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Panama Finance
Panama was considered the most important international banking
center in Latin America in the late 1980s. In 1970 only 28 banks
operated in Panama's international banking center; by 1987 there
were 120, with assets of nearly US$39 billion. The growth in
Panama's
Eurocurrency (see Glossary),
or offshore banking, has
contributed to the country's relative prosperity and accentuated
the importance of the service sector in the economy. As an example
of offshore banking, the Central Bank of India established an
office in Panama in the late 1970s to finance its trade with
Brazil.
The idea of opening Panama up to international banking was the
brainchild of Ardito Barletta, who, as Torrijos's minister of
planning in 1969, sought to diversify Panama's economy away from
the canal and the CFZ. His timing could not have been better;
Panama benefited greatly from the recycling of petrodollars after
the 1973 and 1979 oil price hikes. Panama also became a center for
flight capital from Latin America and tax evasion dollars from the
United States and other countries.
Panama's success in attracting offshore banking has been
attributed to the political stability of the Torrijos years, the
dollar-based economy, the country's tradition as a trade and
business center, and a policy of low taxes on deposits and income.
Most importantly, however, Panama's success has been a result of
its stringent secrecy laws. In 1970 banking laws were liberalized,
secrecy was guaranteed, currency controls were abolished, and few
restrictions were imposed on bank transactions. Panama's banking
commission had the sole right to conduct general inspections of
bank records, and banks were not allowed to disclose information
concerning their customers. Ardito Barletta once claimed that
Panama's secrecy laws were stricter than those of Switzerland.
Observers disagreed on the benefits derived from offshore
banking. Banks were required to maintain offices in Panama, where
they generated employment for 10,000 Panamanians, slightly more
than the number of jobs associated with the canal. Approximately
US$200 million has been injected into the domestic economy each
year through loans. Some critics have charged, however, that the
offshore banking has "denationalized" Panama's economy. According
to this line of thought, offshore banking limits a nation's
political and economic autonomy because the government must
maintain a favorable investment climate. International capital is
highly fungible and is subject to flight in the event of major
political or economic disturbances, as occurred in the latter part
of 1987.
Total deposits in the offshore banks peaked at US$47 billion at
the end of 1982 and then fell, primarily as a reflection of Latin
America's financial crisis. In 1984 numerous United States banks
reduced their Panamanian assets, such as Citibank (by 70 percent)
and Bank of America (50 percent). Some banks (Chase Manhattan and
Citibank) also reduced their operations within Panama, while others
(Security Pacific and Libra Bank International, a London-based
consortium) actually left Panama. This drain, however, was
partially offset by the increased exposure of other United States
banks, such as First National Bank of Chicago, and by the influx of
Japanese banks, many of which have made Panama their Latin American
banking headquarters. Also, "narcodollars" (income derived from the
sale of illegal drugs) reportedly were transferred to Panama from
Caribbean havens that were placed under closer scrutiny.
In 1985 the largest banks in Panama's International Financial
Center were First National Bank of Chicago (assets worth US$3.6
billion); Banco de la Nación Argentina (US$2.8 billion); American
Express Bank (US$2.4 billion); BNP, (US$1.4 billion); Deutsche
Sudamerikanische Bank (US$1.3 billion); Crédit Lyonnais, Sanwa
Bank, Bank of Tokyo, and Sumimoto Bank (US$1.2 billion); and Banco
do Brasil (US$1.1 billion).
The foreign share of total deposits in the International
Financial Center declined from 94 percent in 1979 to 85 percent in
1985. The assets of 14 Panamanian banks remained virtually
constant, at US$5.5 billion from 1982 through 1984; their relative
share of total deposits increased from 10 percent in 1982 to 15
percent in 1985 as a result of the reduction of foreign deposits.
Founded in 1904, the BNP was the country's most important bank. It
served as the government's depository and fiscal agent in addition
to being the largest commercial bank with forty-seven branches
throughout the country and an agency in New York. The other major
state-owned financial institutions were a savings bank (established
1934), a mortgage bank (1973), an agricultural development bank
(1973), and a development finance company (1975). The latter two
institutions were founded to provide longer-term credit for
agricultural and industrial development than was generally
available from the commercial banks.
Panama's offshore banking confronted severe challenges in the
late 1980s. Firstly, it faced charges that it had become the center
for laundering drug money. Given the secretive nature of Panama's
banking legislation, substantiating such charges was difficult.
According to the United States Department of the Treasury, an
estimated US$600 million in drug-related money is laundered through
Panama's offshore banking system annually. Since 1985, the United
States has pressured Panama to sign the Mutual Legal Assistance
Treaty (MLAT), which lifts banking confidentiality. A similar
treaty has been signed by the Cayman Islands, the Netherlands
Antilles, the Turks and Caicos Islands, Switzerland, Turkey, and
Italy. Although Panama has resisted any changes in its banking
secrecy regulations, fearing negative repercussions on its
International Financial Center, it did make major concessions in a
law passed on December 26, 1986. The new law had three basic
provisions: penalties for drug trafficking were made more severe;
extradition procedures were established; and money-laundering was
made a crime. The measures fell short of those established in the
MLAT, but they were expected to deflect United States criticism, at
least in the short term
(see Other Aspects of Panamanian-United States Relations
, ch. 4;
Involvement in Political and Economic Affairs
, ch. 5).
A second major challenge to offshore banking in Panama was that
of political instability. The political turmoil of mid-1987 damaged
Panama's reputation as a safe haven. International banks were a
major target for attacks by progovernment groups seeking to blame
foreign elements for the political disturbances. In June the
government further shattered investor confidence when it suspended
interest payments on its debt to foreign governments, a de facto
default. One international bank lowered Panama's rating on the
political risk scale, and First National Bank of Chicago closed its
Panama branch. Perhaps one-tenth of the estimated US$40 million in
deposits left the country as capital flight, creating a liquidity
crisis for the country.
Data as of December 1987
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