“BANKING CRISIS IN AN UNDERDEVELOPED COUNTRY”

 

Trabajo de Post Grado sobre la Crisis venezolana, presentado por Anabella Frontado Carrasco. (INGLES)

Trabajo de Post Grado sobre la Crisis venezolana, presentado por Anabella Frontado Carrasco. (INGLES)


Degree Title: BA/BSc Business Economics and International Relations and Combined Studies


Department of Economics, London Guildhall University
2003


ABSTRACT


The paper examines the reactions of economic agents to the banking crisis lived in Venezuela in 1994. Analysing the causes of this crisis from the point of view of the president of the Central Bank of Venezuela, Ruth de Krivoy, in the moment of the crisis. Venezuela has been since the 1970’s a developing country with an economy dependant on oil. As a member of the OPEC, Venezuela has slowly been growing in economic terms but the base where this economy was built was not strong enough so therefore the illusion of living out of the exportation of one natural resource will form part of a fantasy. The case studied was that of the banking crisis that took place in 1994, where 8 commercial banks, went bankrupt one after another. Banco Latino, one of the most respectable banks and largest bank of Venezuela at the time, was the first one of eight commercial banks to collapse. This was the beginning of one of the worst crises that the country has suffered until to date. This paper focuses on how a banking crises develops explaining the problem of Latin American economies, specifically the case of Venezuela. It also explains how this problem can be avoided through regulations and policies for both depositors and bankers.


Word count: 5,618.00


ACKNOWLEDGEMENTS


Special Thanks to Ivonia Rebelo for her help and orientation on this project.
Very special thanks to Gustavo Gomez Lopez - chairman of the Banco Latino for the period of 1992-1993 - for his unconditional help, providing me with all the possible existent information on the Banco Latino case. Thank you so much.


CONTENTS
1. INTRODUCTION
2. VENEZUELA’S ECONOMIC ENVIRONMENT IN THE EARLY 90’s
2.1. The role of the government and the Oil Industry
2.2 The economic recession
3. THE VENEZUELAN BANKING CRISIS OF 1994
3.1 Background:
3.1.1 1988-1993 Carlos Andres Perez presidency of the Republic.
3.1.2 Economic Policies from the government.
3.2 The Crisis:
3.2.1 The structure of the Venezuelan Banking Industry.
3.2.2 What triggers a banking crisis. Theories and Case study
3.2.3 Case analysed: Banco Latino.
4. THE STEPS FOR RECOVERY
4.1 The role of the deposit guarantee fund (FOGADE – fondo de garantias de depositos).
4.2 FOGADE’s response to the Banco Latino crisis.
5. FINAL COMMENTS AND RECOMMENDATION


REFERENCES
APPENDIX
A Review: “Five Norms and a Golden Rule to manage a Central Bank and promote a Financial Crisis without dying in the attempt”. By Gustavo Gomez Lopez
1.INTRODUCTION
Since the early 1980’s banking crises have occurred with increasingly regularity in developing countries. Banking crises are complex because they have multiple causes. Banks play an important role as issuers of monetary liabilities and providing clearing services, these crises have created a serious reaction on policymakers and regulators around the world. A crises develops through a long and deep process that is not easily traced. Its impact is quick and violent and spreads to the full range of people’s activity. In Latin America, banking crises emerged because of the problem with external debts. The problem of banking crisis in Latin America is a different from the rest of the regions, because it emerges from the fact that the financial markets are characterised by a lower ratio of financial intermediation relative to GDP, less will of investors to commit to long-term funds and higher volatility in deposits markets. Investors confidence that financial assets will turn into a positive long-term rate of return is weaker in this region than in the rest of the countries. The majority of the financial systems in Latin America are very fragile giving space for consequences such as a sharp reduction on deposits. This fragility is also related to the high costs of restructuring a banking system after a crisis.


2. VENEZUELA’S ECONOMIC ENVIRONMENT IN THE EARLY 90’s

By 1989 the president of Banco Latino, Pedro Tinoco, resigned to take over the presidency of the Central bank of Venezuela, remaining an important shareholder in Banco Latino. Although this was not against the law, it pointed out some personal interest from Pedro Tinoco in keeping the bank in a good economic situation.


2.1 The role of government and the Oil industry

Venezuela’s approach to managing its economy has always been associated with politics. Many citizens suspected the wrongdoings of some bankers in complicity with politicians. Few banks, including Banco Latino were forced to give higher interest rates in order to attract or convince depositors to risk their funds. This gave signs that these banks were unhealthy. The problem of Venezuela should not be explained and it will never be understood properly if is not started with the influence of Oil in the economy. Venezuela’s dependance on Oil shows that the economy is highly sensitive to Oil prices. An Oil boom in the 1970’s made venezuelans think that they lived in a paradise, with increasing investments and expansion of productive capacity beyond the availability of natural market for the country’s products. This allowed the country to cover up inefficiencies that most of the countries could not do but the country’s economy was not a stable one from the fact that when oil prices increased so did the government expenditures but when oil prices declined, government spending did not do so. The government applied policies during bad times when oil prices were falling but as soon as they recovered such policies were abandoned. With this sort of climate Venezuela’s economy became one of the most volatile economies of Latin America. The Oil created two economies in the country, the oil sector and the non-oil sector, where the oil sector dominates the non-oil sector, creating in this way dependence upon oil revenues.

When Venezuela left its last dictatorship in 1958 and started moving towards democracy, government intervention in the economy increased but there was no much will in restructuring the non-oil sector for its development.

2.2 The economic recession

By the 1980’s The financial system was poor in Capitalisation. Banks weakened and depositors started seeking for higher returns by sending their money abroad.

3. THE VENEZUELAN BANKING CRISIS OF 1994

On January, 1994, Banco Latino one of the most powerful banks of Venezuela collapsed. Months before the collapse the bank had showed signs of weakness but people took the optimistic view that such a secure bank will never be harmed. Within 3 weeks, approximately one third of the Venezuelan banking system was either forced to shut down or collapsed causing the country a cost of 11 to 13 percent of its GDP.

3.1 Background:

3.1.1 1988-1993 Carlos Andres Perez presidency of the Republic.
Carlos Andres Perez, a centre-left from the political party Accion Democratica (AD – democratic action) had been in the presidency for the period 1974-1979, a period where the oil boom took place. Many voted him thinking of the illusion of going back to prosperous past times but the president once re-elected realised that the gold era had come to an end and decided to take a radically different approach to his second term announcing free-markets reforms supported by the International Monetary Fund (IMF). Venezuela had to face competitiveness and learn to succeed in a world market economy.


3.1.2 Economic Policies from the government.
Monetary policies shifted from direct government control of interest rates to open market operations that the Central Bank conducts by issuing zero-coupon bonds with the intention to slow inflation. While this reform was making the impact the oil prices increased as a consequence of the Gulf War. The bonanza overshadowed the need for reforms again but the economy did not become stronger. The reform was not being successful, studying riots and criticism that blamed the government of the poor quality of the economy.


3.2 The Crisis:

3.2.1 The structure of the Venezuelan Banking Industry.
Banks were becoming weaker after all the difficulties, Banco Latino instead became one of the most aggressive competitors by the end of 1989, in terms of deposit market share. It was perceived as profiting greatly because of its influence from central bank president Pedro Tinoco. Banks’ performance seemed to recover by the end of 1989, the use of Central bank loans declined as the liquidity of the banking system began to improve. Demand for money recovered and bank deposits grew during 1990-1991.

3.2.2 What triggers a banking crisis. Theories and Case study
First , it should be explained what constitutes a definition of Financial Crises. Some clear definitions have been outlined in the work of Sundararajan and Balino “Banking Crises: Cases and Issues” (1991). A demand for reserve money so intense that the demand could not be satisfied for all parties simultaneously in the short run (Schwartz – 1985; Miron – 1986; Wolfson – 1986). A Liquidation of credits that have been built up in a boom (Veblen – 1904; Mitchell – 1941). A condition in which borrowers who in other situations were able to borrow without difficulty become unable to borrow on any terms- a credit crunch or a credit market collapse (Guttentag and Herring – 1984; Manikov – 1986). A forced sale of assets because liability structures are out of line with market-determined asset values, causing further decline in asset values (Fisher – 1933; Flood and Garber – 1981; Minsky – 1982). A sharp reduction in the value of banks’ assets, resulting in the apparent or real insolvency of many banks and accompanied by some bank collapses and possible some runs (Federal Reserve bank of San Francisco – 1985)

Banking Crises and Financial Crises causes and consequences cannot be generalised owing to cross-countries differences in macroeconomic conditions, the regulatory framework, the intensity of the crisis and the approaches used to deal with it. The failure of managers and the ethic problems of the bankers equally to the lack of supervision and banking regulation that should avoid this, have contributed to what conforms theories or possible explanations to a Banking crises. There are some economic approaches that try to explain the nature of these problems.


- The Economic Cycles or the Keynesian approach: The Business Cycle by Minsky 1977, also called the “the vision of the economic cycles” or “the financial fragility of the banking crises” During profitable periods, economic agents demand loans to buy real or financial assets with the hope to make capital profits with expectations within the expansion of the economic cycle. In other words this model holds that the financial environment responds endogenously to the state of the business cycle or to some “displacement “ i.e liberalization of the financial sector, that opens up opportunities for profit. The hypothesis is that financial fragility increases over the course of business cycle expansion and in response to some displacement. (Sundararajan and Balino –1991) Financial fragility increases when rising interest rates, they rise because of the inleasticity of the demand for credit. Credit rises rapidly and lenders start to restrict lending as cash flow problems of firms accumulate and nonperforming loans build up. Banks behave stricter with lending policies but also attempt to meet loan demands from their prime customers by decreasing the growth of nonloan investments in relation to loans and if necessary reducing excess reserves and increasing the resource in the money markets. These developments make the economy more vulnerable to a crisis by reducing the capacity of the financial system to withstand a shock. This interpretation of the role of credit in the economic cycles could be used to explain the emergence of banking crises because in the phase of recession at the end of the cycle, financial institutions could face problems of solvency if credits of assets lose their value and if depositors start to realise this difficulties then there could be a significant reduction in the volume of deposits causing the bankruptcy of these financial institutions because the devaluated value of real assets would not be enough to cover up with the retire of depositors’ savings.

- The Monetary approach: this approach holds that banking crises are not cause by endogenous factors and are not inevitable events but rather they are the result of the instability provoked by monetary politics because of its immense capacity to produce strong increases and decreases in prices and in the level of economic activity. This is also called the “The monetary offer approach” by Friedman 1959 and Schwartz 1963. According to their research, Financial crises are consequences of the actions taken by Central Banks. A Financial crises can always occur when the control of monetary demand and supply of the Central Bank is erratic and excessively restrictive. Banks are forced to sell assets to get reserves reducing the prices of these assets and therefore increasing interest rates causing insolvency in the financial system.

- The Expectations of banks’ run-out approach: by Diamond and Dybvig in 1983, according to this theory banks are characterised for not having liquidity, this means for transforming short-term deposits into assets that will expire in the long-run. This approach focuses on the expectations of depositors and that these expectations could change even for non-economic factors. It takes only the rumour that a bank is in trouble for depositors to take all their savings out of that particular bank. In this sense the Deposit Insurance should provide the necessary stability. This model holds clearly the advantages of the existence of Deposit Insurance because they protect the financial institution due to their vulnerability to a run-out of deposits.

- The lack of information and social knowledge approach: certain economic events are characterised for a process of education in which generation and transmission of information plays a very important role. Due to the existence of failures in the process of transmission of information in the markets, not all the economic agents perceive in the same way and at the same time the evolution in the economic environment, including the quality of the asset portfolio and the state of solvency of the financial institutions. When a bank runs out of deposits , its just reflecting a process of revelation of information, which was kept in private until certain moment. When this information goes to the public eye, banks immediately start losing their deposits leading to a possible a bankruptcy of the bank. Caplin and Leahy developed this theory in 1994 and it could also be called “Social Knowledge”. The model does not try to explain the economic factors that provoke the insolvency in a bank, it just tries to explain the factors that provoke a run-out of deposits of a bank in a determined time. This model is like the culmination of the process revelation and transmission of information that has developed in the markets. Caplin and Leahy also hold that not all the depositors know about the quality of the bank’s asset portfolio due to the existence of failures of information in the markets. In consequence there is the existence of incomplete information on the real capacity of financial institutions to satisfy their depositors needs. A raise in the interest rates sometimes are signals of a possible crisis within a financial institution.

All this theories of banking crises cannot be applied on its own to explain the problem of Venezuela but all of them in macroeconomic and microeconomic terms have the arguments and facts that could possibly explain the problem.

We could affirm that they are complements in the case of Venezuela. The challenge is to explain the interaction of events that provoked the collapse that in just one year affected 60% of the assets of the financial system and reached a proportion of 20% of the country’s GDP.

Not many financial institutions showed up as in lending. Prudent finance companies focused on lending while the more aggressive banks such as Banco Latino focused on investments such as long-term projects in tourism and real estate. Some of these investments were followed by a potential risk. It looked like good investments since the economy was expanding, but these funds used to finance these long-term investments usually carried short-term maturities but there was the optimism that the Venezuelan economy was going to be a success. On February, 1992 an attempted Coup d’etat led by actual President Lt. Col Hugo Chavez Frias, brought down the optimism and showed the discontent of the population with the government’s economic reform, and as it had happened before, capital rapidly fled out of the country. Real estate and share prices decreased. Oil prices declined making things worse and financial market investors worried about the weakness of the government and its finances. The prices on The Caracas Stock exchange plunged by 43 percent between February and November 1992. The banking system began to crack, the political system was fractured, relations between government and congress were getting worse, political instability hurt the economy causing a loss of deposits. The situation was putting all banks under so much pressure.

During 1992, analysts of the Central Bank did a deep study of the banks and financial institutions. Several banks gave signs of trouble, one of them was Banco Latino, they were desperate for cash, their interest rates were far above from their competitors. It was also known that Banco Latino had invested in those long-term projects affiliated with companies. Loans had been lent by bankers optimistically rather than cautiously. A report from the Central bank in 1992 classified the banking system into three categories, low, medium and high risk. Nine financial groups (15 percent of total financial sector liabilities) were classified to be in high risk, five of them failed in the following 18 months. Ten financial groups were classified to be in medium risk (30 percent of liabilities) – Banco Latino was one of them - seven of these failed in 1994.

Another attempted coup d’etat in November 1992 made matters even worse.
There a five possible causes that can explain the case for Banco Latino. The crisis would be the result of a deep change of the economic cycle, provoked by the strong uncertainty in the political and social framework which led to a profound financial instability. This uncertainty raised as consequence the decrease in deposit which led to the bankruptcy of a group of financial institutions. Another possible explanation holds that crisis was developed due to the lack of supervision and regulation of the financial system because of the weakness of the Government Institutions that were supposed to do so. If these institutions had done their work properly then probably the financial crisis would have been weaker or maybe it had not even occurred. Another argument holds that another reason of the crisis was the combination of the liberated interest rates in a unstable macroeconomic environment and the negligence of the regulation and supervision of the financial system. Together with these hypothesis some have even argued about the possible corruption of between Bankers and Politicians accompanied of the negligence and even conspiracy of public employees. Finally it has been pointed out that the crisis had been growing through time and that it was inevitable to avoid it justifying in this way the enormous costs that this has signified to the Venezuelan population. The reality of the problem was never revealed, all the closure of banks brought up scandals about how corrupted were the directors of these financial institutions but even if this was the case, it is impossible to explain the collapse of so many banks in such a short period with these theory of corruption, because this was obviously a problem that started from decades ago and cannot develop in just one year.

Table 1 that shows all the banks intervened, closed or nationalised since 1994.
Bank Date Deposits
Bils Bs Fogade’s
assistance
Bils Bs %of system
as of
31/12/1993 Action
Banco Latino 1/1/94 134 331 8.6 Closed. Depositors onshore and off paid up to Bs 10 Million plus proceeds from liquidation. Some branches since sold. Other assets to be transferred to leasing company and sold
Banco Comercial
Amazonas 14/6/94 5 16 0.3 Closed. Depositors paid up to Bs.10 million
Bancor 14/6/94 22 82 1.4 Closed. Depositors paid up to Bs.10 million
Banco Barinas 14/6/94 21 70 1.3 Closed. Depositors paid up to Bs.10 million
Banco Construcción 14/6/94 58 261 3.7 Closed. Depositors paid up to Bs.10 million
Banco La Guaria 14/6/94 27 141 1.7 Closed. Depositors paid up to Bs.10 million
Banco Maracaibo 14/6/94 131 306 8.4 Closed. Depositors paid up to Bs.10 million
Banco Metropolitano 14/6/94 63 352 4.0 Closed. Depositors paid up to Bs.10 million
Banco Popular 14/6/94 5 0.3 Intervened and nationalised. To be sold at auction
Banco de Venezuela 9/8/94 143 91 9.2 Intervened and nationalised. To be sold at auction
Banco Consolidado 5/8/94 63 107 4.0 Intervened and nationalised. To be sold at auction
Banco Andino Venezolano 10/11/94 6 7 0.4 Intervened and nationalised. To be sold at auction
Banco Progreso 13/12/94 64 433 4.1 Closed. Deposits transferred to state-owned institutions
Banco Republica 13/12/94 35 22 2.2 Intervened and nationalised. To be sold at auction
Banco Italo-Venezolano 2/2/95 30 132 1.9 Closed. Deposits transferred to state-owned institutions
Banco Principal 2/2/95 32 133 2.1 Closed. Deposits transferred to state-owned institutions
Banco Profesional 2/2/95 12 24 0.8 Closed. Deposits transferred to state-owned institutions
851 2509 54.4
Excluding Fiveca and other finance companies
Source: Arocha & Rojas, FOGADE


3.2.3 Case analysed: Banco Latino
The first step in a the long process of weakening and collapse of the Venezuelan banking system came with the legislative reform of 1975 and the reorientation of the economic process undertaken pursuant to the Fourth National Plan. Until 1975, the Venezuelan banking industry had been highly capitalised with a 7.57% capital coefficient in 1974 , nearly as high as agreed upon by the developed countries 14 years later in Basle, accustomed to perform its intermediation function in a stable macroeconomic environment and in an economy which was closed, protected and in almost uninterrupted expansion since 1935. This reform reduced the minimum capital coefficient almost in half, from 7.69% to 4.76% by increasing the bank’s authority to borrow from a 12:1 ratio to a 20:1 ratio. This was done to facilitate the internal circulation of the new oil income. After the collapse of some important banks neither the monetary and banking regulatory authorities nor the national and foreign banks paid attention to the many red flags going up in the financial market. The Central Bank of Venezuela kept the most overextended banks afloat by channelling liquidity support to them in a proportion of 3:1; this policy was kept up even though it implied sacrificing the goal of preserving the currency’s stability. The Superintendency of Banks issued no resolution implying that it had understood the prevailing situation. The system was going from bad to worse. The Venezuelan private commercial banking sector’s adjusted capital coefficient stood at 3.25% at the end of 1988, one half the minimum level required by the Basle Convention.

The banking crisis occurs in a similar environment to the banking crisis of 1960-1963, after a period of expansion fundamentally of oil origin, the country acquired a a significant debt and a deep recession in a time of political instability. In these circumstances there was a deep fall of the demand for money, particularly in the deposits. In consequence we can say that this coincidence or simultaneity of a decrease in the deposits and a contraction. January, 1994, Banco Latino was not able to clear checks. Television and Radio spreaded the news of the Latino Crisis. The bank had not been closed or taken over by the government. The bank’s board of directors announced that the bank would not open the following day. The shutdown immediately froze about $3.3 billion in depositor funds and $111 millions in interbank deposits. Normally depositors would have to wait a long time to get their funds back but they always did, in the case of the Banco Latino the situation was different.

Banco Latino was the subject of a rumour campaign in 1993 involving its financial position. It became more intense as of November of that year. Documents on the Banco Latino crisis show that in December of that year , the office of the Superintendent of Banks believed that the loss of the institution was estimated at approximately six billion bolivars. Starting in January 1994, the situation became increasingly difficult due to massive deposit withdrawals which had a serious impact on the liquidity of the bank and distorted the instalment structure of its liabilities , creating an imbalance at the institution, which was impacted strongly, especially when it had problems accessing financing from the interbank market, as well as from the last resort lender, in other words, the Venezuelan Central Bank, which excluded Banco Latino from the clearing house on 13th January of that year, thus ordering its government takeover automatically, taking place on the 16th January 1994.

During the management of the Bank’s crisis, before its departure from the Clearing House, the Venezuelan Central Bank maintained that the Entity could not access the benefit of any eventual financial assistance without an order for its takeover by the government. This position contrasts with that assumed later, only a few days aster the bank was taken over by the government, during the management of the financial crisis of the eight institutions which started to have problems involving massive deposit withdrawals.

Table 2 that shows the Venezuelan Banking System by 1996 after the interventions.

Type of institution Number of
Entities Assets Loans Deposits Capital Profit
Commercial Banks 39 4,819 1,341 3,683 552 219
Investment Banks 20 315 158 209 60 15
Mortgage Banks 7 104 62 89 0 1
Leasing companies 18 70 49 43 20 5
Saving institutions 21 294 62 172 18 5
Total 105 5,601 1,672 4,196 659 245
Source: Superintendencf Banks and
other financial insitutions

4. THE STEPS FOR RECOVERY

4.1 The role of the deposit guarantee fund (FOGADE – fondo de garantias de depositos).

The deposit guarantee fund was established in 1985 and was intended to function like the FDIC U.S Federal Deposit Insurance Corporation. Fogade was also in charge of recapitalizing or liquidating banks and granting short-term loans to shore them up. It needed the approval of the Central Bank and the minister of finance before taking any action.

Until the time of the creation of the Deposit Insurance and Bank Protection Fund, financial assistance for banks facing liquidity and financial stability problems was handled directly by the Venezuelan Central Bank. Although , some specific liquidity problems were handled through a mistaken practice by governments consisting of realising deposits with funds from the Federal Government’s Treasury or other government institutions to mitigate liquidity symptoms and artificially prolong the life of the troubled bank, making it impossible to tackle and correct the real causes which originated the insolvency.

In 1985, a new chapter began with the Deposit Insurance and Bank Protection Fund, as a new form of financial assistance for the banking system. The legal instrument which governed such Agency was originally the Organic Statute on the Deposit Insurance and Bank Protection Fund. The Article 2 of the Organic Statute defines the purpose of the Deposit Insurance and Bank Protection Fund as follows:
“...2- Act as means of support for the operation and financial stability of any banks and credit institutions taken over by the Government pursuant to the General Law on Banks and other Financial Institutions.

3- Furnish financial support to any banks and credit institutions governed by the General Law on Banks and other Financial Institutions whenever said support is required for protecting the finance system and preserving such deposits set forth in Paragraph 1 of this article. In this case, authorisation by the Nation’s Executive shall be required by way of the Minister of Finance, in concurrence with the Venezuelan Central Bank.”

4.2 FOGADE’s response to the Banco Latino crisis.
The amount of financial assistance to Grupo Latino was in the order of three hundred ten billion bolivars (Bs. 310,000,000,000.00). These funds were applied for and received by the Government Administrative Board, being allocated as follows to cover different Group losses:
Items Amount in Billions of Bolivars
Banco Latino 82
Money Market Fund (Mesa de dinero) 60
Consorcio Latino (Liquid Asset Fund) 146
Trust Transactions 25
In-House Adjustments 10
Total 323

Recovered assets are deducted from the above Bs 323 billion. This established a net flow of funds in the aforesaid amount.

The Financial Emergency Act, as enacted in March 1994, provided for reopening the bank. The Deposit Insurance and Bank Protection Fund had to request funds from the Venezuelan Central Bank, given that the bond issue in the order of 400 billion bolivars, as approved by the Nation’s Executive, had not been issued.

After its protracted closing, Banco Latino was nationalised and reopened on the 4th April 1994. This was an unprecedented case on the history of the Venezuelan Financial System where a financial institution remained closed for a period of 77 days without its timely rehabilitation or an order for liquidation.

The management of the banking crisis of Banco Latino was described by the Office of the Superintendent of Banks and other Financial Institutions as follows:
“In November and December 1993, the second largest bank with a share of 12% in the deposits market, began to have serious liquidity problems, becoming more intense in late December 1993, and early January 1994. This was in contrast with the effectivenes of the new Bank Law on the 1st of January. The liquidity problem became so serious that Banco Latino had to be excluded from the Clearing House on the 14th January 1994, without having a contingency plan allowing for a strategy to manage such situation, which led to a crisis. These circumstances resulted in severe flaws and the lack of policy on managing the crisis of the country’s second largest bank. Due to lack of decision and political agreement, the bank was closed for over seventy days until the 4th of April 1994, the date on which it started returning deposits. Lack of decision and mismanagement of the Bank’s crisis generated an atmosphere of uncertainty and mistrust”

Table 3 that shows the cost of Venezuelan Banking system bailout
Bils Bs.
Direct assistance of Fogade 2,539
Expected recoveries of assets of intervened banks (500)
Proceeds from privatisations and asset sales (247)
TOTAL 1,791
Source: Standard & Poor estimate


5. FINAL COMMENTS AND RECOMMENDATION
Bank crises are events closely related to economic cycles and often their treatment and solution have a high political content which frequently goes beyond actual business reasons. These circumstances are in detriment of the transparency of the process of handling and generating systems crises.
As a rule, solving a banking crisis inevitably costs taxpayer money, but the economic and social cost of the crises surges when government decisions are untimely, unseasonable or late as a result of lack of contingency plans or because of flaws or delays in diagnosing the status of the net worth and financial standing of intermediaries.
The breakout of widespread bank crises as a result if depositor and investor group panic, referred to as domino, becomes maximised when bank system confidence erodes in the public. If materialised, this could originate a system crisis, should financial authorities fail to act firmly enough to convince economic agents operating in the market.
According to traditional theory, losses generated by a bank crisis are to be distributed throughout the market in particular, as stated in the overall postulate. But when crises threaten to become extended or widespread, timely decisions by the government could halt this evil, by limiting, controlling and even minimising it, in as much as any financial collapse, even if it were minor, has a devastating effect on the economic system.
On the basis of its own international experience, The World Bank has stated as follows: “When losses reach a considerable volume a market-imposed solution may be more costly than government measures because it could lead to a hasty withdrawal of funds from banks by the public and losses of foreign credit lines. This difficulty is illustrated by the events in Argentina, Colombia, Chile, Thailand and Turkey. After letting initially that creditors of bankrupt institutions lose money, authorities in each country were forced to give them assistance in order to prevent widespread fund withdrawals from banks. Consequently, quick action by the government is the less burdensome solution both from the standpoint of the economic cost of continuous inefficient fund allocation and accrued financial losses which, in the final analysis, the Government may have to absorb”.

REFERENCES:
Boue, J. C., (1993) “Venezuela: The political economy of oil” Oxford Institute for Energy Studies, England.
De Krivoy, R. (2000) “Collapse: The Venezuelan Banking Crisis of ‘94” by the Group of Thirty, Washington D.C
Garcia Gustavo, (1998) “Lecciones de la crisis bancaria de Venezuela” (in spanish) by Ediciones IESA, Caracas, Venezuela
Group Report (1994) “Latin American Capital Flows: Living with Volatility” by the group of Thirty, Washington D.C
Hausmann, R., Rojas-Suarez, L. (1996) “Banking Crises in Latin America” by Inter- American Development Bank, Washington D.C
Sundararajan, V, and Balino J., (1991) “ Banking Crises: Cases and Issues” by International Monetary Fund, Washington D.C
Other sources:
World Bank Blueprint 1989 – Venezuela, a blueprint for financial sector reforms. (a copy can be provided if needed)
International Monetary Fund 1989 – A program for Financial Sector Reform in Venezuela to President of Central Bank of Venezuela (a copy can be provided if needed)
Latin American Law & Business Report 1996 – Venezuela, Banking Sector by John Chambers and Ursula Wilheim.


APPENDIX
“Five Norms and a Golden Rule to manage a Central Bank and promote a Financial Crises without dying in the attempt”. By Gustavo Gomez Lopez, former president of Banco Latino.

   
   
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