Is Deposit Insurance Inevitable? - Lessons from Argentina
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Description
This chapter explores the decision by the Argentine government to abolish deposit insurance, and its subsequent decision to reestablish a form of deposit insurance. Prior to 1991, the Argentine banking system operated under a regime of optional, explicit deposit insurance, coupled with extensive implicit deposit insurance in the form of central bank assistance to failing banks. In 1991 and 1992, Argentina reversed this policy by repealing the country's deposit insurance program and attempting to convince financial markets that it would not under any circumstances rescue a failing bank. In 1995, in the face of a forthcoming election and a severe economic crisis sparked by the Mexican peso devaluation of December 1994, the Argentine government reinstituted a form of deposit insurance in an effort to stave off an all out bank panic. The decision to reestablish deposit insurance appears inconsistent with repeated assurances from high-level officials to the effect that the Argentine government would not under any circumstances bail out depositors in a failing bank. Beginning in December 1994, Argentina's banking system entered a major period of instability triggered by the peso devaluation and subsequent economic crisis in Mexico - the so-called tequila effect in which the Mexican problems spread out to other countries in the region and even elsewhere in the developing world. The connections between the Mexican crisis and the loss of investor confidence in Argentina are somewhat difficult to determine. Argentina does not maintain particularly close economic ties with Mexico, so that the economic problems in Mexico, while they might have some direct adverse impact on the Argentine economy, were not sufficiently serious to trigger a major financial panic. Moreover, the Argentine economy was organized quite differently from Mexico's, and did not appear vulnerable to the kind of problems that plagued the latter country (for an optimistic account, see República Argentina, 1995). While the Mexican central bank had inflated the money supply in 1994 as a means of enhancing the ruling party's election prospects, the money supply in Argentina had remained stable or even fallen. Prices in Argentina were stable, and the Mercosur trade pact with Brazil and Uruguay promised further economic growth.
Source Publication
Economic Dimensions in International Law: Comparative and Empirical Perspectives
Source Editors/Authors
Jagdeep S. Bhandari, Alan O. Sykes
Publication Date
1997
Recommended Citation
Miller, Geoffrey P., "Is Deposit Insurance Inevitable? - Lessons from Argentina" (1997). Faculty Chapters. 2037.
https://gretchen.law.nyu.edu/fac-chapt/2037
