$21,500; off-balance sheet coverage up to US$15,000.
- Ecuador (1998-1999): monetization of the crisis reached 12% of GDP by September 1999; 60% of banking system intervened/taken-over/closed.
- Mexico (1995): a group of banks covering 80% of the system received government support.
- Nicaragua (2000-2001): 4 out of 11 banks represented about 21% market share by end-1999.
- Paraguay (1997-1998): six banks represented about 22% market share; IPS lost about 3% of GDP in deposits.
- Peru (1999): Banco Wiese market share 15.1%; Banco Latino market share 3.2%; another 6 small banks held 6.5% of deposits; FSD increased depositor coverage to US$18,500 and had a government contingency line of credit of up to US$200 million.
- Uruguay (2002): about 60% market share affected.
- Venezuela (1994-95): 56% market share affected; direct disbursements approximately 17% of GDP during 1994-95.

*Source: Various IMF Staff Reports.*

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