Sociedad

SEK LOS VALLES SCHOOL SEK INTERNATIONAL AWARD CONTESTANT WORK

SEK LOS VALLES SCHOOL SIXTH COURSE 2007-2008

FROM ECUADORIAN BANKING CRISIS TO A NEW ECONOMIC SYSTEM

VANESSA TOBAR A.

TUTOR: SUSANA DUQUE QUITO-ECUADOR, JULY 26, 2008

I dedicate this monograph to my parents and sister, specially to my mom, who has always been there for me, supporting me and giving me strength to moveon, I know you have been through a lot of pain to give us everything we need I love you mom, you are my inspiration, thank you. I am who I am because of you. To my godfather, a great teacher you were like my grandfather I wish you could be here, this is for you.

I DEX

1. Front Page……………………………………………………………………………...i 2. Acknowledgements……………………………………………………………………ii 3.Summary………………………………………………………………………………1 4. Introduction……………………………………………………………………………4 5. Causes for Banking Crisis……………………………………………………………..7 5.1. Macroeconomic Circumstances 5.2. Microeconomic Policies 5.2.1. Supervision 5.2.2. Inadequate Infrastructure in Matters of Accounting, Law 5.2.3. Liberalization / Deregulation 5.2.4. Government Interference 5.2.5. Moral Hazard 5.2.6. Lack of Transparency 5.3. Banking Strategies and Operations 5.3.1. Poor Credit Assessment5.3.2. Interest rate or Exchange Rate Exposures 5.3.3. Concentration of Lending, and Connected Lending 5.3.4. Unauthorized Trade or Position Taking 5.3.5. Other Operational Failures 5.4. Fraud, corruption 6. Causes of Ecuadorian’s Banking Crisis………………………..……………………13 6.1. Financial Liberalization with Lacks in Institutional Building 6.1.1. Consolidated Supervision Failures

6.1.2. Deficiencies inthe Framework for Bank Failure Resolution 6.1.3. Too Many Intermediates with Low Capital 6.1.4. Financial Liberalization in the Context of Oligarchic Power Structures 6.2. Capital Inflows, Credit Boom, and Sudden Stop 6.2.1. The Surge in Capital Inflows and Domestic Credit 6.2.2. Sudden Stop 6.2.3. Banking System Distress in late-1995 in early-1996 6.3. Post Crisis Inaction or Wasted Opportunity 7.Ecuadorians Banking Crisis………………………………………………………….20 7.1. Crisis Eruption and Containment Efforts 7.1.1. Depositors Anxiety, Shocks and Liquidity Squeeze 7.1.2. Policy Makers Against the Ropes 7.2. Exchange Rate Crisis and Banking System Disarray 7.3. Behind the Failure of Market-Based Containment 7.3.1. Coordination Failures 7.3.2. Deficiencies in Administrative Capacity 7.4. Deposit Freeze 8. TheDepths of the Crisis……………………………………………………………..28 8.1. International Audits 8.2. Sovereign Debt Default 8.3. The Devaluation Insolvency Spiral 8.4. Dollarization 8.5. Inflation Hump and Dilution of Debt 8.6. Banking System Segmentation and Pending Bank Resolutions 9. Conclusion……………………………………………………………………….....36

10. Field research……………………………………………………………………….39 11.Bibliography………………………………………………………………………..40 12. Attachments………………………………………………………………………...41

SUMMARY

We live in a world where everything depends on money and what people do to make it grow in order to live according to their needs and also to get what they want. I think that the system that is product of how our world is managed is amazing, even in ancient times. Life was based on trade and the relations with it.

Since this world has always attracted me, Ihave always like Economics, its structure and the center of its study. A part of it is the analysis of banking systems, economic policies of each country and the preventions for potential crisis.

When I was eight years old, our country experienced a time of real economic crisis, I remember it vaguely; later I learnt that it brought us the dollarization, the closing of many banks, and a newstructure for the economic management.

Our Ecuadorian crisis is one of the many crises that had so many failures in the structure of its economy as well as in its banking system organization. Most people in our country do not know the reasons that lead us to the deposit freezing and the change of currency, I did...