Post-Crisis Bank Behavior: Lessons From Mercosur

1. INTRODUCTION

The working paper Post Crisis Bank Behavior: Lessons from Mercosur is a paper released in 2010 and written by Sara Sanya and Montfort Mlachila, two interns of the International Monetary Fund, an organization of 188 countries working to foster global monetary cooperation, stability, trade, employment, growth and reduce poverty1. Sanya and Mlachila worked together in order to analyze if the occurrence of systemic banking crises in the 1990s and 2000s significantly alter the behavior of banks in the Mercosur and to do so they analyzed changes in bank behavior after crises in the Mercosur region using for the very first time the convergence methodology, which is common in the growth literature, in order to identify the evolution of bank behavior in the region after crisis2. These two interns analyzed the impact of the crises country by country on four sets of indicator of bank behavior such as profitability, maturity preference, credit supply and risk, this framework gave them the possibility to study and compare the behavior of the four members of the Mercosur and analyze the different situations of the countries and circumstances of the post crises era. They also used a set of benchmarks such as the pre-crisis average levels, which reflects the strategy of convergence method, and regional and international benchmarks, which compares the bank system in Mercosur to other countries.

As a result of the study, the authors come out with two answers that they catalogue as the key finding of the paper. The first one is that private sector intermediation is significantly reduced for prolonged periods of time and the second one is that high levels of excess liquidity persist well after the crisis3. To finalize the study, the authors give some recommendations to the audience by advising the implementation of policies that increase confidence in the bank system since during the study countries like Argentina and Uruguay had big issues with

1. http://www.imf.org/external/about.htm

2. Post-Crisis Bank Behavior: Lessons from Mercosur, 2010, Sarah Sanya and Montfort Mlachila, page 4

3. Post-Crisis Bank Behavior: Lessons from Mercosur, 2010, Sarah Sanya and Montfort Mlachila, page 4

expectations and withdrawals, and also to work hard to make the macroeconomic environment more stable.

The methodology used in the paper is very unusual and in fact the paper it’s almost the first one to use the convergence methodology applied in post bank crisis behavior. The use of empirical studies and background hypotheses is well seen in the paper; the authors used both aggregated and bank-level data during the period 1990-2006 as well as and econometric methods such as the convergence method and the robustness test.

In the following section we will have a look at the countries of the Mercosur region and what did motivate the authors to choose this region as a case study. In section three we will discuss the convergence methodology in this type of study and in section four we will conclude.

2. WHY ANALYSING THE MERCOSUR REGION?

The paper analyses the post-crisis behavior of banks in the Mercosur region (Argentina, Paraguay, Uruguay and Brazil). The Mercosur is an economic and political agreement among these countries founded in 1991 and encourages free trade, fluid movements of goods, people and currency4. For the authors this region sounded very attractive since these countries have witnessed a significant number of banking crises and for the study is very relevant because the variables of study are more typical in countries that have experienced several crises.

For the purposes of the paper the authors had made some research about bank crises indicators and they fully see those indicators in the Mercosur region. First, financial liberalization undertaken in conditions where financial institutions are underdeveloped, law enforcement is weal and regulatory supervision is inadequate

4. http://en.wikipedia.org/wiki/Mercosur

can sow the seeds of a financial crisis (Hassan and Hussain 2006). Second, credit booms, if followed by weak and deteriorating economic fundamentals, can lead to weaknesses in bank balance sheets. Third, inconsistencies between fiscal and monetary policies and exchange rate commitments can lead to the simultaneous occurrence of currency and banking crises (Kaminsky and Reinhart 1999). Finally, speculative

...