Financial Stability Report

This semi-annual report presents recent developments and prospects for financial stability in Argentina.

Preface

Financial stability (FI) can be defined as a situation where the financial services sector can channel the population’s savings and provide a national payment service in an efficient and sustainable way over time. The proximity (remoteness) to a context in which the possibility of sustaining the provision of those services is threatened, due to bank runs, excessive leverage, inadequate risk management policies or distortion of asset prices, would define the degree of financial fragility (strength).

In our case, as in most emerging economies, a large part of financial intermediation is channelled through the banking system, so the concept of FI focuses mainly on the assessment of the conditions that make financial institutions function normally. In this context, and in order to serve as a guide for policy implementation, the objective of EF leads from the operational point of view to the adoption of measures aimed basically at addressing market failures (market power, externalities or asymmetric information). In the context of the implementation of sound and stable macroeconomic policies, the achievement of FI requires clear rules regarding the entry and exit of institutions, adequate prudential regulatory framework and safety net, effective official supervision, sufficient legal and institutional support for control bodies, and mechanisms that encourage market discipline.

The existence of a strong interrelationship between PE and economic growth justifies that PE constitutes a social good that the State must seek and protect. On the other hand, in terms of policy implementation, the influence of the FI on the effectiveness of monetary policy, and its importance in the functioning of the national payment system, must be taken into account. Many Central Banks were founded precisely to deal with situations of financial instability and currently most of them have as one of their fundamental functions, directly or indirectly, to promote PE.

“To oversee the proper functioning of the financial market” is one of the primary functions assigned to the Central Bank of the Argentine Republic in Article 4 of the Organic Charter. In order to fully comply with this legislative mandate, it is necessary to complement the BCRA’s usual regulatory and supervisory powers with a transparent communication strategy that is accessible to the general public.

With the above objective in mind, the Financial Stability Bulletin (BEF) has emerged, presenting a general assessment of the evolution of the stability conditions of the financial system. It merges the various channels of information of the BCRA on the subject, in a single publication. Between each semi-annual edition of the BEF, the BCRA releases the Banking Report monthly to keep the public updated on the latest developments in the financial system.

These two publications are the main channels used by the BCRA to disseminate its perspective on the financial system.
Depending on the depth desired by the reader, BEF can be approached in two distinct ways. Reading the Institutional Vision and the Risk Balance, together with the synthesis of each chapter, allows the reader to capture the essence of the analysis contained in the BEF. Naturally, the complete review of the BEF provides a comprehensive assessment of each of the topics covered and is enriched by the analysis of special topics presented in the Sections.

This edition of the BEF outlines an outlook of the financial system for the short term based on developments observed during the first half of 2004. In the following pages of the BEF, special emphasis is placed on consolidating the normalization of the financial system, basically through the recovery of credit, the pillar that will allow the reconstruction of the financial intermediation business.

This process, in a context of prudent risk management policies, will result in an improvement in the solvency of the financial system and a greater contribution to long-term economic growth.

The date of the next publication of the BEF, corresponding to the first half of 2005, will be during the last week of March 2005 via the Internet, with statistical closure at the end of 2004.