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Chilean Banking Crisis of the 1980s: Solutions and estimation of the costs

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  • Gonzalo I. Sanhueza

Abstract

This paper reviews the solutions to the Chilean banking crisis of the 1980s and analyzes their effects on banks, deriving policy lessons from this analysis. This paper also estimates the cost of the rescue of each institution. The three main solutions to the crisis were the following: (i) foreclosure of insolvent institutions or transfer of their assets and liabilities to the solvent institutions; (ii) acquisition of high-risk portfolio (bad loans) under condition of repurchase without provision of fresh funds; and (iii) acquisition of high-risk portfolio under condition of repurchase through future profits with provision of fresh funds. The results showed that the third alternative as the most efficient for the recovery of a significant number of financial institutions with solvency problems. Supporting bank re-capitalization and creating incentives for recovering bad loans helped to accelerate the recovery of the banking industry. The total cost was significant. The cost of foreclosure of insolvent institutions was 10.6 % of the GDP and the cost of portfolio purchase under conditions of repurchase reached 6.7 % of the GDP.

Suggested Citation

  • Gonzalo I. Sanhueza, 2001. "Chilean Banking Crisis of the 1980s: Solutions and estimation of the costs," Working Papers Central Bank of Chile 104, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:104
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_104.pdf
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    Cited by:

    1. Vicente Cuñat, 2009. "Finance for Development: Latin America in a Comparative Perspective. By BARBARA STALLINGS with ROGERIO STUDART," Economica, London School of Economics and Political Science, vol. 76(301), pages 216-217, February.
    2. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "A Decade Lost and Found: Mexico and Chile in the 1980s," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 166-205, January.
    3. Yudaeva, Ksenia & Godunova, Maria & Kozlov, Konstantin & Ivanova, Nadezhda, 2009. "Exit strategies from the banking crisis: international experience," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 3, pages 98-149, June.
    4. Laeven, Luc & Valencia, Fabián, 2012. "The use of blanket guarantees in banking crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1220-1248.
    5. Davide Furceri & Aleksandra Zdzienicka, 2012. "The Consequences of Banking Crises for Public Debt," International Finance, Wiley Blackwell, vol. 15(3), pages 289-307, December.
    6. Mr. Fabian Valencia & Mr. Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 2008/224, International Monetary Fund.
    7. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
    8. Luc Laeven, 2011. "Banking Crises: A Review," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 17-40, December.
    9. Javier Alonso & Jasmina Bjeletic & Carlos Herrera & Soledad Hormazabal & Ivonne Ordonez & Carolina Romero & David Tuesta, 2010. "A Balance of Pension Fund Infrastructure Investments: The Experience in Latin America," Working Papers 1003, BBVA Bank, Economic Research Department.

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