Banking in Argentina

During the 1990s, marked by President Carlos Menem's policies of liberalization, Argentina's financial system saw a significant consolidation and strengthening, in large part through foreign investment. In addition to high reserve and capital-adequacy requirements, the Central Bank of Argentina maintained a repurchase agreement with a consortium of international banks to provide a $6,000 million safety net in the event of a liquidity squeeze.

Mergers and acquisitions, which decreased the number of Argentine banks from nearly 300 in 1990 to fewer than 100 at the end of 1999, were expected to continue and lead to improvements in management and efficiency. The foreign currency reserves of the Central Bank stood at nearly $25,000 million in December 1999, or over 9 months of imports. However, these reserves were used to back the monetary liabilities of the Central Bank and were not available for conducting monetary policy; by the terms of the Convertibility Law, each Argentine peso in circulation was to be matched by one American dollar in the reserves.

Despite the recession (started in 1998 after the international economic shock due to the 1998 Russian financial crisis), bank deposits continued to grow until 2001, although at a much slower rate than in previous years. Total deposits in the banking system stood at nearly $80,000 million by mid-2001 — more than twice that of June 1995, when deposits hit a low of $37,000 million. Foreign-controlled banks held over 40% of total deposits, and six of the top 10 commercial banks were in the hands of American and European financial institutions.

Still, the level of bank utilization in Argentina remained relatively low, and bank intermediation represented only about 30% of the GDP — a much lower ratio than those of Chile, Mexico, or Brazil, for example.

Nevertheless, the banking system suffered a fatal flaw: it lent dollars and took deposits in Argentine pesos (nominally argendollars).