Financial Reverberations: The Latin American Banking System During the Mid-1990s

Abstract

The early 1990s witnessed a broad liberalization of the banking sector across Latin America. Consequently, there was a surge in capital inflows. The new banking institutions, however, were frail and supervision was weak. Therefore, the sector was vulnerable to endogenous and exogenous shocks. The shocks started arriving in 1993 and peaked during the first quarter of 1995, as the reverberations from the Mexican devaluation spread to most of the Latin American economies. This paper examines the different policy responses across the four major countries in Latin America . The paper argues that governments that led pro-market policy responses registered the lowest fiscal and macroeconomic costs. While those that pursued non-market responses registered the highest costs.

JEL Classification: G21, G28