The Role of Public Banking during
Financial Crises in Argentina and Uruguay
Wesley Marshall
Assets and Liabilities of the Public Banking System

As can be seen in Figures 1 and 2, the public banking system’s assets and liabilities showed markedly less cyclical behavior during the crisis than those of private banks, and much less than those of foreign banks. There are various factors behind this behavior. First, there was an important nationalist reaction among many savers. With the imposition of “el corralito,” there was a strong belief that foreign banks had made their profits in the country during the good times and tried to get out with the most money possible and protect themselves from the demands of their clients when they saw the financial storm coming. This perception, together with the anger provoked by the severe limits on deposit withdrawals, led to various moments of physical aggression against foreign banks, as well as the transfer of deposits from foreign banks to national entities (Marshall, 2008).

Second, starting with Scotiabank leaving in April 2002, it became clear that foreign banks were willing to flee the local market. This source of insecurity created a strong incentive for those making deposits to change to national institutions that would have a higher probability of lasting. This incentive was strengthened when other institutions left, notably Crédit Agricolé, as well as the threat of the imminent departure of entities such as Banco Río (Santander), which at that time was the second largest bank in the system.

Third, the better terms offered to clients by national banks regarding the government’s proposals to cash in deposits for government bonds, together with the short terms offered to deprogram deposits trapped in “el corralito,” was also a key impetus to reposition national banking.

Fourth, the departure of Scotiabank and Crédit Agricolé implied an account transfer of their balances to national banks. The private banks Comaf and Bansud acquired balances from Scotiabank (imf, 2002: 59), while bn assumed control of Crédit Agricolé banks. In Figure 1, the transfer of Crédit Agricolé liabilities to bn is notable between February and March, when they went to bn, and between June and July, when they were taken from Crédit Agricolé. The Scotiabank transfers also affected the collective positions of foreign and private banks, although to a lesser extent.

Even though it is impossible to quantitatively determine the impact of each of these factors on the evolution of deposits, the repositioning of the system during the crisis was dramatic, as can be seen in Figure 3. National banks showed strong advances in the face of the withdrawal of foreign banks. However, as can be seen in Figure 2, although national banks had a much smaller reduction in granting credits, neither private nor public banks increased their lending activities during the crisis.

Due to the isolation of market pressures, public banks should have been able to increase their lending activities at the time. The fact that this did not happen can be explained in part by the load of “political” loans that public banks carried from the start of the crisis in December 2002. At that time, delinquent loans were equivalent to 18% of the entire loan portfolio of public banks, approximately double the figure for private banks (bcra, 2001: 19). In this way, as mentioned in the first section of the article, public banks clearly showed their institutional weakness throughout the 1990s in Argentina. Even so, this type of behavior did not cause the crisis and nor did it slow down the extraordinary resolution. It did limit the counter-cyclical capacity in an important way during the crisis, but due to features of public banks, they were able to change their management and pass their bad portfolios to public accounts in order to open new lines of credit relatively quickly. The account transfer of deposits to public banks was also an extremely important aspect to reactivate loans, which shall be analyzed below.

Rescuing the Banks

Besides the counter-cyclical behavior of public banks in terms of liabilities and, to a lesser extent, bank assets, it was only with the departure of Crédit Agricolé in May 2002 that the stabilizing effect of public banks became most relevant. As the authorities argued when assuming control of the banks Bisel, Bersa and Suquia, the banking system could not handle another shake-up, like the exit of Scotiabank in April of the same year. Although Scotiabank’s entities were eventually bought by local banks, at the time of the crisis, when local banks did not have the capital to absorb other institutions and the conditions were not favorable for foreign and national investors to expand their activities, the time that passed between the departure of the owners of an institution and their replacement by others led to strong uncertainty in the system. This fact was shown clearly by Scotiabank’s withdrawal, despite the fact that their abandoned entities were incorporated into private national banks in a timely fashion. In this way, bn’s immediate absorption of three banks abandoned by Crédit Agricolé avoided another episode that could disconcert the financial system.