Argentina achieved great successes in its attempt to create a market based regulatory system, but latter on, the crisis from 2001 that hit Argentina proved that market discipline is not enough to avoid crisis. A regulatory system based on market principles ensures a well functioning of financial institutions during good times characterized by economic and political stability. The political aspect of a country is very important in the creation of a market discipline for the financial system. The case of Argentina is a positive one in the sense that it helped the country to overcome the consequences of the financial crisis from 1990’s and to reform the financial institutional sector.
The following features describe the market-based regulatory framework of Argentina’s financial system between 1990’s and 2000’s:
(a) A strictly limited safety net comprised of a privately funded, limited deposit insurance scheme and restrictions on the Central Bank's potential lender of last resort powers
(b) High and credible minimum risk-based capital requirements ensures that stockholders bear the risk of bank default
(c) The privatization of provincial government-owned banks through privatization programs
(d) A credit rating scheme for each bank
(e) A subordinated debt requirement mandates that banks must issue a subordinated liability for some 2% of deposits each year
(f) Banks must satisfy a “liquidity requirement” in addition to the capital requirement
(g) The Central Bank publishes basic information about bank loans to individuals and firms that borrow from banks
(h) The quality of accounting data is enhanced by mandatory private audits conducted according to Central Bank guidelines ;
The implementation of market-based principles in Argentina can be seen as a good example for other countries interested in developing market discipline for their financial system. At the same time there is no “cook book” of how to create a market-based regulatory system, every country has to reform its own system depending on its political and economical environment. The starting point for creating a market-based regulatory system relies on the existing system in the country.
It also must be understood that a market-based regulatory system is not enough to protect a country against financial crisis, but it can give signals if the general environment worsens. At this stage, if it is to implement the correct changes in the system then a crisis can be softened, reducing its negative consequences. In fact that was the mistake of Argentina. A financial system can not function independently of the fiscal and external sectors. It is impossible to have a sound financial system in a country facing fiscal or even twin deficits. Argentina failed to ease or at least to change the hard peg when the market gave clear signs that there were problems and changes were required. In the case of Argentina financial institutions had their share in creating a wrong believe that the Central Bank will not let them to fail. This comes from the incorrect policy conducted by IMF with respect to Argentina. In the late 1990’s IMF granted a loan that was mainly used to solve liquidity shortages of the financial system.
The second mistake of Argentina is that when the country was face to face with an unavoidable crisis, the monetary authority had a wrong response by reducing the reserve requirements. This was perceived by financial institutions as a sign that the Central Bank would bail out banks, which continued to conduct the policy of making risky investment in government securities.
If the concept of a market-based regulatory system is correctly understood then it is a powerful tool and can be used to create an efficient financial system in any country. Political desire is a crucial factor for the implementation of a market-based regulatory system. This implies that emerging economies encounter not only technical problems for the implementation of such a regulatory system, but also the challenge of creating the political environment as to give credibility to such a system.
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