Basilea

 “REFORM OF THE PERUVIAN FINANCIAL SYSTEM”

Peru currently enjoys a stable financial system that has been accompanied by sustainable economic growth. The Peruvian business sector found in the financial system the necessary tools to enhance their growth and improve the chances of taking advantage of commercial opportunities presented by the international marketplace, nevertheless this was not always the case. During the nineties, the Peruvian financial system had not a huge impact in the economic due to the high levels of participation of the governments in the financial system and the low level of opening to the international market. Given these limitations, a number of measures that would drastically change the participation of the financial system in the economy were applied.

The graphic 1.1 shows the evolution of the Peruvian financial system represented by the indicator of credits placed in terms of GDP through the years. As it is noticed, the trend of the evolution of the financial system is positive but there is a period when it was negative. We will discuss the events that caused the different trends of the evolution of the Peruvian financial system from period to period in the next lines.

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Graphic 1.1

SOURCES: SBS, BCRP

In 1985 the external debt increased from $13000 million to $20000 million due to the reductions of payments experienced in the first government of Alan Garcia in an attempt to improve the economic position in the region. This situation caused the isolation of the international financial system. After 11 years of not paying any penny of foreign debt, Peru agree to participate in the Brady Plan during the government of Alberto Fujimori. This plan allowed Peru to refinance its debt as well as also get a waiver of interest of approximately $ 5.3 billion. Additionally, Peru received an increase in the availability of credit from the World Bank. This allowed to increase the international flows after a long time.

In 1991, Peru strengthened its intention of entering international flows back to the implementation of a series of measures which would modify the financial system. The most important measures were the creation of deposit insurance that would cover deposits of natural persons or companies up to an amount of $ 20,000 if the bank went bankrupt, the constitution of the minimum equity backups taking into account the requirements of Basel I in order to strengthen the solvency of banks, the strengthening of SBS and the privatization of state-owned commercial banks.

2.3.        1998-2002 local financial system crisis. Basel I in Peru

The last years of the 90s saw a stagnation of economic activity due to various factors such as El Niño, the Asian crisis, the Russian crisis and the political crisis that existed in Peru. This resulted in a reduction of loans because banks were more cautious about the growing risk of default and also a reduction in public deposits. Thus, financial intermediation ratios (Loans / GDP and Deposits / GDP) fell.

During the second half of 1998 and the first quarter of 1999, the Russian and Brazilian crises triggered a significant sudden reversal of capital flows in Peru. By the end of 1999, the inflow of capital was reduced to 1 percent of GDP (US $ 583 million), representing only 10 percent of the level seen in 1997 (US $ 5,805 million).

Policy Responses:

Because of the shortage of foreign capital the policy implemented by the Central Bank was directly providing foreign currency liquidity to the banking sector, both temporarily and permanently, to prevent a depreciation of the local currency and to achieve greater exchange rate depreciation. To achieve this goal, the central bank used its international reserves actively through the following mechanisms:

• Access to credit in foreign currency.
• Reduction in the average and marginal reserve requirement for foreign currency deposits.
• Exchange rate intervention.

The Treasury supplemented the measures to inject liquidity in the financial system through the following policies:

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