Banking and Financial Services

Banking and Financial Services

By the end of the Allende period, commercial banks were little more than cash vaults. The availability of credit was low, and lending patterns were highly distorted. During 1975-90, however, Chile's financial sector experienced a remarkable boom, and by 1992 it was modern and dynamic. Banks performed a variety of operations, and the stock exchange was gaining rapidly in importance. The development in the 1980s of several financial operations involved with servicing Chile's external debt helped to increase the sophistication of the system.

The road to a modern financial sector was not easy. In the process, a number of banks collapsed as a result of the credit crisis of the early 1980s, and interest rates were high. After a period of government control, the failed banks were reprivatized in the mid-1980s, and the banking sector went through an extensive consolidation process. Some banks ceased to exist, and others sought mergers. In 1989 the government made the Central Bank independent of government control by creating the Central Bank Council, a five-member group consisting of two members appointed by the government, two by the opposition, and a president selected by consensus. Beginning in the late 1980s, the number of banks became more stable: thirteen domestic banks and twenty-two foreign-owned banks. Their level of operation had rapidly risen by the early 1990s. Nevertheless, Chile's top seven banks, squeezed by growing competition from consumer finance houses and in-store credit operations, suffered a 17 percent decline in profits in 1991. As a result, the banks were looking to the mining sector for profits.

Since the economic crisis of 1982-83, a recurrent preoccupation of policy makers has been the behavior of interest rates in Chile. Many analysts argued that the near collapse of the Pinochet regime's free-market experiment in those years was the consequence of extremely high interest rates. In 1991 and the first few months of 1992, interest rates experienced a major decline; this was the case for both nominal and real interest rates. As the degree of openness in the capital account increased, domestic interest rates seemed likely to converge toward international levels.

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