Ecuador: Blanket Guarantee, 1998

Bailey Decker

Journal of Financial Crises, 2022, vol. 4, issue 4, 167-187

Abstract: After a series of exogenous shocks hit the Ecuadorian economy in 1997-1998, foreign creditors reassessed their emerging-market risk and reduced external credit lines to Ecuador, thus draining liquidity. The closure of a small bank called Solbanco in April 1998 triggered deposit runs at other banks. Banks sought assistance from the Central Bank of Ecuador (Banco Central del Ecuador, or BCE). By the end of September 1998, the BCE had issued emergency loans to 11 financial institutions, totaling nearly 30% of the money base. The crisis accelerated in August 1998 when Banco de Prestamos, the sixth-largest bank, was closed; the existing limited deposit insurance scheme covered only small savers, after a delay, and with haircuts reflecting the depreciation of the sucre. A flight to quality followed, as depositors shifted from sucre deposits to US dollar deposits. On December 1, 1998, the Ecuadorian government created the Deposit Guarantee Agency (Agencia de Garantia de Depositos, or AGD) to restore stability in bank liabilities. The AGD guaranteed trade credit lines and all bank deposits. It also resolved banks, mainly through purchase and assumption transactions. The government also imposed a 1% tax on all financial transactions to support public finances; the tax, imposed amidst a liquidity crunch, accelerated the collapse of several financial institutions, including Ecuador's largest bank. During the blanket deposit guarantee, the government announced a surprise bank holiday, partial deposit freeze, and uncertain schedule for the partial deposit freeze lift. The trade credit line guarantee ended as of March 2000. The AGD phased out blanket deposit coverage between 2001 and 2004. The AGD closed after 11 years on December 31, 2009, replaced by the Deposit Security Corporation (Corporacion del Seguro de Depositos, or COSEDE). COSEDE covers depositors up to USD 31,000.

Keywords: Agencia de Garantia de Depositos; bank runs; blanket guarantee; Ecuador; liquidity (search for similar items in EconPapers)
JEL-codes: G01 G28 (search for similar items in EconPapers)
Date: 2022
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