Systemic Shocks and Financial Crises: Lessons from Argentina, 1991-2001

Throughout the second half of the 1990s, conventional indicators for bank fundamentals depicted the Argentine banking system as potentially resistant to liquidity and solvency shocks. Against this background, in 2001 the Argentine banking system experienced a massive run on deposits that culminated in the disruption of the payment system. We argument that the drawbacks of the currency board regime have been at the roots of this crisis. The dollarization of the economy, the huge overvaluation of the real exchange rate and the exposure to Government debt, all contributed to the buil- ding up of the banks’ critical vulnerabilities. The lack of monetary and exchange rate tools made it difficult to address the recession of the last years of the 1990s and triggered a collapse of confidence in the sustainability of the public debt and the currency board itself. In such a context, the banks’ vulnerabilities became explicit so that the collapse of confidence passed on the banking system, beco- ming the vehicle for financial disaster.