Changes in the efficiency of the Argentine private commercial banking system induced by the 1977 reform

Abstract

Law No. 21,526 (1977 Reform) and the related regulatory standards established by the Central Bank of Argentina undoubtedly constituted a substantial modification to the Argentine financial system. The 1977 Reform established a privileged situation for commercial banks by allowing them to carry out all the operations of other financial intermediaries. This not only benefited the existing institutions of that type, but also created a very strong incentive for other institutions to transform themselves into banks. In fact, whether or not it was the intention of authorities, it brought an increase in the number of commercial banks, despite the fact that the minimum capital requirements were markedly restrictive. High capital requirements and an increase in the number of financial entities converged so that the unit costs of passive deposit operations (and acceptances) –a rather imperfect measure of the system's efficiency– grew in the following years until they reached very high levels. Such is the main thesis: the costs of the private commercial banking system increased as a consequence of the 1977 Reform. However, this conclusion deserves a small temporal qualification because the volume of real financial intermediation decreased starting in 1980 and the entities had to face a large proportion of fixed costs. This situation would not have been reached, or the existing status-quo would not have been maintained, if there had not been a paternalistic attitude on behalf of the monetary authority of granting a subsidy to cover its operating costs above the differential between active and passive interest rates.

JEL classification: G21 ; G28