Volume 44, Number 172,
January-March 2013
The Role of Public Banking during
Financial Crises in Argentina and Uruguay
Wesley Marshall
Banks as a Tool in the Government’s Recovery Plan / Putting the Brakes on the Plan to Dollarize

Although some aspects of the counter-cyclical behavior of public banks during the crisis and its resolution are not historically unknown, the opposition that public banks put up against plans of the foreign banks and the block against dollarization were new. However, what happened in Argentina is an event with greater implications. In current Latin America, there are various countries whose financial systems are dominated by foreign banks. This situation grants extraordinary political-economic power to foreign banks, especially in times of financial crisis.

In the framework of a conflict between the different plans to recover from the crisis, public banks assumed a unique role. In Argentina, the mere existence of national, private and public banks, and their alliance around the plan to center the economy on thepeso, was an obstacle that was hard for those who favored dollarization to overcome. Despite their strong position in the international and domestic financial system, they never managed to achieve full control of the local market. Although there are many ways to weaken public banks in times of crisis, they can mainly be traced back to politics. So, as happened in Argentina, without the political strength to weaken public banks, there is little chance to eliminate their presence. This feature is a strong distinction between public and private banks, the latter of which can be bought without any political interference by their adversaries in times of conflict between foreign banks and private national banks.

Beyond putting the brakes on the foreign banks’ plan to dollarize, the national banks as a whole also took on the role of supporting the government’s crisis resolution plan. Given the opposition from the dollarizing block against measures applied by the government, support from local banks was extremely important for Argentina. The most notable government measures to center the economy on thepeso, recover confidence in the banking system and minimize the fiscal costs of restructuring the banks, almost without exception, were helped along by domestic banks and blocked by foreign banks. Of the mentioned processes, the cooperation of national banks stood out in the three exchanges of deposits for government bonds and in the deprogramming of deposits that came before “el corralito” was lifted. However, public banks also stood out in the “asymmetric pesification” of banking balances, which was a tortuous process to transform debt contracts from dollars to pesos and was central for the generalized pesification of the economy.

Credit Reactivation

Besides registering lower drops in raising and granting loans during the worst moments of the crisis —with public banks increasing their levels of deposits— domestic banks also led in credit recovery, both in the timeline of reactivation as well as in the magnitude of the increase, as can be seen in Figure 4. It is useful to divide the credit recovery into three periods, corresponding to letters A, B and C, assigned in Figure 4. In period A, a tenuous credit recovery begins, with private national banks and, to a lesser extent, public banks leading the way. During this time, loans from foreign banks continued to contract. In period B, credit acceleration gains strength, once again with public and national private banks leading the way, although foreign banks showed signs of the first increases. When period C begins, the transfer of balances from Banco Suquia is performed,2 which go from being part of public banking to private national banking. During this time period, credit recovery is consolidated among the three types of banks.

Figure 4. Evaluating Loans by Type of Bank
August 2003 — June 2005
Source: bcra.

In this way, during the generalized credit shrinkage, national banks had the lowest credit contraction, and they also initiated the credit recovery. In contrast, foreign banks used a highly cyclical strategy consistent with their institutional incentives. Before analyzing the performance of public and private national banks in the mentioned period, we will briefly talk about financing for small and medium-sized enterprises (smes).

2 Bersa Bank returned to private hands in the summer of 2005 and in August 2006, the last account transfer was made from public banking to private national banking, from Banco Bisel.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 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,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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