Transition to a Functional Financial Safety Net in Latin America

Peter Garber

No 4056, Research Department Publications from Inter-American Development Bank, Research Department

Abstract: The basic worldwide financial safety net architecture provides for a system of similar institutions: a lender of last resort, deposit insurance, and prudential regulation. In countries whose banking systems suffer seriously from negative capital positions and overbanking, such as in some Latin American markets, the safety nets and the detailed mechanisms of their operation may not be functional in reducing excessive risk taking. They offer banks strong incentives to double their bets for survival. Thus, banks` negative capital positions have been eliminated with capital injection, liquidation, and mergers.

Date: 1997-02
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Working Paper: Transition to a Functional Financial Safety Net in Latin America (1996)
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