Privatization of Public Banks
Market discipline is enhanced by its institutions both the regulatory ones and the direct financial institutions. To be able to create an effective market-based regulatory system, Argentina started to make changes in the ownership structure of the financial institutions. Because of the administrative organization of the country at the end of 1980’s, every province had at least one bank under its authority. This allowed the provincial authorities to have access to cheap finances from the provincial banks. In the eventuality of a crisis it was considered that the central bank would bail out the banks in trouble. Privatization of provincial banks was the solution for this situation. At the beginning of 1990’s the proper environment for privatizing financial institutions was in place but investors did not rush to invest in the system. The reason for this is that investors lacked confidence in the regulatory and economic framework of the country. They waited for the system to be tested. This happened through the Mexican crisis after which the number of privatized banks increased. This allowed Argentina’s financial institutions to react in a better way to market incentives. After the privatization the financial institutions could adapt to the new market circumstances changing their activity from financing the state to channeling credits towards economic agents. The privatization of provincial banks was enhanced by the creation of a fiduciary fund. At the same time, a second fiduciary fund was created to restructure the private banking system. These two funds were created as a measure for the liquidity problems that the banking system of Argentina was facing during the Tequila crisis.
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