Countries of the World/COUNTRYS.BIN/dp/0016/00165.txt

Text File | 1991-06-24 | 38KB | 581 lines

$Unique_ID{COW00165}
$Pretitle{273}
$Title{Argentina
Chapter 3E.   Financial System}
$Subtitle{}
$Author{Robert S. North}
$Affiliation{HQ, Department of the Army}
$Subject{percent
financial
government
central
banks
bank
foreign
system
billion
sector}
$Date{1987}
$Log{}
Country:     Argentina
Book:        Argentina, A Country Study
Author:      Robert S. North
Affiliation: HQ, Department of the Army
Date:        1987

Chapter 3E.   Financial System

     Argentina's financial system was exposed to numerous changes during the
1976-85 period. The uneven performance of the economy and the frequent change
of governments gave rise to various conceptual shifts in financial policy. In
pursuit of its free market philosophy, the government launched a significant
reform that modified the operation and direction of the financial system in
1977. Financial markets were liberalized in order to mobilize the flow and
allocation of capital, reduce market imperfections, and foster overall
efficiency through an increased exposure to domestic and foreign competition.
Accordingly, interest rates were freed, restrictions on international capital
movements were eliminated, capital requirements were reduced, and most of the
quantitative limits on Central Bank operations were dismantled. At the same
time, financial institutions were given complete freedom to expand
geographically and open new branches.

     Because the 1977 liberalization of the financial system was more
concerned with deregulation than with regulation, the high degree of
interlocking ownership of industrial firms and financial institutions,
coupled with the easy access to cheap credit, led to the overexpansion and
concentration of the financial system. The total number of financial
institutions increased from 692 main offices in 1976 to a peak of 723 in
1977, declined to 721 in 1978, and dropped to 496 in 1979. The total number
of branches, however, grew from 3,171 in 1976 to 4,106 in 1979. Of the total
number of financial institutions, the number of banks increased from 111 to
157 over the interim, while the number of nonbanking financial institutions
declined from 573 to 278.

     Commercial banks were the heart of the financial system. They accounted
for more than 90 percent of the capital and assets of the Argentine financial
system in the mid-1980s and were authorized to engage in all banking
activities in which other financial institutions specialized. They were
empowered to accept time and demand deposits, issue debt instruments, grant
almost all kinds of loans, manage security portfolios, and engage in leasing
and underwriting activities. Commercial banks were either private or state-run
and either domestic-or foreign-owned; domestic banks were defined as those
that were at least 70-percent owned by local investors. The total number of
commercial bank headquarters increased from 111 in 1976 to 211 in 1979, while
the number of branches jumped from 2,906 to 3,720. The federal
government-owned Bank of the Argentine Nation was founded in 1891; by 1979,
the number of its branches had increased to 573. Concurrently, there were 24
provincial-owned banks, whose branches increased to 1,056 by 1979. The number
of banks owned by the municipalities increased to five in that year, whereas
the branches edged up to 59. Private domestic banks jumped from 64 main
offices in 1976 to 161 in 1979, and the number of branches rose from 1,100 to
1,814, largely as a result of the conversion of non-banks into banks and
through their attraction of business from official of and foreign commercial
banks. More than 65 percent of the number of private domestic banks and over
75 percent of the total banking system's capital were located in the city of
Buenos Aires. The Bank of the Argentine Nation's capital base was equivalent
to about one-quarter of the total of the entire banking system in Buenos
Aires. The Bank of the Province of Buenos Aires and the Bank of the City of
Buenos Aires were smaller than the Bank of the Argentine Nation in terms of
equity capital, but each of these state-run banks was much larger than any
other single privately owned commercial bank in the country. The number of
foreign banks increased from 18 in 1976 to 20 in 1979, whereas the number of
branches declined from 226 to 218.

     The government-owned National Development Bank, created in 1971, was
primarily engaged in financing long-term industrial development projects
through its 33 branches, which were scattered throughout the country. The
National Mortgage Bank and its 52 branches, the mortgage divisions of the
commercial banks, and the home savings and loan associations constituted the
mortgage banking system. These investment banks were prohibited from offering
demand deposits to the public, but they were empowered to accept time
deposits, provide loans, and issue shares on the loans.

     The Central Bank of the Argentine Republic was formed in 1935 as a mixed
operation owned jointly by the government and domestic and foreign private
banks. In 1946 it became a wholly owned government bank. The Central Bank
discharged the normal functions of a central bank, which included regulating
the activities of banks and other financial institutions; controlling the
issue and circulation of money; maintaining the exchange rates; setting
interest rates and reserve requirements of the commercial banks; holding the
nation's gold and foreign exchange reserves; and acting as the fiscal agent of
the government.

     Finance companies, savings and loan associations, credit cooperatives,
and consumer credit associations were the four kinds of nonbanking financial
institutions. The number of finance companies increased from 80 main offices
in 1976 to 142 in 1979, while the number of their branches jumped from 40 to
205. The number of credit cooperatives declined from 424 to 104 over the
period. Savings and loan associations and consumer credit associations also
declined over the period.

     By 1979 these nonbanks held 12 percent of the country's bank deposits
and provided almost 15 percent of all loans. Private domestic commercial
banks held 45 percent of the deposits; state-run banks; 34 percent; private
foreign banks, 9 percent; finance companies, 9 percent; savings and loan
associations, 2 percent; and credit cooperatives and consumer credit
associations, about 1 percent. About the same proportion of loans were
provided by the respective institutions.

     Inconsistent macroeconomic policies, the lack of effective supervision,
easy access to both domestic and foreign credit, negative real interest rates
on deposits, the drop of aggregate demand, and public uncertainty as to the
solvency of the banking system prevented financial institutions from
mobilizing sufficient domestic savings and led to the eventual overextension
of the banking system after 1980. Between 1976 and 1981 demand deposits in
the commercial banking system dropped from 41 to 12 percent, and savings
deposits declined from 19.5 percent to 9 percent. Time deposits, however,
increased from 39.5 percent in 1976 to 78.5 percent in 1981. By 1981
financial savings were primarily in the form of short-term time deposits
with a maturity of 30 days or less. In order to compensate for the lack of
domestic medium- and long-term funds, the private sector increasingly resorted
to foreign loans that carried a lower cost as a result of the overvalued peso.
By 1980-81 private sector firms had become highly indebted in terms of both
the peso and the United States dollar.

     Excessive borrowing during the economic expansion in 1979 led to private
sector distress borrowing during 1980 and 1981 as the economic recession took
root. The cash flow problems of the private sector were reflected in the
liquidity difficulties of the financial system, which endangered their
solvency. By the end of 1981 potential loan defaults of the private sector
totaled over 100 percent of the net worth of the official banks, finance
companies, and credit cooperatives and more t