The Role of Public Banking during
Financial Crises in Argentina and Uruguay
Wesley Marshall
THE CASE OF URUGUAY ( ...continuation )

In this way, even in the most severe moments of crisis, the brous was in a much stronger position than its counterparts from the private sector, especially with regards to liabilities, but also related to assets. Ironically, however, this same strength facilitated a banking rescue that was not favorable to this institution. When the government launched a definitive resolution of the crisis in July 2002, the brous was assigned an onerous burden. While the activities of private local banks were suspended for an indefinite time, operations for foreign banks were allowed to continue normally.4 At the same time, public bank deposits were frozen and reprogrammed, in a similar fashion to what happened with the funds trapped in “el corralito” in Argentina.

Figure 5. Evolution of Deposits by Type of Bank
November 2001 — October 2003

Source: Central Bank of Uruguay

Figure 6. Evolution of Loans by Type of Bank

Source: Central Bank of Uruguay

Due to the different nature of the Uruguayan crisis and its resolution, public banks in Uruguay played a much more limited role than their Argentinean counterparts. The reasons are multifold. First, there was never a confrontation between the government and foreign banks, as there was in Argentina (Marshall, 2007). As such, there was no possibility for the public banks to put the brakes on the plans of the foreign banks. Second, and related to the previous point, the Uruguayan market never had the same concentration of large foreign institutions as was present in Argentina. The large financial conglomerates that dominate other regional markets, such as bbva, hsbc, Citigroup and Santander, had a much lower presence in Uruguay. These banks, together with other foreign entities with a global reach, made up less than a third of the system at the end of 2001. At the same time, large banks of Argentinean capital, like Galicia, Comercial and Montevideo-Caja Obrera, never assumed an active role in resolving the crisis. Third, unlike in Argentina, Uruguay did not experience a drastic change in its economic path and never had to implement pesification of the economy or reorient the national credit policy. As such, there was no chance for public banks to head up these efforts. With their own counter-cyclical capacities weakened by policies applied by the government during the crisis and its resolution, the most important ways that public banks minimized the effects of the crisis was with their counter-cyclical capacities during the period when the crisis was developing.

Preventing a disaster is always less visible than resolving it, especially in the midst of a situation as dramatic as that which developed in Argentina in 2002. But the fact that the largest bank in the Uruguayan market never participated in damaging behavior to the system, and that, as a result, a crisis of the entire system was avoided, was fundamental to the outcome of the Uruguayan banking crisis.

4 Except the bank Galicia, from Argentinean capital.