Argentina - Bank Reform Loan

 ICRR 10521 Report Number : ICRR10521 ICR Review Operations Evaluation Department 1. Project Data : OEDID: OEDID : L3926 Project ID : P040904 Project Name : Bank Reform Loan Country : Argentina Sector : Financial Sector Development L/C Number : L3926 Partners involved : Prepared by : Elliott Hurwitz, OEDCR Reviewed by : Anwar Shah Group Manager : Ruben Lamdany Date Posted : 08/20/1999 2. Project Objectives, Financing, Costs and Components : Objectives : The purpose of the loan was to provide balance of payments assistance to support the government's bank reform program. Specific objectives were: (1) to hasten consolidation of the private banking sector; (2) to encourage the acquisition, merger, and restructuring of the private banking sector; and (3) to contribute to restoring confidence in the banking system . Financing : The operation was funded by a 3-tranche IBRD loan of US$500 million, of which US$166 million was redirected (per Board-approved amendment of April, 1997) to the Provincial Bank Privatization loan, which experienced relatively greater demand . The Bank Reform Loan was approved July 25, 1995, became effective December 1, 1995, and closed on December 31, 1998, the original closing date. 3. Achievement of Relevant Objectives : The project largely achieved its goals, as 73 banks that benefited from the project -supported trust fund were consolidated down to 19, although the degree to which the fund was a factor in each of these consolidations varied . The 73 banks comprised around 1/3 of the banks active in the country . From December 1994 to September 1997, the number of private domestic banks fell from 108 to 65. 4. Significant Achievements : Analysis of the banking sector suggests that the consolidation enabled by the Trust Fund helped create relatively strong banks able to survive in an increasingly competitive banking system . The project helped achieve a restructuring of the banking sector, and contributed to restoring confidence in the financial sector . 5. Significant Shortcomings : Although not significant, it is worth noting that, at inception, it was envisioned that stronger banks would take over weaker ones, but in practice it was difficult to entice stronger banks to participate . Of the US$770 million in disbursed loans for bank capitalization, about US$ 70 million were lost due to failure of acquiring banks, indicating that some relatively weak banks were allowed to participate . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : In a bank privatization project, a strong selection bias may occur whereby banks that perform poorly may be more likely to seek Fund support .  In a banking sector consolidation project, if a goal is to utilize stronger banks as acquirers, it might be more effective to have flexible criteria so that stronger banks can obtain better terms in obtaining funding . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR presents abundant and insightful data on the impact of this operation on the banking sector .