Download Locations:
Summary:
Chile experienced a banking crisis from 1981-84 that in relative terms had a cost comparable in size to that perhaps facing the United States today. The Chilean Central Bank acted quickly and decisively in three ways to restore faith in the credit markets. It restructured firm and household loans, purchased nonperforming loans temporarily, and facilitated the sale or liquidation of insolvent financial institutions. These three measures increased liquidity in the credit markets and restored the balance sheets of the viable financial institutions. The Central Bank required banks to repurchase the nonperforming loans when provision for their loss could be made and prohibited distribution of profits until they had all been retired. Although the private sector remained engaged throughout the resolution of this crisis, the fiscal costs were, nonetheless, very high.
