Volume 44, Number 172,
January-March 2013
The Role of Public Banking during
Financial Crises in Argentina and Uruguay
Wesley Marshall*
Date received: February 24, 2012. Date accepted: August 13, 2012
Abstract

The goal of this article is to emphasize the counter-cyclical nature of public commercial banking. This study will provide a historical analysis of the banking crises in Argentina and Uruguay at the beginning of the twenty-first century. In Argentina, this type of bank encompassed a variety of crucial actors involved in policies that successfully resolved the crisis and led to financial restructuring. In Uruguay, public commercial banking had a lesser role during the crisis resolution phase, but played a fundamental part in minimizing financial system risks that had contributed to the 2002 crisis.

Keywords: financial crises, economic history, financial markets and institutions, Latin America, economic development, financial markets.
INTRODUCTION

In the current large-scale global economic crisis, the debate surrounding which financial institutions and structures are most appropriate to ensure the stable provision of credit in turbulent times is becoming increasingly important for societies that have lived through relatively long periods of financial stability. One of the few positive results of going through repeated and severe financial crises during the last few decades in Latin America is the possibility to learn from them. In this spirit, this article shall focus on the importance of public commercial banking during financial crises in Argentina and Uruguay at the beginning of the twenty-first century.

The presence of this type of bank, and especially its role in the moments leading up to and during these crises and in the recovery stages, is particularly relevant for the current global crisis. In the same sense that all financial systems may not be affected in the same way, the banking systems in Uruguay and Argentina faced different types of crises, each with their own mix of factors endogenous and exogenous to the banking system. Despite these differences, public commercial banking, first-tier banks that grant loans and collect deposits directly from the public, obeyed a different logic than that which governed its private counterparts. As such, it proved to be a notably less cyclical agent, which is why public banking expands less during a credit boom, is less affected by asset deflation during times of crisis, can start extending credit lines much sooner than its private counterparts and can be analyzed from a theoretical perspective (see Marshall, 2010).

This article shall address the counter-cyclical nature of public commercial banking from a historical approach. The role of public commercial banking is a constant; given the distinct nature of the crises in Argentina and Uruguay, this article shall dedicate a large section to examining the conditions of the economic and financial systems in Argentina and Uruguay that affected the performance of this type of banking entity. As this work shall argue, despite acting in extremely different environments, the nature of public banking determined a less cyclical behavior than its counterparts in the private sector in both instances. Moreover, this work emphasizes that in Argentina, in extreme cases, public banking can serve as a stronghold for an economy besieged by external forces.

THE ARGENTINEAN CASE

Convertibility

The current financial crisis, as evidenced in some countries such as the United States, Ireland, Iceland, etc., originated in banking excesses. The difference between a crisis produced within a banking system and an exogenous crisis is fundamentally important, as a correct diagnostic of the origin of a crisis determines the success of the recovery policies chosen by the authorities. In the case of Argentina, the crisis did not originate in banking excesses. Due in large part to the specifics of the economic situation in Argentina, which shall be examined later on, there was never systemic generation of speculative mania, monetary expansion or fraud from the private banking system. In fact, the Argentinean banking system proved to be surprisingly resistant, holding up against various years of economic recession before falling to the macroeconomic crisis, which was a product of the draconian application of structural reforms common in the region, including commercial and financial openness, privatization programs and the establishment of a stable and over-valued exchange rate. The cornerstone of these reforms in Argentina was the parity between the dollar and thepeso, created with the Law of Convertibility in 1991.

* Research Professor at the Universidad Autónoma Metropolitana. E-mail: wesm@xanum.uam.mx

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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