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Uruguay Banking and Financial Services
Uruguay's banking sector was headed by the Central Bank
of
Uruguay (Banco Central del Uruguay; hereafter, Central
Bank),
founded in 1967 and charged with regulating the nation's
banking
and financial system and performing such standard central
bank
functions as controlling the money supply, regulating
credit,
issuing currency, controlling foreign exchange, and
overseeing
the operations of the nation's private commercial banks.
The Bank
of Uruguay (Banco de la República Oriental del
Uruguay--BROU),
founded in 1896, had performed some of the functions of a
central
bank prior to the creation of the Central Bank. An
autonomous
entity, it remained in 1990 the country's largest and most
significant commercial bank. The banking sector also
included the
Social Welfare Bank (Banco de Previsión Social), the
Commercial
Bank (Banco Comercial), and several other state-owned
banks, such
as Mortgage Bank of Uruguay (Banco Hipotecario del
Uruguay), and
the State Insurance Bank (Banco de Seguros del Estado), as
well
as a number of private commercial and savings banks.
In the late 1980s, Uruguay's financial sector was still
feeling the effects of a profound banking crisis that had
begun
early in the decade. The crisis had its origins in the
rapid
expansion of credit to the private sector during the
1978-82
period. The unrestrained expansion of credit was made
possible by
the deregulation of the banks. As part of its effort to
reorient
the Uruguayan economy to the external market, the military
government removed or reduced most restrictions on banks,
including reserve requirements (which limit the amount of
loans
that can be made, relative to bank deposits), interest
rate
ceilings, and foreign currency regulations. The sudden
removal of
these and other restrictions encouraged banks to expand
the
supply of credit. The demand for credit also expanded
because
rising prices for exports convinced many ranchers and
manufacturers to invest in land or equipment. The first
signs of
trouble came from the livestock sector. When world beef
prices
fell in 1980, rural land prices began to decline sharply,
and
ranchers began to have difficulty servicing their loans
(see Livestock Ranching
, this ch.).
The crisis became widespread after the economy went
into
recession in 1981. By 1982 one-quarter of all loans to the
private sector were considered nonperforming. The
increasing
dollarization of credit complicated the situation. Banks
that had
received large United States dollar deposits also made
loans in
dollars in order to avoid exchange-rate risk. The trend
toward
dollarization increased in early 1982 because banks
expected a
major peso devaluation. By late 1982, about 60 percent of
all
loans were denominated in dollars. When the fixed peso
exchange
rate was finally abandoned toward the end of the year,
leading to
a large peso devaluation, many already-troubled private
companies, which earned pesos on the domestic market,
suddenly
faced dollar-denominated loans whose peso value had
tripled.
Government intervention was required to prevent
widespread
bankruptcies. BROU devised a two-part strategy for dealing
with
the crisis. First, it provided credit to the private banks
so
that loans could be refinanced. About one-fifth of all
outstanding loans (worth US$400 million) were refinanced
by late
1982, allowing debtors a two- or three-year grace period
and a
lengthened repayment schedule. The loans were still in
dollars,
however, so that further devaluations of the peso remained
a
difficulty for debtors. BROU's second action was to
acquire many
loan portfolios from the private banks. The government
thus
propped up several private banks, actually buying out four
of the
twenty-four banks in the country. This policy prevented a
banking
collapse but significantly increased BROU's obligations,
making
it responsible for a large share of the public-sector
deficit.
The financial sector remained in a precarious condition
as
the Sanguinetti government took office. By the end of
1984, the
banking system had a negative net worth. In 1985, however,
the
banking system raised US$400 million in new dollar
deposits.
Although overall economic conditions improved during the
first
three years of the Sanguinetti administration, credit
remained
restricted and interest rates high, making it difficult
for even
solvent borrowers to obtain new loans. The government
continued
its efforts to strengthen the banks. For example, it
planned to
spend US$160 million in 1989 to restructure the four banks
bought
during the height of the banking crisis so that they could
be
sold to the private sector. Critics charged that these
banks were
too highly indebted, inefficient, and overstaffed to be
sold. As
of mid-1989, all but one of the banks remained under the
supervision of BROU, Uruguay's largest bank (a state
enterprise).
One bank, the Commercial Bank, was sold to a group of
international investors in 1990.
Dollarization of the banking system continued to
increase.
The proportion of money held in United States dollar
accounts
reached 84 percent in 1989. The major source of these
funds was
Argentina, whose savers sought a safe haven and a
dependable
currency. Uruguayan savers placed deposits in dollars to
avoid
exchange-rate fluctuations. Thus, the openness of the
banking
system may have prevented some capital flight, but the
dollarization of bank deposits made it difficult for the
government to conduct a monetary policy because the money
supply
could not be tightly controlled. Nevertheless, the
government did
not restrict the banking system to deposits in pesos,
encouraging
instead the further internationalization of Uruguay's
banks, most
of which were foreign owned. In addition, liberal offshore
banking rules (for transactions among nonresidents) were
introduced in 1989.
Although Lacalle supported the idea of Uruguay as an
international banking center, he indicated in early 1990
that his
administration planned to introduce legislation under
which bank
secrecy i.e., anonymous accounts, would be lifted in cases
where
illegal drug-money laundering was suspected. The
government was
pressured to change that aspect of its banking regulations
after
an alleged Colombian "drug lord" told United States
officials
that he and others often used Uruguayan accounts.
Data as of December 1990
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