Capital Structures and Portfolio Composition During Banking Crisis: Lessons from Argentina 1995

Alberto Ramos

No 1998/121, IMF Working Papers from International Monetary Fund

Abstract: This paper constructs a theoretical framework that rationalizes banks’ short- and long-run adjustment dynamics—in portfolio composition and in the capital structure—following a period of financial distress. The model captures stylized facts about banks’ behavior following a shock to the capital base—namely, the rush to liquidity and credit crunch. Bank panel data show that Argentine domestic retail banks underwent a period of adjustment of six quarters following the Mexican devaluation crisis, reducing their risk-exposure since, owing to bank capital scarcity, depositors became less prone to tolerate bank default risk. Foreign-owned banks suffered a milder shock and adjusted immediately.

Keywords: WP; central bank; optimal portfolio; capital structure; Banking Crisis; Argentina; Bank Capital; Tequila effect; Banking Distress; present discounted value; capital base; bank default risk; ÷ assets; adjustment dynamics; expected return; exposure bank; bank regulator; asset risk; vault reserve; insurance bank; Loans; Deposit insurance; Stocks; Bonds; Insurance (search for similar items in EconPapers)
Pages: 54
Date: 1998-08-01
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