POLICY-INDUCED DISINCENTIVES TO FINANCIAL SECTOR DEVELOPMENT - SELECTED EXAMPLES FROM LATIN-AMERICA IN THE 1980S

This commentary argues that heavy-handed regulation and onerous implicit taxation of financial intermediaries in Latin America in the 1980s was softened by governments' assumption of responsibility for bank failures. This in turn induced governments to avoid dealing with bank distress, with disastrous subsequent consequences. In effect, mismanaged bank regulations were propped up by mismanaged bank exit procedures. The disincentives induced by such financial policies on bankers, depositors, creditors and regulators were pervasive. Illustrations are drawn from the experiences of four Latin American countries (Argentina, Bolivia, Nicaragua, Venezuela) in the 1980s.