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WEEKLY NEWSLETTER
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Chile
Index
A major policy objective of the military regime was the
liberalization and modernization of the banking sector.
Until 1973
the domestic capital market had been highly repressed,
with most
banks being government owned. Real interest rates were
negative,
and there were quantitative restrictions on credit. The
liberalization process began slowly, in early 1974, with
the sale
of banks back to the private sector, the freeing of
interest rates,
the relaxation of some restrictions on the banking sector,
and the
creation of new financial institutions. International
capital
movements, however, were strictly controlled until
mid-1979. In
June 1979, the government decided to begin to liberalize
the
capital account (see
Glossary) of the balance of payments,
lifting
some restrictions on medium- and long-term capital
movements.
The opening of the capital account resulted in a
massive inflow
of foreign capital that contributed to Chile's subsequent
international debt problems. In 1980 capital inflows were
more than
double those of 1979--US$2.5 billion versus US$1.2
billion--and in
1981 the level of capital inflows nearly doubled again, to
US$4.5
billion.
An important result of the reforms of the financial
sector was
that the number of financial institutions and the volume
of
financial intervention both increased greatly. For
example, in 1981
there were twenty-six national banks, nineteen foreign
banks, and
fifteen savings and loan institutions
(financieras), a
number significantly higher than the eighteen national
banks and
one foreign bank in operation in September 1973.
Furthermore,
between 1973 and 1981 the real volume of total credit to
the
private sector increased by more than 1,100 percent.
At least in terms of increasing the degree of financial
intermediation, liberalization was a success. However, it
was
apparent from the beginning that capital-market
liberalization
faced three major obstacles. First, interest rates were
very high.
Second, in spite of the significant growth in the extent
of
financial intermediation, domestic savings had not
increased to the
extent that the proponents of the reforms had expected. In
fact,
domestic savings were at one of their lowest levels in
history from
1974 to 1982. There are several possible explanations for
the
behavior of domestic savings. One of the most popular of
these
relies on the notion that the appreciation of domestic
assets that
was taking place at the time, such as stocks and land
prices,
resulted in a real accumulation of assets without saving.
This
increase in private-sector wealth was consistent with
higher levels
of consumption at a given income. Third, and perhaps more
important, the rapid growth of the financial sector took
place in
an environment in which monetary authorities exercised no
supervision. As a result, many banks accumulated an
unprecedented
volume of bad loans, a situation that led to the financial
crisis
of 1982-83. As a consequence of this crisis, a number of
banks went
bankrupt during 1983-84, were placed temporarily under
government
control, and then were reprivatized. By 1992, after
monetary
authorities had learned the hard way the importance of
bank
supervision, Chile's financial sector had become highly
stable and
dynamic.
Data as of March 1994
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