The Role of Public Banking during
Financial Crises in Argentina and Uruguay
Wesley Marshall
smes, Public Banks and Credit Demand

The reactivation of the credit market and the Argentinean economy has a strong counterpart in the demand for credit in the SME sector. As indicated in a seminar organized by the Center for Financial Stability, cited byClarin, “[...] smes have more of a drive to invest than larger firms. Today, 80% of investments correspond to small companies, while the most important firms invest only what is necessary to cover wear and tear on their productive plants [...]” (2006).

Because they are companies that are frequently new enterprises, are generally not highly sophisticated in terms of finance and often lack the kind of detailed credit histories needed to obtain a bank loan, SMES tend to be excluded from the formal financial market. Credit restriction towards smes is particularly damaging to the economy, because smes are among the biggest creators of employment in many countries, and especially so in Latin America. At the end of the crisis, the Argentinean government established the channeling of credit to smes through public banks as a priority. At that time, Banco Nacional and Banco de la Provincia, the two largest public banks in the system, were the greatest drivers of channeling resources towards smes. The former expanded its credit to the sector by 93% between December 2003 and June 2006, going from $1,114,439,000 pesos to $2,152,154,000 destined towards smes (Banco de la Nación, 2006). During this period, the weight of public bank financing for smes was also notable when compared to the rest of the system. For example while 22% of the loan portfolio of public banks was destined for the SME sector in 2004, this figure was only around 14% for both private national banks and foreign banks.

An Evaluation of Public Banking in Argentina

Taken as a set, Figures 1, 2 and 4 indicate that in spite of the benefit of an important transfer of deposits from foreign banks to public banks, private national banks really drove credit in the final stage of the crisis. Considering that counter-cyclical behavior for credit is of greater relevance to a healthy economy than counter-cyclical behavior for deposits, it would appear that public banks did not fully carry out their role. Although they cut less credit lines than any other entity during times of crisis, it was the private national banks that later took the reigns of the credit expansion. This conclusion does not necessarily invalidate the main argument of this text; it can be easily proven that public banks were the most strongly counter-cyclical agent with respect to foreign banks. However, according to this article’s hypothesis, the institutional nature of public banking lent itself to a higher capacity than private banks (national or not) to act in a counter-cyclical manner.

As proposed, public banks were indeed used to stabilize the system during times of crisis and to promote credit expansion and economic recovery in a way that was only possible for this type of institution. But the stability and growth offered by public banks is more reflected in the credit portfolio of private national banks than in that of public banks. Financing for smes is a good example of this dynamic. As a sector of the economy that is traditionally ignored by banks, but extremely important for economic growth, credit from public banks, especially given the relative size of public banks in the system, creates important multiplicative effects, and results in greater consumption. Credit for consumption is an extremely profitable banking activity, traditionally taken care of by private banks, but not by public banks. In this way, public banks provide an important support for the activities and profitability of private banks.

Another clear example of how public banks grow the crops, while private banks harvest the fruit, is the issue of custody over banks abandoned by Crédit Agricolé. In the most tense moments of crisis, a market transfer of these banks, even if successful, would have required time, and the uncertainty created in that lapse would have deepened the panic. Only the public banking system was of sufficient size to be able to incorporate the abandoned banks in a complete and immediate fashion. Undoubtedly, calming the markets during a moment of panic provoked by the foreign banks was an indirect support for all local banks, in the same way that transferring the banks to national owners after the crisis was a direct benefit for them.

The role that public banks played against the plan to dollarize —which would have created the possibility to eliminate private domestic banks— in combination with actions taken by public banks in favor of measures applied by the government during the year of “el corralito,” the fundamental support that public banks provided for private national banks becomes more evident, although still impossible to calculate.