Managing Banking Crises in Latin America : The Do's and Don'Ts of Successful Bank Restructuring Programs

This paper focuses on the design of successful bank restructuring programs in Latin America-a region where banking crises have been frequent in the past two decades. In each episode, Latin American policymakers have had to act under the severe constraints imposed on developing countries, which become particularly binding during periods of financial problems. Nevertheless, a review of these experiences demonstrates that a well-conceived bank restructuring program can succeed under even the most adverse conditions. This paper is organized as follows: Section II establishes a framework for carrying out a successful restructuring program, which includes defining objectives and principles for execution of these objectives. It also illustrates how differing constraints faced by regulators affect the application of principles to achieve a successful restructuring program. Section III uses the framework to evaluate the bank restructuring efforts in Argentina and Chile in the early and mid 1980s. The nature of the constraints faced by regulators and the willingness to adhere to basic principles of effective crisis management explain why Argentina emerged from its crisis with a much weakened banking system while Chile strengthened its banking system. Section IV considers the management of the more recent banking crisis in Argentina and Mexico based on the framework as well as the lessons of the 1980s