Can Emerging Market Bank Regulators Establish Credible Discipline? The Case of Argentina, 1992-1999

49 Pages Posted: 12 Jun 2000 Last revised: 31 Jan 2021

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Andrew Powell

Inter-American Development Bank (IDB); Universidad Torcuato Di Tella - School of Business; Harvard University - Center for International Development (CID)

Date Written: May 2000

Abstract

In the early 1990s, after decades of high inflation and financial repression, Argentina embarked on a course of macroeconomic and bank regulatory reform. Bank regulatory policy promoted privatization, financial liberalization, and free entry, limited safety net support, and established a novel mix of regulatory and market discipline to ensure stable growth of the banking system during the liberalization process. Argentina suffered some fallout from the Mexican tequila crisis of 1995, but its response to that crisis (allowing weak banks to close) and the redoubling of regulatory efforts to promote market discipline after the crisis made Argentina's banking system quite resilient during the Asian, Russian, and Brazilian crises. Argentina's bank regulatory system now is widely regarded as one of the two or three most successful among emerging market economies. This paper traces the evolution of the regulatory policy changes of the 1990s and shows that the reliance on market discipline has played an important role in prudential regulation by encouraging proper risk management by banks. There is substantial heterogeneity among banks in the interest rates they pay for debt and the rate of growth of their deposits, and that heterogeneity is traceable to fundamental attributes of banks that affect the riskiness of deposits (i.e. asset risk and leverage). Moreover, market perceptions of default risk are mean-reverting, indicating that market discipline encourages banks to respond to increases in default risk by limiting asset risk or lowering leverage.

Suggested Citation

Calomiris, Charles W. and Powell, Andrew P. and Powell, Andrew P., Can Emerging Market Bank Regulators Establish Credible Discipline? The Case of Argentina, 1992-1999 (May 2000). NBER Working Paper No. w7715, Available at SSRN: https://ssrn.com/abstract=232101

Charles W. Calomiris (Contact Author)

Columbia University - Columbia Business School ( email )

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Andrew P. Powell

Inter-American Development Bank (IDB) ( email )

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Universidad Torcuato Di Tella - School of Business ( email )

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Harvard University - Center for International Development (CID) ( email )

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