Saturday, March 11, 2017

Collapse: The Venezuelan Banking Crisis of '94 byRuth de Krivoy Group of Thirty, Washington, 2000, [xv] + 281 pp., $40 (paper).

Although many authors have studied the causes, consequences, and early indicators of banking crises, this book is unique for several reasons. It presents a detailed account by one of the major players in the drama of the events that took place before and during one of the worst banking crises to hit Latin America. An interesting and provocative case study in political economy, it aims at a broad audience and provides important evidence about the factors that contribute to banking crises in general and those that led to the one in Venezuela in particular. It describes the consequences of inappropriate macroeconomic policies, weak institutions, and ineffective regulatory frameworks, combined with bad luck and lack of political will to take the necessary measures at the right time.

Ruth de Krivoy was president of the central bank of Venezuela during the height of the crisis that erupted in early 1994. During the early 1970s, she had been vice president of research at the central bank, where she played an active role in strengthening economic research as a major instrument of support for monetary policy. After she left the central bank, she continued to be involved in financial sector issues as an independent consultant. In 1992, two months after an attempted coup d'état, she became president of the central bank. Her appointment seemed a natural choice, given both her extensive experience and her firm belief in central bank independence. Ruth de Krivoy resigned the central bank presidency in April 1994, but continued to be actively involved in financial sector issues, participating in the Toronto International Leadership Center for Financial Sector Supervision and several international seminars and events.

This book provides an excellent background for the main macroeconomic developments in Venezuela before the crisis as well as for the structural problems associated with the country's dependency on oil, the distortions created by price and interest rate controls, and the pervasive subsidies supported by oil revenues. The asymmetric response of fiscal policy to oil price shocks created a government that was too large and overly involved in the private sector. The book also describes the weaknesses and ineffectiveness of the financial and banking regulatory system. Excessive controls discouraged transparent, easily monitored institutions, while too many supervisory agencies were responsible for maintaining a sound financial system, all in the absence of appropriate prudential regulations and effective enforcement. In this context, structure and ownership in the banking sector became highly concentrated, with little foreign competition, poor corporate governance, and an overreliance on oil revenues.

The reader is exposed to all possible factors that contributed to the Venezuelan crisis, many of which have been found to underlie other banking crises: moral hazard, inadequate accounting rules and prudential norms, an undercapitalized banking system, a weak regulatory framework, and large undisclosed contingent liabilities. One of the book's most interesting aspects is the combination of technical and political economy analysis. As de Krivoy explains, the rapid transformation of the economic system resulting from the liberalization of Venezuela's economy in the late 1980s and early 1990s did not take place as expected, because reforms were not appropriately sequenced and they adversely affected too many interests, which conspired against the political support required for the success of the program.

The attempted coup in 1992 ignited a series of events that weakened the very core of the democratic regime. Reforms were reversed, credibility was lost, and the economy was destabilized by large capital outflows. In this context, before and throughout the crisis, a political struggle between the central bank and the institutions directly responsible for taking corrective actions undermined the central bank's recently established independence.

Perhaps the most valuable contribution of the book is contained in the last chapter, "A Call for Action." After a careful analysis of the events, and based on first-hand experience, de Krivoy expounds on how to avoid a banking crisis, and, if a crisis emerges, how to minimize and control its impact. It is useful and pragmatic advice, with recommendations directed at bank owners and managers, institutions involved in the regulation and supervision of banks, central bankers, lawmakers, economic policymakers, and the world community of bankers and supervisors. The author also presents important reflections on special problems faced by Latin America and Venezuela.

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