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Policymakers roundtable
Journal of Banking & Finance 23 (1999) 1542±1544 www.elsevier.com/locate/econbase
Policymakers roundtable Pedro Pou
*
President, Central Bank of Argentina, Reconquista 266, 1003 Buenos Aires, Argentina
Abstract In summarizing the conference, I will comment on how a central bank ocial lived through the Tequila Crisis, how it looked from the inside, the lessons we learned, and the policy changes we implemented. Ó 1999 Published by Elsevier Science B.V. All rights reserved.
1. Policy rules... Dierent views on the Mexican crisis' eect on Argentina have been outlined in this conference. Adolfo Sturzenegger based his opinion on internal factors. Guillermo Calvo based his on the impact of devaluation prospects, probably caused by internal weaknesses that were emerging in the second half of 1994 and by the peculiar political situation in Argentina in the ®rst half of 1995. Constitutional reform before the crisis brought, among other things, a total change in the electoral system allowing re-election and requiring an absolute majority for election to the presidency. Previously, Argentina had a less complicated, indirect election system. Thus, there were some very important destabilizing factors, such as expectations that an Argentinean devaluation would follow the Mexican one. There also was political uncertainty that could not be dissipated until after the elections later in the year. Expectations of changing variables were strong enough to induce a signi®cant change in capital ¯ows and the withdrawal of more than 18% of the ®-
*
Tel.: 54-1-348-3500.
0378-4266/99/$ ± see front matter Ó 1999 Published by Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 9 ) 0 0 0 3 1 - X
P. Pou / Journal of Banking & Finance 23 (1999) 1542±1544
1543
nancial systemÕs deposits, as Adolfo Sturzenegger clearly showed. This crisis, though comparable in some ways to the one in the 1930s, was a bit more intense because it lasted only four or ®ve months. In retrospect, I believe analysis will show that the crisis was handled successfully because the central bank was able to ful®ll its two main goals: stability in currency value and stability of the ®nancial system. There was no devaluation, as some Wall Street investors had anticipated. Nor did the ®nancial system break down, the other possibility that comes with a policy of maintaining convertibility at all costs. The quick recovery of deposits, beginning in May 1995, the small number of company closings, the small losses for depositors, and the resolution of this ®nancial crisis, unlike previous ones, at no ®scal cost to the government are factors that con®rm the crisis was handled relatively successfully. 2. ...And Tequila lessons The crisis taught us some lessons about how to improve the ®nancial system, and we have made some changes. In the monetary area, we were left with two lessons. First, if the economic base is solid, any changes in expectations that are not reasonably founded will have no real consequences, but any inconsistency in the governmentÕs near-term ®scal program may indeed alter the convertibility plan. Second, convertibility is more ¯exible than many analysts believe. Convertibility, together with an adequate systemic liquidity policy, enabled the central bank to accommodate the withdrawal of approximately $8 billion in deposits without causing an equal fall in the level of credits, which fell less than one-third that amount. As long as the central bank adopts a reasonable systemic liquidity policy, convertibility is not as much of a straitjacket for the ®nancial system as some may have believed. With respect to the ®nancial system, I believe the most important lesson was to place greater emphasis on liquidity problems. During the ®rst three years of convertibility, the central bankÕs primary focus was on the capitalization of the system ± all our discussions centered on this point. In accordance with the convertibility plan, existing reserves had to be deposited as international reserves and therefore provided resources for systemic liquidity. However, the reserves policy, though good from a global point of view, had some ¯aws related to the disparity in liquidity among various banks. Because reserves are a tax, this tax is levied on those liabilities that are least ¯exible: checking and savings accounts. Therefore, the amount of liquid funds each institution had was based on its percentage of checking and savings accounts in relation to total liabilities, even though these accounts were the most volatile liabilities in the ®nancial system.
1544
P. Pou / Journal of Banking & Finance 23 (1999) 1542±1544
This very important lesson led us to modify the central bankÕs liquidity policy by orienting it toward liquidity requirements, which are the assets the banks have to have, based on their liabilities. These assets must have systemic liquidity, which means they must be foreign assets that have no correlation to Argentine assets so that, in a crisis, banks can have that liquidity at their full disposal. Assets may be high risk or low risk; in this case, we are less concerned about capital requirements than about the liquidity of the assets. This change has been a signi®cant one that imposes the liquidity requirement on all types of assets, not only deposits but also on negotiable debt, bonds and so forth. The only distinction we make is in the maturity of the liabilities. A second lesson is that, considering the central bankÕs limited ability to act as a lender of last resort under the convertibility plan, we should encourage banks to seek their own coverage, and we should establish incentives to induce them to do so. One such strategy is for the banks to associate with foreign banks, which will give Argentine banks access to liquid resources in the event of a systemic crisis. A third lesson is the importance of standardization of assets. We have seen that banks whose assets were structured in a more standard manner had greater liquidity, and that discovery led us to seek a consensus among the banks on policies designed to standardize the structure of certain assets. We had to modify the central bankÕs bylaws in order to respond to situations involving systemic liquidity. The bylaws had previously contained only provisions to address speci®c problems related to liquidity. The ®nal lesson was recognition of the need to create new institutions, the most important of which involves deposit insurance. The central bank had tried unsuccessfully to promote this idea among ®nancial institutions during the early years of convertibility. The crisis led to a consensus that made it possible to establish a partial deposit insurance plan, totally ®nanced by the private sector and with no risk for the public sector ± now banks pay a premium that is related to the risk they impose on the system. 3. Conclusion To summarize, during one of the worst ®nancial crises of recent times, the convertibility plan and the prudent supervision and regulation of banks were useful tools for achieving the goals of ArgentinaÕs central bank: stability of currency value and the stability of the ®nancial system. We have learned some lessons; we have already implemented some economic policy ®ndings; and we are in the course of implementing others.
Policymakers roundtable Pedro Pou
*
President, Central Bank of Argentina, Reconquista 266, 1003 Buenos Aires, Argentina
Abstract In summarizing the conference, I will comment on how a central bank ocial lived through the Tequila Crisis, how it looked from the inside, the lessons we learned, and the policy changes we implemented. Ó 1999 Published by Elsevier Science B.V. All rights reserved.
1. Policy rules... Dierent views on the Mexican crisis' eect on Argentina have been outlined in this conference. Adolfo Sturzenegger based his opinion on internal factors. Guillermo Calvo based his on the impact of devaluation prospects, probably caused by internal weaknesses that were emerging in the second half of 1994 and by the peculiar political situation in Argentina in the ®rst half of 1995. Constitutional reform before the crisis brought, among other things, a total change in the electoral system allowing re-election and requiring an absolute majority for election to the presidency. Previously, Argentina had a less complicated, indirect election system. Thus, there were some very important destabilizing factors, such as expectations that an Argentinean devaluation would follow the Mexican one. There also was political uncertainty that could not be dissipated until after the elections later in the year. Expectations of changing variables were strong enough to induce a signi®cant change in capital ¯ows and the withdrawal of more than 18% of the ®-
*
Tel.: 54-1-348-3500.
0378-4266/99/$ ± see front matter Ó 1999 Published by Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 9 ) 0 0 0 3 1 - X
P. Pou / Journal of Banking & Finance 23 (1999) 1542±1544
1543
nancial systemÕs deposits, as Adolfo Sturzenegger clearly showed. This crisis, though comparable in some ways to the one in the 1930s, was a bit more intense because it lasted only four or ®ve months. In retrospect, I believe analysis will show that the crisis was handled successfully because the central bank was able to ful®ll its two main goals: stability in currency value and stability of the ®nancial system. There was no devaluation, as some Wall Street investors had anticipated. Nor did the ®nancial system break down, the other possibility that comes with a policy of maintaining convertibility at all costs. The quick recovery of deposits, beginning in May 1995, the small number of company closings, the small losses for depositors, and the resolution of this ®nancial crisis, unlike previous ones, at no ®scal cost to the government are factors that con®rm the crisis was handled relatively successfully. 2. ...And Tequila lessons The crisis taught us some lessons about how to improve the ®nancial system, and we have made some changes. In the monetary area, we were left with two lessons. First, if the economic base is solid, any changes in expectations that are not reasonably founded will have no real consequences, but any inconsistency in the governmentÕs near-term ®scal program may indeed alter the convertibility plan. Second, convertibility is more ¯exible than many analysts believe. Convertibility, together with an adequate systemic liquidity policy, enabled the central bank to accommodate the withdrawal of approximately $8 billion in deposits without causing an equal fall in the level of credits, which fell less than one-third that amount. As long as the central bank adopts a reasonable systemic liquidity policy, convertibility is not as much of a straitjacket for the ®nancial system as some may have believed. With respect to the ®nancial system, I believe the most important lesson was to place greater emphasis on liquidity problems. During the ®rst three years of convertibility, the central bankÕs primary focus was on the capitalization of the system ± all our discussions centered on this point. In accordance with the convertibility plan, existing reserves had to be deposited as international reserves and therefore provided resources for systemic liquidity. However, the reserves policy, though good from a global point of view, had some ¯aws related to the disparity in liquidity among various banks. Because reserves are a tax, this tax is levied on those liabilities that are least ¯exible: checking and savings accounts. Therefore, the amount of liquid funds each institution had was based on its percentage of checking and savings accounts in relation to total liabilities, even though these accounts were the most volatile liabilities in the ®nancial system.
1544
P. Pou / Journal of Banking & Finance 23 (1999) 1542±1544
This very important lesson led us to modify the central bankÕs liquidity policy by orienting it toward liquidity requirements, which are the assets the banks have to have, based on their liabilities. These assets must have systemic liquidity, which means they must be foreign assets that have no correlation to Argentine assets so that, in a crisis, banks can have that liquidity at their full disposal. Assets may be high risk or low risk; in this case, we are less concerned about capital requirements than about the liquidity of the assets. This change has been a signi®cant one that imposes the liquidity requirement on all types of assets, not only deposits but also on negotiable debt, bonds and so forth. The only distinction we make is in the maturity of the liabilities. A second lesson is that, considering the central bankÕs limited ability to act as a lender of last resort under the convertibility plan, we should encourage banks to seek their own coverage, and we should establish incentives to induce them to do so. One such strategy is for the banks to associate with foreign banks, which will give Argentine banks access to liquid resources in the event of a systemic crisis. A third lesson is the importance of standardization of assets. We have seen that banks whose assets were structured in a more standard manner had greater liquidity, and that discovery led us to seek a consensus among the banks on policies designed to standardize the structure of certain assets. We had to modify the central bankÕs bylaws in order to respond to situations involving systemic liquidity. The bylaws had previously contained only provisions to address speci®c problems related to liquidity. The ®nal lesson was recognition of the need to create new institutions, the most important of which involves deposit insurance. The central bank had tried unsuccessfully to promote this idea among ®nancial institutions during the early years of convertibility. The crisis led to a consensus that made it possible to establish a partial deposit insurance plan, totally ®nanced by the private sector and with no risk for the public sector ± now banks pay a premium that is related to the risk they impose on the system. 3. Conclusion To summarize, during one of the worst ®nancial crises of recent times, the convertibility plan and the prudent supervision and regulation of banks were useful tools for achieving the goals of ArgentinaÕs central bank: stability of currency value and the stability of the ®nancial system. We have learned some lessons; we have already implemented some economic policy ®ndings; and we are in the course of implementing others.