Announcement of World Bank Lends Four Hundred Million US Dollars for Argentina's Banking Sector Reform on March 29, 1988

. FOR IMMEDIATE RELEASE 'NorldBank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.• Telephone: (202) 477-1234 BANK NEWS RELEASE NO. 88/61 Contact: Ciro Gamarra (202) 676-1217 WORLD BANK LENDS $400 MILLION FOR ARGENTINA'S BANKING SECTOR REFORM WASHINGTON, March 29, 1988 -- Argentina's program to increase the overall efficiency of the banking industry and enhance its ability to finance investment will be assisted by a quick-disbursing World Bank loan of $400 million. The main objectives of the program are to increase deposit mobilization and confidence in the banking system, improve credit allocation and reduce the cost of credit. Low savings mobilization through the banking system; financial difficulties in certain private and public banks; segmentation of deposit and credit markets, including substantial reserve requirements, forced investments and a large intermediation role of the Central Bank; and scarce and costly credit to the private sector, make it difficult to achieve efficiency in investment and growth. In the last 15 years, Argentina's financial sector has been unstable and experienced drastic policy changes. Policies went from extreme regulation--with nationalization of deposits and allocation of credit•. through the Central Bank (1973 to mid-1977)--to liberalization of interest- rates, credit allocation and entry into the system (mid-1977 to mid-1982). Then they went from a return to financial control and substantial reliance on Central Bank credit (mid-1982 to early 1985) to, most recently, gradual movements again towards a more liberal system. These policy shifts, coupled with macroeconomic instability, have resulted in a weakened financial sector characterized by high real interest rates, large banking costs, and low financial savings. Not only did real financial savings decline but the maturity of financial assets has shortened dramatically. Currently, maturities of over 30 days are considered long term in Argentina. Operating costs are extremely high in Argentina. The monthly ratio of operating costs to average total deposits stood at 1.77 percent in March 1987 for the whole financial system. These are extremely high figures by international standards (about four to five times higher than those in the average industrial country). As of March 1987, there were 294 institutions operating in the financial system. These included 189 banks, 64 finance companies, 11 savings and loans associations and 30 credit unions. Banking institutions include 183 commercial banks, two development banks, two investment banks, one mortgage bank and one government-owned savings and insurance bank. Of these, 37 were public and 152 private. Public banks control 58 percent of the value of total loans, private banks 39 percent, and the non-bank financial institutions the remaining 3 percent. NOTE: Money figures are expressed in U.S. dollar equivalents. I ...  - 2 - . The Argentine government is aware of the problems affecting the banking system and since September.1986 it has been implementing important reforms to solve them. The World Bank loan will support these and additional reforms. Mobilization of bank deposits will be increased as a result of the lifting of controls on deposit interest rates, strengthening of banking supervision, increased transparency and reliability of financial statements, establishment of an efficient mechanism to rehabilitate troubled banks and insurance coverage for small deposits. A lower rate of inflation and the maintenance of a realistic exchange rate will also help in achieving this goal. To increase mobilization of deposits, the government has recently eliminated all controls on savings and time deposit interest rates. As a result, lending rates on all loans financed with deposits have also been decontrolled. This is a major step in the deregulation of the banking industry. The government will also establish an autonomous deposit insurance corpo- ration--similar to the Federal Deposit Insurance Corporation of the United States or the Deposit Guarantee Fund of Spain--to assist the process of bank rehabilitation. Improved credit allocation is expected to result from increased discretion- ary lending by banking intermediaries as well as the rationalization of,Central Bank rediscounts. Finally, the cost of credit is expected to decline gradually as a result of the reduction of both the fiscal deficit and Central Bank losses, increased deposit mobilization, the redimensioning of the system and.the subsequent reduc- tion of operating costs, reduction of reserve-•-.re'f.ltrlrementa· and· forced investments on incremental deposits, and increased efficiency of some public banks. The bulk of the World Bank loan will be applied to all c.i.f. costs of eligible private and public sector imports. Imports such as alcohol, tobacco, armaments, and goods already being financed by other World Bank loans cannot be purchased with funds from the loan. The loan will be disbursed in two tranches, the first ($199.5 million) soon after loan effectiveness and the second ($200 million) after a review in nine months of the adjustment program and an assessment of the country's macroecon- omic situation. About $500,000 of the loan will be• use~ to-buy computer equipment for the Central Bank and for technical assistance. The technical assistance component, geared towards strengthening the bank- ing superintendency's capabilities in credit risk analysis and assessment 0£ the overall financial condition of banks, will be disbursed over a per.iodnot to exceed two years. The $400 million loan to Argentina is for 15 years, including three years of grace, with a variable interest rate, currently 7.72 percent, linked to the cost of the Bank's borrowings. It also carries an annual conunitment charge of 0.75 percent on the undisbursed balances. - 0 -