The Peruvian Experience with Financial Liberalization,
1990-1999
Patricia Ledesma Liébana∗
Northwestern University
E-mail: pledesma@northwestern.edu
September 5, 2001
Abstract
Between 1990 and 1997 the Peruvian banking system underwent considerable restructuring, the result of legal reforms specific to the sector, as well as reforms in the
broader economic environment. These reforms have been rather rapid, countering conventional wisdom on the sequencing and speed of reform. The banking system faced its
first serious test in the aftermath of the 1998 Russian crisis. Since then, the government
created two programs to assist troubled banks. Nevertheless, two small-sized banks were
shut down and two others were encouraged and helped in their restructuring. Recovery
has been sluggish and problems seem to be lurking below the surface. While the Peruvian regulation and supervisory system has been praised for its transparency relative to
other Latin American countries, published financial statements do not allow their users
to distinguish between troubled and non troubled banks before the supervisory agency’s
intervenes. This paper documents the Peruvian experience and provides an assessment
of its impact on the economy.
J.E.L. classifications: E440, O160, O540
Keywords: Financial liberalization, dollarization, banking system, Peru
Prepared for delivery at the 2001 meeting of the Latin American Studies Association,
Washington DC, September 6-8, 2001.
∗
Kellogg School of Management, 2001 Sheridan Road, Evanston, Illinois 60208-2001. Phone: (847) 4677658. Fax: (847) 491-5719.
1
1
Introduction
The importance of financial markets and monetary policy for the growth of an economy is
beyond question. However, the causalities between growth and finance, the proper institutional arrangements for effective financial markets and the best practices in monetary policy
have been the subject of heated debates, with mixed econometric evidence, and disappointing policy experiences. The empirical evidence is nothing short of alarming. Kaminsky and
Reinhart (1996) review 25 banking crises and find that in 18 of them, a financial liberalization had taken place in the previous five years. They also find that 56% of the banking
crises are followed by a balance of payments crisis within three years.
The motivation for this paper comes from a simple empirical observation: during the
1990s, following the structural adjustment in Peru and judging by the evolution of financial
ratios, the brunt of the adjustment has been faced by the non financial sector, while financial
enterprises fared relatively better. This observation contrasted with the pattern observed
during the 1983-1985 crisis, as documented by Webb (1987). In the mid 1980s crisis, nonfinancial firms were able to shift the burden of the adjustment to the financial sector, namely
private banks.
This paper is part of a broader research agenda that looks into the behavior of three sets
of actors (the banking system, the non financial sector and the Central Bank) during the
financial liberalization of the 1990s. The paper focuses on the financial sector, specifically
the banking sector, as it accounts for most of the financial sector’s assets, as well as for the
majority of the credit to the private sector. The Peruvian experience provides a rich series
of contrasts and poses many problems in terms of questioning the conventional wisdom
about financial reform and monetary policy.
There are at least three areas of theoretical and empirical research that must come together in order to examine the Peruvian case. The first and more obvious strand of economic
literature is the one concerning financial liberalization as a policy to counter “financial repression”, a term made popular by the influential contributions of McKinnon and Shaw in
19731 . In a nutshell, the financial repression argument is that distortions in key financial
prices (including interest rates and exchange rates) reduce the rate of growth of the financial
system relative to the non-financial system. While the transmission mechanism is different
for both authors, the message is similar: financial liberalization will ultimately contribute to
the growth of the economy. The second area of the literature is the concerned with dollarization or currency substitution, which has been a pervasive phenomenon in the Peruvian
economy since the 1980s; in terms of theoretical elaboration, this topic has commanded
renewed interest in the late 1990s, focusing on dollarization of liabilities phenomenon. The
1
An extensive review of the financial liberalization literature can be found in Fry (1995) and Gibson and
Tsakalotos (1994).
2
third area of the literature needed is concerned with the choice of nominal anchor for
macroeconomic stabilization. Fujimori’s administration resorted to the money supply as
the nominal anchor, thus being one of a handful of cases among developing economies to
make this choice, frequently cast as the “recession-now” (money-based stabilization) versus
“recession-later” (exchange rate based stabilization) alternative (Calvo and Végh 1994).
A look at the Southern Cone liberalization experiences in the late 1970s and early 1980s
and a review of the financial liberalization literature highlights two puzzles. The first puzzle
was that theoretical work about financial liberalization ignored the role played by foreign
exchange. The review of the Southern Cone experience at the micro level (Tybout, 1986;
Corbo, 1985; Diaz-Alejandro, 1985), via the analysis of financial statements and firm level
surveys, indicated that the impact of exchange rate policies on firms was critical. Firms
engaged in speculation with foreign exchange while central banks pursued pegged exchange
regimes. The second puzzle is that the role of the central bank in the financial system
is largely ignored. As an economic agent, the central bank is quite powerful in that it
can affect the relative prices of financial assets via changes in monetary and exchange rate
policies.
Time and again, proponents of financial liberalization have ascribed failed liberalization
experiences to implicit deposit insurance (a moral hazard, over-borrowing argument)2 , lack
of macroeconomic stability, inadequate banking supervision, lack of competitiveness in the
banking sector3 , and improper sequencing of reforms. However, the very nature of the
process creates complex interactions between policy decisions and the ensuing adjustment
periods that are frequently overlooked. In particular, in the Peruvian case, for example, the
choice of nominal anchor for the stabilization process is a critical element of the financial
liberalization, together with the legalization of dollar denominated bank accounts. In the
aftermath of a hyperinflationary process, the Central Bank found itself relying on foreign
exchange transactions to remonetize the economy. The tight monetary policy pursued
by the Central Bank made credit in dollars relatively cheaper. At the same time, banks
took advantage of regulatory changes that allowed them to generate capital inflows, which
they intermediated in the domestic markets, matching the currency denomination of their
assets and liabilities. Thus, the financial liberalization process creates financial fragility. At
2
See, for example, McKinnon and Pill (1997). The argument is that the state offers implicit or explicit
deposit insurance, which allows banks to undertake riskier loans. The reasoning is based on Stiglitz and
Weiss (1981): high real interest rates cause adverse selection on the borrower side. Unlike Stiglitz and Weiss,
banks are not assumed to be risk neutral, but rather to engage in moral hazard (which relies on deposit
insurance), lending to unsafe borrowers
3
This is one of the most interesting indictments, especially if one recalls that one of the functions ascribed
to the financial sector is that of gathering costly information (see, for example, Levine, 1997). This could
translate into a concentrated banking industry due high fixed costs or economies of scale. Also, in many
instances financial liberalization is accompanied by an opening to foreign capital flows and changes in
regulation that allows foreign capital to invest in the banking sector.
3
the macro level, the economy is more vulnerable to external shocks that result in capital
outflows. At the micro level, firms hold dollar denominated debt, making them vulnerable
to sudden devaluations. The banks, in this context, amplify shocks in the economy4 . The
examination of a case also allows highlighting the importance of institutional adaptation to
a new regulatory environment; simply put, it takes time for an institution, even under the
ideal circumstances to learn and adapt to a new regulatory environment.
In brief, financial liberalization is inherently a risky undertaking. Ex post, any failure
can be interpreted as a lack of proper supervision and regulation. However, supervision and
regulation are a dynamic “exercise”; perfection in this matter would require perfect foresight
by the relevant government agencies in order to anticipate all the possible contingencies. In
some cases proper regulation and credibility of a reform may be contradictory. For example,
capital controls may be appropriate, but credibility of the government’s commitment to a
market economy (in a country with a long and recent history of capital and price controls, in
addition to macroeconomic instability) may require abstaining from imposing such controls.
2
Overview of the Peruvian stabilization and structural adjustment process
With a GDP per capita of US$2,266 and an estimated 25.2 million inhabitants in 1999 , the
World Bank counts Peru among the lower middle income, severely indebted countries, countries. From a socioeconomic point of view, Peru is characterized by an unequal distribution
of income, and significant social and regional disparities.
The neo-liberal policies applied in Peru since August 1990 represent just the most recent
swing in Peruvian policy over the last 30 years. Much of Peruvian economic history over
this period is a story of short-run economic management, often exacerbated by unfavorable
external shocks—either in the form of instability in international capital markets or natural
disasters. History matters and, in particular, the recent memories of trouble and policy
failure set limits to the scope of feasible policies.
Table 1 provides a rough summary of the broad policy frameworks followed during the
different administrations in Peru since 1968. As the table shows, the “orthodox” approach
has dominated the stage, but with different variants. Before the 1990s, the pro-market
approach kept controls on interest rates and exchange rates; it did not include any significant
reform of the financial system, which continued to operate under a 1931 law of banking.
4
Goldfajn and Valdes (1997) formalize the interaction between capital flows and the occurrence of balance
of payments and banking crises.
4
2.1
The juncture leading to the August 1990 stabilization
The presidential elections of 1989 took place amid serious political and economic disturbances. The political debate was polarized in every conceivable fashion: from discussions
about the best course to stop inflation and end the recession, to social tensions with racial
and religious overtones. Alberto Fujimori won the election in a second round early in 1990,
promising to stabilize the economy gradually, but without any substantive plans or even
advisers.
The situation that the new administration faced was daunting:
• Liquidity as a percentage of GDP fell to around 6% by the second quarter of 1990.
• Tax pressure (tax revenues as a percentage of GDP) had dropped to around 3.6%
GDP, compared to 15-17% during the first half of the 1980s. The fiscal deficit was in
the order of 8% of GDP.
• Net international reserves were negative US$142 at the end of June 1990. Peru had
completely lost access to international credit markets.
• Real wages had halved their value compared to mid 1985.
• The official exchange rate was less than half the exchange rate in the free market.
• Inflation rates were increasing in anticipation of a ”shock” adjustment. The inflation
rate during July 1990 was 63.2% (over 90% if measured comparing end of period
prices).
• Basic imported food products (a public sector monopoly) were scarce; electric and
water services in the main cities were frequently shut down.
With little room to maneuver, Fujimori assembled a heterogeneous team of advisers.
Ten days after taking office, on August 8, 1990, the new minister of economics announced
a stabilization plan in which all price controls were removed and the exchange rate was
allowed to float.
2.2
Stabilization and Structural Reforms since August 1990
The stabilization program launched in August 1990 used monetary supply as the nominal
anchor to stabilize inflation. Price controls on goods and services produced by the private
sector were lifted, and there was an initial large adjustment in public sector prices . The
multiple exchange rate framework (a legacy of the previous administration) was eliminated
5
and the exchange rate was left to float. The private sector expected a large devaluation and
then a fixed exchange rate regime; thus, the exchange rate float caused some uncertainty.
From the outset, the exchange rate policy was subordinate to monetary policy, which, in
turn, was geared to the control of inflation.
The intention of policy makers was to generate some credibility for the stabilization
program. By floating the exchange rate, the idea was also to impose fiscal discipline, as any
spending financed through an increase in the money supply would translate into devaluation.
One of the big questions after the shock was how to remonetize the economy after the
hyperinflation. At this point, the central bank essentially one policy instrument: it chose
to expand domestic money supply by purchasing dollars from the banking system.
The initial stabilization effort also included immediate reforms of the tariff system,
reducing the number and level of rates, and the elimination of almost all tax exemptions.
As in the Bolivian 1985 adjustment, the government created a budget committee (comité
de caja), which met every week and determined what expenses the public sector could make
based on actual revenues.
The stabilization program has been accused of being weak, especially regarding fiscal
reform. An additional complication was the lack of coordination between fiscal and monetary policies, namely, coordination between the central bank and the ministry of economics
(Iguíñiz 1996; Escobal 1992).
The slow decrease in the inflation rate (as table 2 shows, it dropped below 20% per
year only in 1994) has been attributed to this lack of coordination. Escobal argues that the
acceleration of the structural reform program was in part to deal with the program’s fiscal
weaknesses.
A detailed review of all the reforms is beyond the scope of this work. Table 3 summarizes
the main ones. The tenor of all the reforms enacted is clearly pro market, liberalizing
markets to make them more “flexible”.
The main accomplishment of the program has been the control of inflation. International
liquidity indicators have improved significantly, as have public finances. However, there is
a persistent and significant current account deficit, and reform in the public administration
is far from complete.
Also, the privatization program is considered a success of the administration. Table 3
shows the annual totals through the end of 1999; as a result of this program there have been
close to 200 transactions, for a total sale value of US$8.1 billion, and promised investment
for US$7.8 billion.
One of the major shortcomings of the program is the level of the real exchange rate,
which sparked a debate whether this is the new equilibrium level exchange rate or whether
6
this is sustainable . Chart 1 shows the evolution of real exchange rate since 1979 . On
average, between August of 1990 and October of 2000, the real exchange is equivalent to
32.7% of its mean value between 1980 and 1985.
The low level of real exchange rate, coupled to the trade liberalization, has reduced
effective protection to domestic manufacturing. One estimate by the central bank indicated
a loss in effective protection from 122.7% in July 1990, to 41.4% in December 1990 for the
manufacturing sector as a whole (Rojas 1996).
CHART 1
REAL EXCHANGE RATE, 1979-2000
(1980-1985=100)
250.0
200.0
150.0
100.0
50.0
2.3
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
0.0
After July 2000
At the end of July 2000, as Fujimori started its third period under intense scrutiny from the
international community for an alleged fraud in the general elections, Peru seemed headed
to another policy cycle.
During the inauguration speech, Fujimori promised “competitive import substitution”
and decentralization, giving tax incentives to the private sector. Nevertheless, within two
days of the inauguration, he named Carlos Boloña as minister of economics and Finance.
Boloña was in charge of the same ministry between February 1991 and January 1993, and
7
is a vocal advocate of free market and privatization policies.
Less than four months later, Fujimori resigned the presidency, new presidential elections
were announced, and a transition government was in place. The turn that economic policies
will take is uncertain, but it is very likely that there will not be a sharp departure from
neo-liberalism. The new government has reconcile the demands of international investors
for a “deepening of market reforms” with the demands of local entrepreneurs and workers,
frustrated with the economic slow-down.
3
Financial reform and restructuring
The focus of this paper is on the banking sector, which, as of December 1999, accounted for
79.3% of the financial system’s total assets and liabilities. Among the latter, the banking
system accounted for 93.2% of the deposits-from the public, other financial institutions and
international organizations-in the financial system. The banking system’s share in assets
and liabilities has increased significantly, from 23.6% in December 1990, when state-owned
development banks, Banco de la Nación (henceforth, BN) and Banco Central de Reserva
del Perú (henceforth, BCR) were more active within the financial system. In terms of credit
to the private sector, the share provided by the banking system has increased from 64.2%
in 1990, when state-development banks accounted for 31.8% of the credit, to around 97.5%
in 1999. Table 4 provides a summary of the reforms with impact on the financial system,
distinguishing among those directly concerned with it and those in other sector, which could
be considered complementary.
By most measures, the situation leading to the August 1990 stabilization program could
be described as financial repression and disintermediation, a fleeing from formal financial
institutions and domestic currency. After extensive regulatory reform, private analysts
singled out the Peruvian regulatory framework as one of the strictest in the area5 . In
particular, J.P. Morgan’s report identifies Peru and Argentina as the only two countries
(out of six reviewed) that “enjoy regimes that are-on average-superior to the U.S. system”
(J.P. Morgan Securities Inc. 1998).
The start of the financial liberalization process was marked by three policy decisions at
the outset of the stabilization program:
• Financial institutions were authorized to create accounts and loans denominated in
foreign currency (1991).
• Controls on the capital account started to be liberalized (March 1991). Not all controls were removed immediately because the magnitude of the potential outflows was
5
See J.P. Morgan Securities Inc. (1998) and The Economist (1997).
8
unknown, while the stock of net international reserves was negative (US$163.1 million
at the end of July 1990).
• The maximum interest rates were not re-adjusted. The last adjustment, on July 1,
1990, had set the maximum lending rate at 42.5% per month. Given that policy
makers expected a quick disinflation, the lack of a change in the interest rate implied
a decision to free interest rates, as the ceiling would become ineffective if the program
yielded the expected results.
The banking sector’s legal framework has been overhauled three times since August
1990: in 1991, 1993, and 1996. The previous legislation, the “Ley de Bancos” (Decree
7159), became effective in to 1931. Through the years, this law experienced many revisions
and additions, most notably in 1968 and 1988. The financial setup was one of specialized
financial institutions, a scheme that started to break down during the 1980s as part of a
global trend towards universal banking.
The first important reform of the financial system was the “Law of Financial and Insurance Institutions” (DL 637) was given in April 1991, replacing the 1931 law and all its
modifications. The decree’s objective was to increase competition in the sector, as well as
to improve public confidence and the solvency of the system. It allowed commercial banks
to engage in more activities, consistent with a universal-banking model . It allowed the
Superintendence of Banking and Insurance (SBS) to monitor any institution involved in
financial intermediation, thus broadening the SBS powers to eliminate informal banking
activities.
DL 770 replaced DL 637 less than three years later, in October of 1993. The latter
dealt with “glitches” and provided more precision and order in the regulatory framework.
It distinguished those regulations that concerned the entire financial system from those
that applied exclusively to either the financial or the insurance system. DL 770 was more
specific regarding the role of the state in the financial system, limiting its direct presence to
minority participation in institutions and majority participation (to be disposed off within
a year) under exceptional circumstances. Where DL 637 established an interest rate ceiling
set by the Central Reserve Bank , DL 770 completely liberalizes interest rates; the Central
Reserve Bank can only set ceilings or floors under exceptional circumstances. DL 770 also
allowed commercial banks to be more active in the capital market (including being able to
buy, sell and keep shares in mutual funds), changing their denomination to multiple in lieu
of commercial.
The last major legal overhaul went into effect on December 10, 1996. According to the
SBS, the main goal of Law 26702 was to set standards compatible with the Basle agreement.
The SBS (1997) argues that the new law was necessary due to the persistence of interest rates
much above international levels, the lack of access to financial and insurance services by a
9
great portion of the population, and the need for reform in the insurance market. The SBS
states as further goals to foster competition among market participants in the context of the
globalization process, and to allow new financial operations such as factoring, deployment
of futures’ contracts and derivatives, etc. In a sense, this new law makes the treatment
of different financial institutions more homogeneous, by tying the different activities an
institution can undertake to their level of capital, rather than to the type of financial
institution.
3.1
Complementary reforms
Reforming laws directly linked to the financial sector has not been the only source of change
in the Peruvian financial sector. The government undertook other reforms with direct
impact on the financial sector, mainly reforming the central bank’s charter, labor market
reforms that affected worker’s monetary benefits, and a new law for the stock market.
The government approved a new charter for the BCR at the end of 1992 (December 29,
DL 26123). According to the new charter, the main goals of the central bank are to preserve
monetary stability and regulate money supply. It specifically prohibits financing the public
sector (except through the purchase of treasury bonds) , the creation of multiple exchange
rates, any intervention in to modify the private banks portfolios or loans to any state bank.
Finally, the new charter allows the establishment of floors and ceilings to interest rates only
under extraordinary circumstances.
It should be noted that, despite a separation of supervisory and regulatory (SBS), and
monetary policy (BCR) duties, the BCR retains an important supervisory role. Since it
provides liquidity credits through the discount window and it closely monitors credit (daily),
it is often aware of banking problems before the SBS is. An additional source of information
for the BCR is that it manages the payments (settlements) system. At the end of 1999,
a major reform was in the works, which was being tested by selected banks. The current
SBS administration has taken steps to improve this situation by requiring a number of
daily reports, such as those tied to the liquidity requirements. The BCR charter and the
financial law require attendance of the SBS superintendent to meeting of the BCR’s board of
directors on a quarterly basis. Nevertheless, there is frequent discretional contact between
officials of both institutions.
Among the changes in labor regulation with bearing on the financial sector, two of them
warrant a mention: the management of severance payments and the pension reform. Both
of these reforms have translated into an injection of liquidity and dynamism into the system.
Also, both of these reforms can be construed as “forced savings” mechanisms.
The first of these reforms was the handling of severance payments (known in Peru
as “compensación por tiempo de servicios” or CTS), in August 1991 . Labor law in Peru
10
requires a severance payment of up to one salary per year of service. Before the legal changes,
employers would make an allowance in their balance sheets for the severance payments .
The new framework requires employers to deposit the amount due in individual accounts per
employee, in the bank and currency (domestic or foreign) of the employee’s choice. These
accounts are intangible, that is, they can only be cashed when the employment relation
ends. The initial law allowed a certain percentage to be used freely, which was raised until
it reached 50%. There is also a limit on the percentage that can be used as a guarantee
on a personal loan (50%). To transfer the allowances made before this regulatory change,
firms could choose to do it all at once or to do it within the following ten years.
As of December 1999, CTS deposits were equivalent to 4.2% (US$528.4 million) of total
deposits, having reached a peak of 12.7% in 1995. Taking into account only time deposits,
the percentage represented by CTS deposits was 7.8% in December 1999 (again, the share of
CTS deposits peaked in 1995, at 29.7%). The impact of CTS deposits should be quantified
also in terms of adding dynamism to the market for personal loans, and in term of the cash
flow imposed on firms. Regarding personal loans, up to 50% of the account can be used
as a guarantee for a loan. Finally, regarding the impact of CTS deposits on non financial
firms, the strain it created on these firms was not negligible, especially when firms had to
translate accounting entries into actual deposits in the midst of a recession, such as the one
experienced during 1991.
Another major source of funds for the banking system has been the new private pension
system. The reform of the pension system was enacted in December of 1992 (Legislative
Decree 25897), and went into effect in June 1993. Initially, the share of banks in the
investment portfolio of pension fund administrators exceeded 50%. In 1994, 55.1% of all
pension fund investments were either in time deposits in banks (which accounted for 33.6% of
the portfolio) or in bonds and stocks issued by banks (Superintendencia de Administradoras
de Fondos de Pensiones, 1997). This proportion has declined as a result of new limits
imposed by a 1995 regulatory change, which caps the allowed share of time deposits and
bonds issued by the financial system at 40%; the individual limits for time deposits and
bonds were set at 30% and 25%, respectively. This, in turn, has allowed industrial firms
and privatized infrastructure services to issue financial instruments. Nevertheless, figures for
June 1999 showed that pension funds are still operating very close to the ceiling imposed
on investments on instruments issued by financial institutions: these represented 39.6%
of total investment (Asociación Internacional de Organismos de Supervisión de Fondos de
Pensiones, 1999). In terms of time deposits in the banking system, pension funds represented
over US$380 million in 1998; pension funds time deposits represented 8.3% of total time
deposits in 1998.
Capital inflows have provided an important source of funds to banks, both in terms of
lending funds as well as investment in the banking sector. These inflows were part of a trend
in the emerging economies, which, in Peru’s case, was aided by the liberalization of capital
11
outflows and the re-establishment of relations with the international financial community.
Credit obtained abroad (from financial institutions or governments) by domestic banks is
not subject to reserve requirements. Given the scope for expansion and modernization of
the banking business , it is not surprising that foreign investors have been keen on investing
in the Peruvian financial system over the last few years.
Finally, the law regulating the stock market was reformed in November 1991 (DL 755)
and in October 1996 (DL 861). Both regulatory changes included three main areas of
reform: the creation of a Guarantee Fund, increased transparency in the market (by means
of timely and accurate information about market participants and transactions), and the
permission to establish new institutions, such as risk rating agencies and mutual funds.
3.2
3.2.1
Restructuring of the financial sector
Retreat of the state and increased foreign participation
In terms of the restructuring of the financial system, two main tendencies are discernible.
On the one hand, the state has retreated from the financial sector, limiting the scope of
its action to supervision and “second floor” banking. On the other hand, there has been
a renewed inflow of foreign capital into the banking industry. Between 1997 and 1999,
the Asian crisis and, later, the Russian crisis precipitated a round of consolidation in the
financial system which, arguably, has not ended as of early 2000. This last round of mergers
and takeovers is analyzed below.
Table 5 below provides a list of events affecting the institutional composition of the
financial system between August 1990 and June 1998. Since August 1990, the administration decided not to transfer resources from the monetary program to the state development
banks. This policy plus the re-organization of these banks reduced the activities of these
banks.
As with other aspects of economic policy, there was no consensus within the administration as to what to do with the state development banks. This can be seen in the following
sequence of measures, some published by the Ministry of Economics and Finance, others
by the cabinet presidency (Superintendencia de Banca y Seguros 1992):
• February 1991: The administration decided to transfer these banks to the regional
governments (DS 041-91-PCM).
• April 1991: The first revision of the financial system’s law, DS 637, declared these
banks under re-organization.
12
• June 1991: The administration announces (DS 143-91-EF) that development bank’s
personnel will be reduced to “achieve financial equilibrium”.
• September 1991: The administration suspends the transfer of development banks to
the regional governments (DS 204-91-EF, given on September 7, 1991), arguing that
“technical and economic circumstances did not favor a transfer”.
• November 1991: DL 754 approves the merger of all the state development banks into
a single bank, the Banco Nacional de Fomento, on the basis of the Banco Agrario. All
state banks are intervened by the SBS. The new Banco Nacional de Fomento would
not receive deposits from the public and give loans for small and micro-enterprises, as
well as to farmers without other source of credit.
• Throughout 1991, several financial institutions were placed under “vigilance regime”,
while others were intervened by the SBS. In most cases, interventions culminated in
liquidation of the affected institution.
Towards the end of 1991 (November), the administration redefined the activities of the
Development Financial Corporation, Cofide, issuing DL No. 725. Founded in 1971, Cofide
undertook medium to long-term financing projects with resources mainly from multilateral
organizations. Despite DL 637 allowing state-owned financial enterprises to compete on
the same terms as private ones, Cofide became a second-tier financial institution. While
retaining its specialty in medium and long-term financing, since 1992, then, Cofide has
channeled its resources through private banking institutions; it has also focused on export
activities and the micro and small business sectors. Besides the Banco de la Nación, Cofide
is the only remaining state-owned financial enterprise.
The April 1992 “autogolpe” by Fujimori was a key moment in terms of policy decisions.
With increased legislative powers (and no opposition from a congress), the administration
swiftly liquidated all state development banks. Four of them were dissolved in May 1992,
one in August 1992. All regional state banks were merged with Banco Continental, which
was privatized in 1995 (Rojas 1994).
The state’s de facto retrenchment from the financial sector was materialized in the 1993
law of the financial system, as mentioned at the begining of this section. Parallel to these
changes, the private sector’s participation in the market was being reconfigured as well.
New participants entered the market, mostly through the acquisition of stock in existing
institutions, but also through the establishment of new institutions.
It should be noted that, unlike Chile since the early 1980s financial crisis, Peruvian
authorities made the decision to allow the establishment of new banks. Just like in the
Chilean case, Peru’s superintendent can deny the permit to establish a new bank. In Chile,
as a result of its financial crisis in the early 1980’s, the superintendent has used this power
13
to avoid the creation of new institutions in the market . According to Julio Velarde (1999),
the IMF encouraged Peruvian officials to adopt a similar policy. This would force new or
foreign entrants into the Peruvian financial market to acquire stock in an existing institution.
However, it benefits the incumbents, since the value of their stock is raised. The Peruvian
superintendence did not abide by the IMF’s suggestion. Instead, it has allowed the creation
of new institutions, as well as the failure of some. The issue of failure is explored further
below.
Among the most notorious trend has been the increased participation of foreign capital.
Measured by the share of banks’ net worth owned by foreign nationals, foreign participation
has risen from 0% in 1990 to 44.4% in 1997 (SBS, 1997) .
The new entrants into the Peruvian market include the Spanish Banco Bilbao Vizcaya
(BBV), the biggest bank in Spain. Unlike its main competitor, Banco Santander, BBV
had traditionally shied away from Latin American markets; acquiring Banco Continental
in Peru was seen as a change in the group’s strategy. Bilbao Vizcaya and Santander are
considered the leading foreign players in Latin America (Warner 1999). During 1999, Banco
Santander and Bancosur merged due to the global merger of their parent companies. Banco
Banex, with partial ownership of the Inter-American Development Bank, was intervened
and liquidation started in November 1999.
The increased foreign participation is significant because a standard recommendation to
avoid banking crisis is, in fact, to allow foreign banks to compete in the local market.
At the end of 1997, it was possible to distinguish four strata in the banking system:
large, medium, small, and banks specialized in consumption credit. Chilean capitals have
an important participation in the latter. The large banks are Banco de Crédito, Banco
Wiese, and Banco Continental, two of which (Crédito and Wiese) were locally owned in
their entirety. Table 6 shows the average asset level per institution, as well as the average
net worth per institution.
3.2.2
Revamping the regulator
While the SBS has been among the few government institutions to cling to its good reputation throughout the years, it is also one that requires a constant upgrade to keep up
with changes in financial markets. Just as important as the regulatory aspect, the supervisory tasks require an effective counter-part in policy discussions with representatives of the
banking system and with the BCR .
Despite being declared under re-organization in 1991, serious efforts to reorganize the
SBS started in 1997. Between 1991 and 1997, efforts were geared towards adapting supervision to the new laws, hiring top-level personnel through consultant positions . The
14
1996 law, in some respects, was the result of effort led by the SBS, which did not escape to
criticisms for being an unnecessary, and even counter-productive, change6 .
During the appointment of Martín Naranjo as superintendent between July 1997 and
August 2000, the SBS made considerable efforts to improve both the operations of the SBS,
as well as its publications. Also, it has been making efforts to upgrade the quality and
timeliness of information it gets from banks (such as daily liquidity ratios). Following an
upgrade of the institution’s computing equipment, publications have been made available
since mid-1997 in electronic format, and online.
The SBS started to imitate the BCR’s scheme for the recruitment of new personnel,
offering its first extension program in finance, banking, insurance and supervision during
the summer of 1998 (Superintendencia de Banca y Seguros (1998), (1999). It has also started
to train its personnel more aggressively with internal seminars taught by foreign professors
and consultants hired for that purpose, sending personnel to courses and internships abroad.
Finally, through agreements with local universities, it has created academic programs in
banking and insurance law, as well as a program in finance and insurance.
In brief, the financial turmoil resulting from the Asian and Russian crisis caught the SBS
“in transit”, not entirely ready to face serious disturbances in the financial and insurance
markets.
3.3
Impact of the reforms on the behavior of banks
Most studies use two sets of measures to follow the performance of banks. The first of
these are intermediation or financial deepening indicators. Among these, typical measures
are ratios of M2 to GDP, rates of growth in credit and deposits, etc. The latter rates of
growth are also used frequently in studies that aim at detecting potential financial crises.
The second set of measures includes indicators of portfolio quality, such as the percentage
of non-performing loans to gross loans. In this sub-section, I review the evolution of these
indicators in addition to some less explored ones.
With the exception of the indicators of financial deepening (which come from BCR
data), the following discussion is based mostly on data collected from SBS publications.
Throughout the years, the availability of SBS published information has been spotty; the
scope of indicators and their frequency has changed. Furthermore, the analysis is complicated somewhat by changing accounting standards.
Generally speaking, there have been considerable expansions in capital, and improvement in efficiency indicators. However, there still is room for improvement comparing to
other countries in the region, and considering that the economic situation is not stable
6
See Cigüeñas (1997) and Velarde (1999)
15
enough.
Some indicators not included here are matching loans and deposits by their maturity, the
structure of bank’s balance sheets, and liquidity indicators. Although changes in the layout
of balance sheets have made these computations difficult, it appears that term deposits
(including certificates of deposit, deposits for severance payments, etc) have increased their
share of total deposits to around 55%. This shift towards longer-term liabilities has yet to
be matched by an equivalent change in the banks’ assets.
3.3.1
Indicators of intermediation or financial deepening
All indicators of financial intermediation experienced a dramatic drop during the hyperinflationary period. Both real domestic credit and real credit from banks to the private
sector (claims on non-financial private institutions) were at their lowest historical points
(since January 1964) in August 1990, a point that can be seen in chart 2. Since then, these
monetary aggregates have recovered extremely fast both in real terms and as a percentage
of GDP (see chart 3).
Real rates of growth in credit are an indicator used frequently by researchers trying
to predict the possibility of a financial crisis. In the wake of the East Asian and Russian
crises, the rates of growth observed in Peru called the attention of researchers (Kaminsky
and Reinhart 1996; Fernandez-Arias and Calvo 1998) as a possible cause of instability in the
country. The argument put forth is that the banking system could be growing excessively
without a corresponding development in management techniques. One consideration that
should moderate this argumentation is that these researchers overlook the degree of financial
disintermediation at the outset of this credit growth spurt. In comparative perspective, as
table 7 demonstrates, Peru’s monetization and credit indicators are low relative to its peers
among the lower middle income countries.
At December 1999, bank claims on non-financial institutions have grown 1,384.2% relative to their level at the end of August 1990, while real domestic credit grew by 543.9%
between august 1990 and November 1999. Growth in real domestic credit was particularly
high during 1997, reaching a rate of almost 60% for the year. This was a cause for concern
for the BCR (Choy Chong 1999) which monitors credit aggregates on a monthly basis.
Liquidity has also grown significantly. Nevertheless, comparing the level of real liquidity
to the average between the first quarter of 1979 and the second quarter of 1988 (leaving
aside the hyperinflationary period), liquidity is still below that historical average.
During this same period, dollarization has risen sharply, as shown in chart 4, where
dollarization is measured in the “traditional” fashion, as the ratio of liquidity in foreign
currency relative to the total. Table 8 shows two additional measurements, using data
16
from the Lima’s clearinghouse (Cámara de Compensación de Lima). The first of these is
the share of check dollar payments (in terms of amounts), which is close to the liquiditybased measure of dollarization. The second is the share of checks in dollars relative to the
total number of checks received by the chamber. This could be construed as a proxy for
the number of transactions occurring in dollars. In these terms, dollarization amounts to
around 35 to 42% of transactions. Thus, what the figures reveal is that dollarization is more
prevalent for large transactions.
CHART 4
DOLLARIZATION RATIO
80.0
70.0
69.8
60.0
60.1
52.9
50.0
40.0
35.1
30.0
20.0
11.6
10.0
0.0
Source: BCRP
The significance of dollarization is mentioned repeatedly throughout this study. In terms
of credit risks associated with lending in foreign currency to the non-tradable sector, the
banks are not protected. Banks do keep a net long foreign currency position (i.e., their total
assets exceed their total liabilities in foreign currency) , which protects them from currency
risk (International Monetary Fund 1998). The currency futures market is incipient and it
only started to operate during 2000.
17
3.3.2
Concentration index
Table 9 presents calculations of two popular indicators of market concentration. The first
of these is the Herfindahl-Hirschman concentration index, which adds the square of each
bank’s share of the market. The close the index is to zero, the less concentrated the market
is. The second is the C-4 index, which is simply the sum of market shares of the top four
banks. The last two columns show, the number of equivalent banks (banks of the same size)
that would produce the observed Herfindahl-Hirschman, and the ratio of existing banks to
equivalent banks. These calculations exclude the state development banks.
As these figures show, concentration in the banking industry has risen in periods of
crises. Between 1980 and 1999, there are three surges in concentration. The first of these
happened in 1983, in the aftermath of the 1982 Mexican debt crisis, and a severe recession
in the Peruvian economy, partly due to the El Niño phenomenon in 1983. The second spike
in concentration occurs in 1988, following the 1987 nationalization attempt by the García
administration, and the beginning of the hyperinflation. The third surge is in 1992, during
the liberalization period.
The charts clearly show that concentration is significantly higher than in the preliberalization period. Moreover, since the figures do not include state development banks,
concentration indexes are actually even higher in the post-liberalization period
It is interesting to notice that concentration in deposits is consistently higher than
concentration of gross loans among the banks in the industry. Some of this is consistent
with a “flight to quality” during periods of economic instability.
Also, relative to other Latin American countries, concentration in Peru’s financial system would seem higher. Calculations done for Bolivia and Colombia revealed HerfindahlHirschman indexes for deposits in 1999 of 1354 and 704, respectively, while the C-4 indexes
were 62.3% and 40.8%, respectively .
3.3.3
Quality of portfolio
Table 10 shows four different sets of proxies for the quality of the banking system’s portfolios.
The most used figures around the world are those for non-performing loans as percentage
of gross loans. Loans are classified as non-performing if they have not been paid for a
number of days after payment was due. The number of days varies with the type of credit;
the Peruvian supervisory agency distinguishes three categories: commercial (15 days; this
was the only type of credit available prior to 1991); month loan (30 days); and consumption
loans (90 days, recording the value of the overdue payments, not the value of the entire
loan). The SBS does not make statistics by type of loan available.
18
Chart 5 depicts the evolution of the non-performing loans ratio every December since
1970. It clearly shows the periods of crisis in the banking system: the 1983 through 1985
crisis and the more recent crisis following the stabilization program and the start of the
financial liberalization period. While the annual data exhibits a peak in 1985, the actual
peak during the 1983-5 crisis was in September of 1985 (18.6%), while the peak in the more
recent period was in September 1990 (20.4%), right after the stabilization started. The data
in table 10 also shows that the rate of non-performing loans has been consistently higher
for foreign currency loans than for domestic currency loans.
CHART 5
NON-PERFORMING LOANS, 1979-2000
(PERCENTAGE OF GROSS LOANS)
20.0
18.0
17.7
16.0
14.0
13.0
12.0
10.0
8.3
8.0
6.1
6.0
4.8
4.0
2.0
1.8
0.0
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
The next set of figures is the percentage of credits considered normal. Since 1997, the
SBS classifies loans by criteria such as customer behavior, and the state of the economic
sector involved, without taking into account any collateral, With this scheme, it considers
five categories of loans: normal, with potential problems, deficient, doubtful and loss. The
short monthly series available shows that normal credits peak in August 1998, at 79%, and
then drop steadily to the 66% shown for September 1999.
The third set of figures in table 10 is the ratio of risk-weighted assets and contingent
credits relative to effective net worth, for the system banking as a whole. The fact that the
ratio has been declining even when assets have been deteriorating shows the efforts made by
banks and the SBS to increase net worth. This summary ratio hides individual differences:
the small to medium, foreign owned banks (Citibank, BankBoston, BNP Paribas-Andes,
Standard Chartered) have much stronger positions than the rest of the system.
19
The final set of figures show the ratio of provisions made for troubled loans relative to
non-performing loans. These figures have to be viewed with some caution. In the first place,
the peak in this ratio is reached during the 1988-1990 hyperinflation, which is probably due
to the fact that debts are eroded by high inflation. Second, the increase in coverage at
the end of 1998 and 1999 is most likely due to the bank interventions that took place (see
below), forcing banks to comply with the required provisions.
3.3.4
Profitability indicators
Table 11 shows the rates of return on equity and on total assets. As is evident, banks only
suffered net losses during 1984 and 1991. Webb’s (1987) hypothesis that banks bore the
brunt of the adjustment cost in the 1983-85 crisis appears hold true when one contrasts the
information with non financial sector data..
Nevertheless, this is only partially true. It should be noted that part of the profitability
is generated by gains made by buying and selling currency. The third column in table 11
computes the net gains due to exchange rate trading relative to the banking system’s net
profits. In a presentation made at the end of 1999, Marthans (1999) suggested that two
thirds of the banks would show net losses if exchange rate trading was taken away from the
banking system. A quick calculation for the banking system as a whole between 1986 and
1999 shows that a zero gain due to trading would have translated into net losses for 1987
through 1990, 1992, 1993 and 1999. In the last year, only seven banks out of 20 would have
made net profits. In other words, when the non-financial sector is doing poorly and the
exchange rate is fluctuating, banks are kept afloat by a secondary line of business: trading
with foreign currency.
3.3.5
Interest rates
Table 12 shows the evolution of interest rates between 1980 and September 2000. As
expected, lending interest rates have been high in real terms in the post-liberalization
period, reaching their lowest level in 1996. There are several factors at play: monetary
policy, capital inflows, and competition between banks. Despite liberalization of the current
account, interest rates on foreign currency loans are still high relative to the U.S. prime rate;
although the spread has declined, there is still a significant margin.
Increasing competition between banks should lead to smaller spreads between saving
and lending rates. The data shows that the spreads are still very high. This could be due
to several reasons: lack of competition (which could be supported by the concentration
indicators shown above), increased capital requirements, and the quality of the banks’ assets. Rojas (1998) tried to explain the observed spread between 1991 and 1996 using bank
20
individual level data. In his regressions, concentration was the most important determinant
of the spread in domestic currency rates, while country risk was the most important explanatory variable for the spread in foreign currency rates. Non-financial expenditures as a
percentage of total expenses was another variable included, but with not much explanatory
power. Rojas did not include any indicators of portfolio quality in his regressions, which
could be positively correlated to the spread and should influence a bank’s perceived risk.
3.3.6
Sectoral distribution of credit
Looking at the sectoral distribution of credit , the percentage of credit going to (completely)
non-tradable sectors such as construction, real estate, retail trade, and services has increased
since 1990. The loser has been the industrial sector, whose share of credit diminished
from averages of 44.8% and 39.1% for the 1976-79 and 1980-89 periods, respectively, to an
average of 28.5% for the 1990-99 period. Nevertheless, the trend during the 1990s is just
the continuation of the trend in the previous decade.
The currency composition of loans clearly shows the level of dollarization (which was also
shown in chart 4): as an average, between 1984 and 1989, 46.1% of total loans outstanding
were denominated in dollars. For the 1990 through 2000 period, this average is 77.4%.
3.4
Dealing with banking problems in the aftermath of the Russian crisis
During the second half of 1998 and most of 1999, policy makers and the financial community
were concerned with the situation of both banks and corporations. As of this writing, there
have been four important cases which illustrate that policy makers were willing (and able)
to follow a case by case approach: liquidate smaller banks, restructure the big ones. While
the crisis has not been systemic, it has been a severe one. Between November 1998 and
December 1999, there were three cases in which the Superintendence acted, and a fourth
one in which there was no “official” action taken.
The strategy followed by the SBS has been different according to the size of the institution involved. Small banks have been intervened and shut down (Banco República and
Banco Banex), while larger institutions (Banco Latino and Banco Wiese) have been given
some breathing room and have been encouraged to restructure.
While the rating of the statistical information provided by the SBS has been praised,
it does not allow the user to distinguish between the good banks and the bad banks before
the crisis erupts. Exploring this issue in full is beyond the scope of this dissertation. The
pertinent question is whether banks are proficient in masking their figures (and thus escaping
SBS in depth audits) or whether SBS officials are fully aware of the problems that banks
are having and is exercising regulatory forbearance
21
In terms of impact in the Peruvian financial sector, neither the Mexican devaluation
of December 1994 nor the East Asian crises starting in July 1997 appear to have had as
much impact as the Russian effective default and devaluation in August 17, 1998. However,
the basic elements of this crisis were laid by the Asian crisis. Peru, as well as most of
Latin America, experienced the double impact of a double shock. The first of these was
the deterioration of the terms of trade, while the second shock was the decline in capital
inflows.
The reversal in capital flows was critical for the banking system. As table 13 and chart
6 show, net short-term capital flows actually increased during 1997. Starting in the third
quarter of 1998 there was a clear reversal in net short-term capital flows to banks; at the
end of 1999, these flows were still negative.
The capital inflow problem was reflected in the banks’ increased reliance on deposits as
a source of funds. However the deposit base contracted every quarter between September
1998 and December 1999. Deposits at the end of 1999 were 6.0% lower than at December
1997. Net loans contracted by 13.3% during the same period, which could be attributable
to an increase in caution on the side of bankers, given the economic slow down. Also in
play (Superintendencia de Banca y Seguros 2000) were private securitization processes of
debt, bond swaps for Treasury bonds, and equity consolidation programs.
The percentage of refinanced and restructured loans increased from 2.7% of net loans
at the end of the second quarter of 1997 to 7.2% at the end of the third quarter of 2000.
Note that these loans are not part of the non-performing loans discussed earlier.
The response of policy makers, particularly the central bank, was to soften the monetary
stand. This was accomplished mostly through decreases in the marginal reserve requirement
on foreign exchange. The central bank decided to reduced marginal reserve requirements
by 4.5 percentage points, but split the reduction over three months (1.5 percentage points
each time). Some government officials interviewed considered this one of the worst policy
mistakes made during the period, the result of underestimating the magnitude of the crisis.
In retrospect, the interviewed officials admitted that a more aggressive expansion of liquidity
was warranted.
3.4.1
Responding to banking problems
The strategy followed by the SBS has been different according to the size of the institution
involved. Small banks have been intervened and shut down (Banco República and Banco
Banex), while larger institutions (Banco Latino and Banco Wiese) have been given some
breathing room and have been encouraged to restructure.
While the rating of the statistical information provided by the SBS has been praised, it
22
does not allow the user to distinguish between the good banks and the bad banks before the
crisis erupts. Exploring this issue in full is beyond the scope of this paper. The pertinent
question is whether banks are proficient in masking their figures (and thus escaping SBS
in depth audits) or whether SBS officials are fully aware of the problems that banks are
having and is exercising forbearance. This question may not be answered, but the scenario
of rumors in the financial community in addition to the frequent negotiations between the
SBS and top banking officials would indicate that the latter case prevails.
This sub-section provides a brief summary of how Peruvian authorities dealt with banking trouble between the second half of 1998 and 1999, summarizes the case of four banks in
distress, which highlights the differential treatment banks receive from the SBS and, more
generally, from the government, according to their size. While trying to reduce the degree
of moral hazard by punishing owners (as losses incurred are written-off against the bank’s
equity and removing managers), the degree to which it enforces these actions depends on
the bank’s size. During 2000, two additional small banks (not reviewed here) were shut
down: Banco Orión, due to persistent deficits in its loan provisions and discrepancies in the
classification of its portfolio, among other violations, and Serbanco, which had experienced
liquidity problems since the intervention of Banco República in 1998 (Apoyo Consultoría
2000).
Banco República: On November 23rd, 1998, Banco República was placed under vigilance. By law, this resulted in the immediate suspension of access to the BCR’s discount
window. Banco República was unable to fulfill its commitments to the BCR and was subsequently intervened and liquidated. Among the main offenses listed by the SBS were not
complying with reserve requirements and an illegal concentration of loans in three borrowers, one of them connected to the group that owned the bank. The bank owners, in the
meantime, blamed government agencies for suddenly withdrawing their deposits.
The fact that the SBS authorized the operation of Banco República was questionable:
The main stockholder in the bank was Francisco Errázuriz, a Chilean senator with a long
history of alleged corruption and fraud in Chile. Moreover, in 1989 a bank owned by
Errázuris in Chile (Banco Nacional) was liquidated by the Chilean superintendence for
similar violations: excessive concentration of loans in group-related firms.
Banco Latino: Two weeks after Banco República’s intervention, on December 9, 1998,
Banco Latino was intervened and then nationalized7 . Banco Latino was the fifth largest
bank in terms of deposits (eighth in terms of loans) in November 1998. The SBS and Cofide,
the government’s second-tier bank orchestrated the takeover. The bank’s balance sheet was
7
Interestingly (in terms of political economy), the word “nationalization” has not made a single appearance in Peru, nor by government officials, nor by any analyst or journalist.
23
cleaned up; the SBS valued the bank’s assets, established the necessary reserves and charged
them against the bank’s capital. Thus, Banco Latino’s equity was reduced to $8 million
(down from US$53.1 million in November 1998). To restore solvency, Cofide swapped debt
(funds discounted by Cofide and lent to the bank) for equity for US$60 million; the existing
shareholder base was reduced to 12% (CreditWeek, January 6, 1999, p. 7). The SBS
appointed two reputable people, Richard Webb (former BCR governor), as president of
Banco Latino’s board of directors, and Henry Barclay (former member of the BCR board
of directors) as CEO. The original plan considered selling the restructured bank at market
price.
Nationalization came on the footsteps of a deposit run, after several attempts to sell
the bank had failed. A former president of Banco Latino (El Comercio, April 14, 1999)
argued that the SBS was unreasonable and demanded an increase in capital of $60 million
within 24 hours. He attributed the banks problems to the fact that, when its sale was
announced, the public sector withdrew, within a year, S/.440 million (valued at the average
exchange rate in the previous 12 months, this would be equivalent to US$141.4 million).
Then, the Russian crisis hit, and foreign credit lines were cut. Government officials argued
that problems ran deeper: Banco Latino was engaged in a process of “ever-greening” loans.
The ”ever-greening” avoided showing increases in the share of credits refinanced or in the
non-performing loan categories, both of which show up as balance sheet items. One way it
was accomplished was by authorizing an overdraft for a credit that became due, following
the overdraft with a new loan. Acknowledging these non-performing loans as such explains
why non-performing as a share of gross loans from 11.0% at end November 1998 to 38.5%
in June 1999.
In December 2000, Banco Latino was still owned by Cofide. In October 2000, amid political unrest, the Ministry of Economics (of the interim administration) published a decree
that would allow the original owners of Banco Latino (the Picasso group) to repurchase the
bank’s debt portfolio at a loss of 85% of the value to the government.
Banco Wiese: After more than six months of rumors about financial problems, the
merger of Banco Wiese and Banco de Lima-Sudameris was announced in mid-February
1999 and the due-diligence was finalized by mid-June 1999.
When rumors started in August 1998 (denied by bank and government officials), Banco
Wiese ranked second (after Banco de Crédito) in both in terms of loans (17.3% of the
market) as well as deposits (16.7% of the market). Banco Wiese was not only a key player
in the market (the second oldest bank in the market), but it was also the center of the Wiese
Group, which includes many firms owned by the Wiese family, which range from fishing
companies, to trade, marketing, insurance, pension funds, etc.
Between October 1998 and December 1998, Banco Wiese increased its capital by US$50
24
million. After the initial merger announcement, there was a lengthy negotiation between
the two parties. The initial deal had the Wiese Group with a share of 47% in the merged
bank. The final version of the deal was considerably more favorable to Sudameris Group:
It controls 64.83% of the bank, versus 35.17% controlled the Wiese Group. In addition, the
Wiese Group was forced to contribute an additional US$52 million in fresh capital.
In terms of government involvement, it is worthy to notice that the additional capital
contributed by the Wiese family was paid with a loan from Banco de la Nación. Additionally, in June 1999 the government issued bonds for US$ 150 millions, under the net worth
restructuring program (see below), which Banco Wiese used to write off the discrepancies between its valuation of its non-performing loans and the valuation of an independent
auditor. Banco Wiese had been the only large bank to resort to express interest in the
first issuance of bonds, back in December 1998. Despite the merger, Banco Wiese saw its
Standard & Poor’s “Pi” (public information) rating downgraded from BBpi (CreditWeek,
March 19, 1997) to Bpi8 (CreditWeek, June 16, 1999, p. 87). Standard & Poor’s argued that
Banco Wiese continued to show weak core profitability, requiring substantial provisions. It
described the merger as “essentially a takeover”.
Banco Banex: On November 29, 1999, Banco Banex was intervened by the SBS and
plans for immediate liquidation were announced. The intervention was preceded by three
on-site inspections of its accounts and procedures since September 1998. On each occasion,
SBS officials found significant “discrepancies” between their assessment of the bank’s loans
(in terms of risk category) and the assessment made by the bank itself. Also, SBS officials
found that the bank had an increasing deficit in allowances for losses.
Banex’s niches in the market were medium and small size firms, especially those involved
in foreign trade and leasing. It was one of the smallest institutions in the market. Based
SBS figures for October 1999, Banex’s share in deposits within the banking system was
0.65%, while it accounted for 0.90% of total gross loans.
A few days before, the stockholders had approved an increase of the bank’s net worth
by US$4.2 million. Nevertheless, that increase would not have been enough to avoid the
superintendence’s intervention, as the reduction in the bank’s net worth still exceeded 50%.
3.4.2
Measures to address the financial crisis
Table 14, summarizes events reported by the Superintendence and the media with impact
on the bank’s financial statements. All the events imply some kind of bank restructuring,
8
A rating of “BB” or lower by Standard and Poor’s indicates vulnerability. The downgrade is from
“marginal” to “weak” security characteristics, an increase in the likelihood of seeing the institution’s ability
to fulfill its financial commitments impaired by adverse business conditions.
25
as banks scrambled to shore up their positions.
The administration approved several programs to deal with the crisis on a system basis:
• First, it approved two bond swap programs, which allowed banks to swap problem
loans for government bonds. The first program was approved for US$300 million in
December 1998; the second program was approved for up to US$400 in June 1999.
Credits classified as losses could not be swapped under either program. The swap
implied a repurchase agreement - banks have to buy one fifth of the swapped loans
every year. Six (small and consumer) banks swapped debt in the first round and ten
did it in the second round. The latter included more medium and one large bank:
Banco Continental.
• It also created an “Equity Consolidation Program”, by which the government could
invest temporarily in a bank’s shares. The amount authorized at the end of June 1999
was US$150 million, giving banks until December 1999 to utilize the program.
• During the first week of December 1999, the SBS approved a legal change that would
allow banks to “capitalize” loans to firms.
Both programs required certain commitments from the banks, such as accumulating
earnings, strengthening internal controls, fresh cash capital increases, etc .
Despite these efforts, banking problems persist. In the wake of the Banco Bánex case,
Moody’s downgraded Interbank’s financial strength rating to D (from D+) and placed it on
negative outlook. It also announced that the ratings for Banco de Crédito and Banco Continental were under review for possible downgrade (Moody’s Investors Service 1999). This
announcement comes about two months after rumors circulated among banks, according
to which Banco de Crédito was not performing well and that BBV might sell its share in
Banco Continental Banco.
In brief, between 1998 and 1999 Peruvian banks experienced a severe crisis. The fact that
it did not become systemic is attributable to a great extent to the SBS’crisis management
(which did not let banks actually get to the point of failure), the programs created ad hoc
by the administration, the efforts made to increase banks’ net worth, and the relaxation of
the monetary stance.
4
Concluding remarks
During the 1990s, Peru liberalized its financial system, which resulted in significant restructuring. Even if banking supervision is more strict between 1990 and 1997 than in the
26
previous decade, capital requirements were adequate, etc., the banking system was still at
risk of facing a crisis if the real exchange depreciated suddenly or if there were significant
capital outflows: firms that produce for the domestic market and, therefore, earn domestic currency, would face solvency problems, translating into an increase of non performing
loans. Capital outflows, on the other hand, would impact the banking system by reducing
its sources of funds.
The fragility of the financial system and of the economy as a whole is the result of
the specific type of liberalization and stabilization pursued. The policy decisions of using
monetary policy as the nominal anchor for inflation and lifting restrictions on the capital
account resulted in an increased level of dollarization of the assets and liabilities of the
financial sector. Despite the fact that the 1998-99 banking crises did not become systemic,
banks appear fragile, particularly if one considers that an directly unproductive activity,
such as trading foreign exchange, has become an important source of profit. The asset
dollarization has its counterpart in non financial sector dollar-denominated liabilities. Due
to the wide range of reforms enacted since 1990, especially trade liberalization, a great
portion of the non financial sector is financial distress.
In terms of monetary policy, the lack of commitment of the central bank to maintain
a pegged exchange rate allowed policy-makers discretion in changing the monetary stance
and better absorbing external shocks.
The problems in the banking sector show three issues. The first is the frailty of the
banking system to a crunch in external financial flows and its sensitiveness to devaluation.
The second is that good regulation is not enough: Institutions require time to adapt and
bring supervision practices up to snuff. Despite the SBS’ best efforts, the crisis came too
soon and the SBS was not ready yet. The third issue is that the SBS has been able to
pursue a strategy that distinguishes different bank types: small banks are shut down; big
banks are encouraged (or forced) to restructure. The extent of the moral hazard created by
“too-big-too-fail” consideration when the SBS decides on the appropriate course of action
has yet to be assessed. The case of Banco Wiese and Banco Latino show that the Peruvian
government can still improve its record regarding transparency.
References
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Calvo, G. A. and C. A. Végh (1994). Inflation stabilization and nominal anchors. Contemporary Economic Policy XII (2 (April)), 35—45.
Choy Chong, M. (1999). Interview with Patricia Ledesma, Lima, Peru. October 25.
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Cigüeñas, B. (1997). El sistema financiero y las nuevas disposiciones legales (entrevista).
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Corbo, V. (1985). Reforms and macroeconomic adjustments in chile during 1974-84.
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developing countries: A critical survey. Journal of Development Studies 30 (3 (April)),
578—628.
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(Ed.), The Peruvian Economy and Structural Adjustment: Past Present and Future,
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el tercer milenio. presentation in the 4th annual banking meeting. Technical report,
Universidad de Lima.
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interbank and puts on review for possible downgrade bank financial strength ratings
of Banco de Credito del Peru and Banco Continental.
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1991-1996. Working Paper R-330 (April), Inter-American Development Bank.
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Banca y Seguros.
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Banca y Seguros.
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29
TABLE 1
KEY CHARACTERISTICS OF ECONOMIC POLICY, 1968-2000
Period
1968-1976
1976-1980
1980-1985
1985-1990
1990-1995
1995-2000
Exchange Interest
rate
rate
regime
regime Financial sector
Type of policies
President
General Juan Velasco
"Radical" reforms,
Fixed
Ceilings Nationalization of some banks, creation
"state capitalism"
of development banks; credit programs
specific to sectors and regions. Sector is
closed to foreign investment.
General Francisco Morales Orthodox stabilization
Fixed
Ceilings Sectoral and regional programs
maintained, but reduced.
Fernando Belaúnde
Orthodox stabilization
Fixed
Ceilings Divestiture of nationalized bank. Sectoral
and regional programs maintained.Foreign
investment allowed.
Alan García
Heterodox, income and Fixed & Ceilings Nationalization of banking sector attempt.
price policies
multiple
Increased use of sectoral and regional
credit programs.
Alberto Fujimori
Orthodox
Free
Free Overhaul of legal system towards risk
based practices
Alberto Fujimori
Orthodox
Free
Free Overhaul of legal system towards risk
based practices; privatization of
development banks, elimination of
regional and sectoral credit programs.
TABLE 2
BASIC INDICATORS 1970-1999
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Real GDP
per capita 1/
190.9
193.4
193.4
198.2
210.7
211.9
210.3
205.4
200.5
206.7
212.0
217.4
210.9
181.6
186.7
187.7
202.2
213.9
191.3
165.6
156.5
158.2
152.7
159.7
177.6
187.4
188.5
198.9
196.1
200.1
Annual percentages
Devaluation
Real GDP
(Market
growth
Inflation exchange rate)
5.9
5.6
26.1
4.2
7.6
20.7
2.9
4.3
0.0
5.4
13.8
7.1
9.3
19.2
-21.3
3.4
24.0
18.6
2.0
44.7
30.0
0.4
32.4
59.3
0.3
73.7
46.9
5.8
66.7
18.5
5.2
60.8
36.0
5.1
72.7
48.4
-0.6
72.9
95.5
-11.8
125.1
131.5
5.2
111.5
146.8
2.8
158.3
205.3
10.0
62.9
13.1
8.0
114.6
368.0
-8.7
1,722.3
1,747.8
-11.7
2,775.3
661.2
-3.7
7,649.6
4,131.1
2.9
139.2
77.7
-1.7
56.7
68.6
6.4
39.5
31.7
13.1
15.4
-0.9
7.3
10.2
8.9
2.4
11.8
11.2
6.9
6.5
5.0
0.3
6.0
15.4
3.8
3.7
11.0
Percentage of GDP
Current
Account
-7.8
-6.2
-1.5
6.9
-0.6
-8.6
-8.2
-5.5
-1.5
-0.3
-5.9
-5.7
-7.7
-1.8
-3.8
-3.6
-5.0
-5.6
-5.3
-7.3
-5.9
-5.0
-6.0
-3.6
Public
Deficit 2/ Investment
-0.6
-1.2
-2.4
-4.0
-5.9
-8.1
-8.8
18.1
-8.6
15.1
-5.3
14.4
-0.9
14.1
-3.9
17.7
-6.7
22.1
-7.6
25.9
-10.0
18.3
-6.7
15.3
-3.2
14.2
-6.4
15.9
-8.5
21.0
-10.0
22.1
-9.5
17.8
-7.5
15.6
-2.3
16.6
-3.3
16.6
-2.7
18.6
-2.4
21.9
-2.9
24.4
-1.0
23.3
0.1
24.4
-0.7
24.3
-2.6
21.7
1/ In millionths of 1979 nuevos soles.
2/ Public non-financial sector.
Source: BCRP (various years), Memoria. Lima: BCRP. BCRP (2000), http://www.bcrp.gob.pe/
Total
Savings foreign debt Liquidity
17.1
18.3
19.2
19.3
18.4
17.6
10.3
53.9
15.5
8.9
68.2
13.6
12.9
86.9
12.6
21.0
67.2
12.6
17.1
55.7
15.0
13.5
41.3
15.1
17.7
47.4
16.2
12.8
69.4
16.2
13.9
67.2
16.4
13.9
85.5
15.3
10.0
66.6
13.9
15.3
53.0
12.3
14.4
86.2
7.5
16.0
67.0
7.0
11.8
62.5
5.1
13.0
60.5
6.9
11.6
63.3
9.5
13.0
67.0
11.7
16.6
60.1
13.5
17.1
56.5
15.0
17.4
55.4
18.0
19.4
43.9
19.4
18.3
47.8
21.0
18.1
50.1
22.8
BCRP, Millions of US$
Net International Foreign Exchange
Reserves
Position
323
295
439
532
809
407
-179
-484
-592
426
1,480
793
914
889
1,125
1,493
235
958
192
43
-783
-352
-1,434
357
-440
-105
-1,071
1,304
-55
2,001
311
2,742
595
5,718
1,179
6,641
1,601
8,540
1,718
10,169
2,301
9,183
2,151
8,404
2,538
TABLE 3
STRUCTURAL REFORMS, 1990-1999
Monetary policy
and exchange rate,
Foreign trade
financial sector reform
Labor market
The maximum import
New charter for the
Labor stability legislation
tariff was reduced from central bank approved in was revised to include
50 to 25% in March
1992.
more causes to dismiss
1991; most transactions
workers.
subject to a 15% tariff.
Most restrictions on
private sector current
and capital transactions
were eliminated in 1991.
New law for the financial
system approved in
1991, revised in 1993,
1996 and 1998
The foreign exchange
deposits "frozen" in the
previous administration
were freed; opening
accounts abroad was
authorized.
Privatization of the stock
exchanges; deregulation
of fees and rates charged
by traders.
Public finance
and administration
Reduction in the number of
taxes from 34 to 8;
elimination of most
exemptions.
Property structure
New private investment
law, which guarantees
private property and
guarantees equal treatment
for all investors (including
foreign) and lifts
restrictions on areas
previously reserved for the
Legislation to allow
Consumption tax on fuels Legislation to foster
temporary hirings
was increased; two
foreign investment,
(without the benefit of temporary taxes on wealth guaranteeing the same
stability), and
rights as domestic investors
were established.
apprenticeship programs
and authorizing the
for younger workers.
establishment of legal
stability contract which
cannot be modified by the
Revision of legislation
To reduce personnel, the Land legislation modified
concerning collective
government offered
to allow the leasing and use
bargaining and unions
"incentives" for voluntary of land as collateral for
credit.
retirement
TABLE 3
STRUCTURAL REFORMS, 1990-1999
Foreign trade
The export surrender
requirement and the
official registry of
foreign exchange
transactions were
Reorganization of the
customs system.
Monetary policy
and exchange rate,
financial sector reform
Public finance
Labor market
and administration
Changes in the
Privatization of Statelegislation concerning
Owned Enterprises (by
severance payments to means of a law "promoting
workers
private investment in
SOEs"
A private pension system Elimination of state
was created in 1992,
monopolies in agriculture,
encouraging workers to industry and infrastructure.
join it.
Property structure
Market protection laws:
Anti-monopoly law to
allow free entry and exist
from the market and
regulate business practices;
TABLE 4
MAJOR REFORMS OF REGULATIONS
WITH IMPACT ON THE FINANCIAL SYSTEM
Year
Key policy decisions
1990
Interest rate ceilings are
not modified.
1991
Financial institutions
authorized to receive
deposits and give loans
in dollars (March)
Primary reforms
First reform of the
financial system law
(DL 637, April)
Capital account
liberalized (March)
Complementary reforms
Reform in severance
payments (August)
First reform of stock
exchange law
(November)
1992
New charter for the
central bank
(December)
Privatization of pension
system (December)
1993
Second reform of the
financial system law
(DL 770, October)
1996
Third reform of the
Second reform of stock
financial system law
exchange law (October)
(Law 26702, December)
1998
Liquidity requirements
imposed (June)
Law 26702 is modified
(December)
1999
Law 26702 is modified
(May)
TABLE 5
LIQUIDATION AND MERGERS
OF BANKS, 1990-1997
Institution
State development banks
Banco Minero
Date
Event
Nov-90
Intervention; remained in operation throughout 1991;
merged with "Banco Nacional de Fomento" in Nov.
Vigilance; merged under the new "Banco Nacional de
Fomento"
Vigilance; merged under the new "Banco Nacional de
Fomento"
Intervention; merged under the new "Banco Nacional
de Fomento"
Liquidation
Liquidation
Banco Industrial
Nov-91
Banco de la Vivienda
Nov-91
Banco Agrario
Nov-91
Banco Nacional de Fomento
Banco Hipotecario
May-92
Aug-92
"Associate" banks
Banco Comercial del Peru
1991
Banco de la Industria de la Construccion 1991
Banco Popular
Dec-92
Banco Internacional (Interbank)
Jul-94
Banco Continental
Apr-95
Regional banks
Surmebanc (Banco Sur, Medio y Callao) Sep-92
Banco de los Andes
Sep-92
Banco Amazónico
Sep-92
Banco Nor Perú
Sep-92
Banco Sur del Perú
Jan-96
Liquidation
Liquidation
Liquidation
Privatized; sold to International Financial Holding
(composed by Peruvian Carlos Rodríguez Pastor,
Chilean Osorno Financial Investment, and others)
Privatized between April and August; sold Spanish
Banco Bilbao-Vizcaya (xx%) and Peruvian group
Brescia
Merged with Banco Continental between, SeptemberOctober
Merged with Banco Continental between, SeptemberOctober
Merged with Banco Continental between, SeptemberOctober
Merged with Banco Continental between, SeptemberOctober
Absorbed by Banco del Libertador; merged bank is
named "Bancosur"
New banks
Banco del Trabajo
Banco Solventa
Serbanco
BankBoston
Dec-94
Feb-95
Mar-96
Nov-96
Chilean group Cummins - Financiera Condell
Chilean group Yaconi Santa Cruz - Financiera Atlas
Chilean Banco BHIF / group Cruz Blanca
U.S. BankBoston
Acquisitions
Banco del Libertador
Banco Financiero
Banco República
Banco Interandino
Banco Mercantil
Banco de Lima
Jul-94
Jan-95
May-95
Sep-95
Oct-95
Sep-95
Acquired by Chilean group Luksic
Acquired by Ecuatorian Banco de Pichincha
Acquired by Chilean group Errázuriz
Bought by Banco Santander
Absorbed by Banco Santander
Bought by Italian Banque Sudameris
Source : Rojas (1994), Apoyo (1997), SBS, Memoria (various years).
TABLE 6
THE BANKING SYSTEM AT THE END OF 1997
Banks included
Total
Large
Crédito, Wiese,
Continental
Number
Average assets
of banks (in US$ millions)
25
879.7
3
4,219.8
Medium
Average net worth
(in US$ millions)
74.6
348.1
8
835.2
70.9
10
209.3
40.6
4
139.2
14.2
Interbank, Bancosur,
Latino, Santander,
Lima, Nuevo Mundo,
Sudamericano, Citibank
Small
Consumption
Progreso, Regional del
Norte, Extebandes,
Banex, Interamericano,
Financiero, República,
Comercio, Serbanco,
Boston
Trabajo, Solventa, Del
País, Orión
Source: Author's calculations based on SBS data.
CHART 2
BANK CREDIT TO THE PRIVATE SECTOR, 1964-99
(Millions of December 1999 Nuevos Soles)
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
0
Bank credit to private sector
Domestic credit
CHART 3
INTERMEDIATION COEFFICIENTS
35.0
30.0
20.0
15.0
10.0
5.0
Claims on Private Sector
Total domestic credit
84
83
82
81
80
79
78
77
76
75
74
73
72
71
70
69
68
67
66
65
0.0
64
Percentage of GDP
25.0
TABLE 7
FINANCIAL DEEPENING IN COMPARATIVE PERSPECTIVE
Domestic credit
Liquidity
(Percentage of GDP) (Percentage of GDP)
1990-98
1990-98
average
average
1998
1998
Upper middle income countries:
Argentina
Chile
Brazil
México
Uruguay
Venezuela
3/
43.0
27.4
63.3
73.2
28.2
41.8
23.9
38.7
32.0
67.2
49.8
26.6
40.0
16.5
33.3
19.3
39.6
40.8
26.8
46.7
26.4
32.9
28.7
31.2
45.8
28.3
44.3
19.0
Lower middle income countries:
Bolivia
Colombia 1/
Costa Rica
Dominican Republic
Ecuador
El Salvador
Panama
Paraguay
Peru
3/
31.7
47.9
20.7
29.4
19.7
28.7
38.2
66.1
21.9
12.6
41.7
58.6
26.8
44.6
25.1
37.5
43.9
93.6
23.4
21.7
33.6
40.1
20.2
40.9
26.2
28.1
38.7
61.2
27.0
20.0
40.5
47.8
23.3
43.9
30.1
36.0
46.5
78.8
29.9
28.6
77.8
81.6
60.3
60.3
48.8
50.9
61.2
45.1
59.2
78.1
45.5
47.4
42.6
45.5
47.4
42.6
93.0
94.4
29.0
128.1
133.9
41.3
81.6
81.0
20.2
81.6
81.0
20.2
Other countries:
United States
India 1/
Indonesia
Korea
Malaysia 1/
Thailand
Russia 2/
1/ Data available until 1997.
2/ Data available between 1993 and 1998
3/ Simple country averages
Source : International Financial Statistics CD-ROM, February 2000
TABLE 8
TRANSACTION DOLLARIZATION
Amounts (thousands of Nuevos Soles)
Checks denominated in Nuevos Soles
Checks denominated in Dollars
Total
Share of checks in dollars
Number (thousands of checks)
Checks denominated in Nuevos Soles
Checks denominated in Dollars
Total
Share of checks in dollars
1/ January September.
Source: BCRP
1996
1997
1998
46,023.00
86,573.80
132,596.80
65.3
55,958.20
136,799.39
192,757.59
71.0
62,465.50
221,599.10
284,064.60
78.0
6,507.70
6,225.50
5,775.20
3,544.80
3,604.40
3,530.30
10,052.50
35.3
9,829.90
36.7
9,305.50
37.9
1999
2000 1/
63,587.10 43,645.78
214,291.90 45,299.69
277,879.00 88,945.47
77.1
50.9
4,801.90
3,178.50
7,980.40
39.8
3,188.8
2,276.84
5,465.61
41.7
TABLE 9
BANKING CONCENTRATION INDEXES, 1980-1999
(End of Period)
H-H
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Number
of banks
21
21
22
21
24
24
24
24
21
22
23
24
16
20
22
23
22
25
26
20
1/
Gross
Loans Deposits
1174
1332
1154
1293
1174
1328
1385
1421
1288
1415
1176
1344
1103
1242
1067
1181
1255
1391
1091
1125
965
979
967
1323
1352
1664
1393
1646
1465
1694
1476
1659
1482
1651
1259
1557
1164
1540
1361
1794
C-4
2/
Gross
Loans Deposits
59.7
62.1
58.4
60.7
57.0
62.6
69.7
66.2
65.2
65.1
63.4
63.4
60.9
61.7
59.6
61.3
62.8
62.5
55.6
54.1
53.9
51.7
54.7
74.3
68.3
72.3
68.5
72.9
69.1
73.6
69.3
73.2
68.7
72.9
63.6
70.4
60.4
70.0
66.0
76.0
Number of
Banks /
3/
Equivalents
Equivalents
7.5
2.8
7.7
2.7
7.5
2.9
7.0
3.0
7.1
3.4
7.4
3.2
8.0
3.0
8.5
2.8
7.2
2.9
8.9
2.5
10.2
2.3
7.6
3.2
6.0
2.7
6.1
3.3
5.9
3.7
6.0
3.8
6.1
3.6
6.4
3.9
6.5
4.0
5.6
3.6
1/ H-H is the Herfindahl-Hirschman concentration index.
2/ C-4 is the share of the 4 biggest institution in the total.
3/ Inverse of the Herfindahl-Hirschman index, calculated for deposits.
Source: Author's calculations based on SBS data
TABLE 10
QUALITY OF ASSET PORTFOLIO
(END OF PERIOD FIGURES)
% of normal credits
% of non-performing loans
Provisions
relative to
nonperforming
loans
Year
Risk-weighted
assets relative to
effective net
worth1/
All
1985
1986
1987
1988
1989
-.-.-.-.-.-
-.-.-.-.-.-
-.-.-.-.-.-
-.-.-.-.-.-
-.-.-.-.-.-
-.-.-.-.-.-
17.7
11.8
9.6
9.5
6.1
6.3
3.9
3.3
2.5
1.8
31.5
30.2
20.9
13.3
8.1
68.2
68.3
89.2
123.2
116.9
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
20002/
-.-.9.5
10.5
10.7
10.6
10.0
9.8
8.9
8.3
8.0
-.-.-.-.-.-.-.75.8
75.8
66.0
66.0
-.-.-.-.-.-.-.-.74.7
65.0
65.3
-.-.-.-.-.-.-.-.79.4
77.4
77.8
-.-.-.-.-.-.-.-.89.3
80.7
82.4
-.-.-.-.-.-.-.-.-.63.0
69.0
10.5
10.7
13.0
9.3
7.3
4.8
5.2
5.1
7.0
8.3
10.3
1.7
9.7
10.0
9.1
4.4
3.6
5.3
5.4
6.4
6.4
7.9
14.7
11.0
13.7
10.5
8.2
5.3
5.3
5.1
7.2
8.7
10.8
104.6
62.1
59.2
75.9
75.6
91.1
86.1
90.6
92.1
97.3
88.3
MicroTrade Consumption Mortgage entreprise
All
Domestic Foreign
currency currency
1/ From June 1999 onwards, the SBS subtracts a minimum net worth requirement for market risk from the figure for
effective net worth.
2/ Figures for September 2000.
Source : SBS
TABLE 11
PROFITABILITY
OF THE BANKING SECTOR
(PERCENTAGES)
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
Return on
equity
24.40
19.16
15.60
16.44
-14.33
4.13
23.90
19.36
14.64
17.40
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
7.08
-0.45
8.74
9.57
11.52
18.81
17.98
13.73
8.33
3.77
Return on Exchange gains
assets
to net profits
1.12
-.1.43
-.1.11
-.1.29
-.-0.70
-.0.29
-.2.30
46.1
1.57
103.8
1.73
301.1
1.63
239.3
0.97
-0.04
0.94
0.88
1.11
1.73
1.62
1.17
0.73
0.34
569.2
-.160.2
111.7
62.0
39.6
37.1
42.5
109.2
163.5
Source : Calculations by author based on SBS statistics
TABLE 12
ONE-YEAR INTEREST RATES, 1980-2000
(End of Period)
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
20003/
Domestic Currency
Lending1/ Savings2/ Spread
34.5
32.9
1.2
49.4
56.4
-4.5
49.4
67.7
-10.9
62.0
75.5
-7.7
65.7
79.6
-7.7
44.2
21.0
19.2
39.3
21.0
15.1
31.4
25.3
4.8
791.6
578.5
31.4
934.9
731.2
24.5
311.0
81.6
126.3
230.7
38.2
139.3
135.3
18.2
99.1
72.3
13.2
52.2
39.0
7.3
29.5
33.5
9.9
21.5
30.6
10.5
18.2
30.4
9.9
18.7
37.1
12.6
21.8
32.0
10.6
19.4
27.9
9.3
17.1
Dollars
Lending Savings Spread
-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.-.20.3
7.8
11.6
16.9
5.8
10.5
15.2
5.0
9.7
15.2
4.9
9.9
17.2
6.2
10.4
16.8
5.7
10.5
15.6
5.2
9.9
16.8
5.4
10.8
14.8
4.9
9.4
12.9
4.7
7.9
Inflation
60.8
72.7
72.9
125.1
111.5
158.3
62.9
114.5
1722.3
2775.3
7649.6
139.2
56.7
39.5
15.4
10.2
11.8
6.5
6.0
3.7
3.9
Real DC
Rate
-16.4
-13.5
-13.6
-28.0
-21.6
-44.1
-14.5
-38.8
-51.1
-64.0
-94.7
38.2
50.1
23.5
20.4
21.1
16.8
22.4
29.3
27.3
23.1
US Bank
Spread in $
Prime rate Peru-US rates
20.4
-.15.8
-.11.5
-.11.0
-.11.1
-.9.5
-.7.5
-.8.8
-.10.5
-.10.5
-.10.0
-.7.2
12.2
6.0
10.3
6.0
8.7
8.5
6.2
8.7
7.9
8.3
7.9
8.5
6.5
7.8
8.4
8.5
5.8
9.5
3.1
1/ Between 1980 and 1981 the rate corresponds to the effective interest rate charged by banks before taxes and
fees. From 1991 onwards, the rate correponds to the TAMN.
2/ Between 1980 and 1981 the rate corresponds to the interest rate paid by banks on savings deposits.
From 1991 onwards, the rate correponds to the TIPMN.
3/ Rates correspond to September.
Sources: Central Reserve Bank of Peru; Federal Reserve Bank of St. Louis
TABLE 13
FINANCIAL CAPITAL ACCOUNT:
SHORT-TERM CAPITALS 1/
(MILLIONS OF US DOLLARS)
CHART 6
SHORT-TERM CAPITAL FLOWS TO BANKS, 1996-2000
(MILLIONS OF US$)
Flows to private banks
242
475
-119
-703
-105
-119
19
-44
-224
-368
232
73
-333
-395
-445
129
-1,044
-266
-43
1999 I
-182
-452
II
-820
-376
III
-606
-489
IV
-66
-95
Year
-1,674
-1,412
2000 I
-109
-34
II
25
30
1/ Preliminary figures
2/ A negative sign indicates an increase in assets.
3/ A positive sign indicates an increase in liabilities.
Source : BCR
-200
-400
-600
-800
2
-20
-56
-47
88
-35
4
222
419
-166
-615
-140
00.1
368
437
355
-1,344
-185
0
3
1998 I
II
III
IV
Year
200
2
245
260
309
657
1,471
99.1
-157
38
-201
195
-125
4
88
298
108
852
1,346
3
698
328
431
1,184
2,641
400
2
1997 I
II
III
IV
Year
600
98.1
288
144
-47
-92
293
4
-73
19
37
113
96
3
215
163
-10
21
389
800
2
-96
276
-380
180
-20
1,000
97.1
1996 I
II
III
IV
Year
1989
1990
1991
1992
1993
1994
1995
4
Liabilities 3/
-7
-115
15
134
161
166
560
3
Assets 2/
-212
92
-118
-64
-102
214
-115
2
Net flows
-219
-23
-104
70
59
380
445
96.1
Total short-term
capital flows
-436
308
-66
1034
137
437
637
TABLE 14
BANKING EVENTS BETWEEN APRIL 97 AND SEPTEMBER 2000
Bank affected
Date
Event
Banco del País
May 1997
Permission to start operations (May 13, 1997).
Banco Regional del
Norte
August 1997
The only regional bank that survived, acquired by a
local group. Changed named to Norbank in July
1998.
Extebandes
January 1998
Standard Chartered Bank (England) bought 67.3%
of the stock; renamed Standard Chartered in March.
Banco Solventa
October 1998
Sells S/. 154 million (US$50.5 million) of its loan
portfolio to Financiera Solución.
Banco República
November 1998
Intervened on November 24; liquidation announced
on November 25. Last update of financial statements
is October 1998.
Banco Solventa
June 1999
Split; part of its effective equity capital was set aside
and taken over by Norbank.
Banco Serbanco
June 1999
Receives additional capital.
Banco del País
September 1999
Taken over by Banco del Nuevo Mundo. Banco del
Nuevo Mundo also takes over Nuevo Mundo
Leasing and Coordinadora Primavera S.A.
Banco Wiese
Sudameris
September 1999
Merging process completed (simple reorganization
process), additional capital provided by Banco de
Lima Sudameris.
Banco Solventa
September 1999
Exits the market
Banque Nationale de
Paris - Andes
October 1999
Start of operations (authorization granted during
1998)
Banco Santander and
Bancosur
November 1999
Merging process completed.
Banco Bánex
November 1999
Intervention and liquidation are announced on
November 29.
Norbank and Banco
del Progreso
December 1999
Merged, changing name to NBK Bank early in 2000
Banco Orión
June 2000
Intervention; liquidation announced on 6/6.
NBK Bank
June 2000
German development bank, Deutsche Investitionsund Entwicklungsgesellschaft (DEG) subscribed
$3.7 million in new stock (a share of 6%).
Banco Serbanco
September 2000
Intervention; liquidation announced on 9/8.