2002 Uruguay banking crisis

2002 Uruguay banking crisis

The Uruguay Banking Crisis was a major banking crisis that hit Uruguay in July 2002 in which a massive run on banks by depositors caused the government to freeze banking operations. The crisis was caused by a considerable contraction in Uruguay's economy and by over-dependence on neighboring Argentina, which experienced an economic meltdown itself in 2001. In total, approximately 33% of the country's deposits were taken out of financial system and five financial institutions were left insolvent.

According to many sources, the banking crisis could have been avoided if Uruguayan authorities had properly regulated its banks. The Uruguay Central Bank had trusted international banks to regulate themselves properly and was too lenient and slow in responding to the crisis.

Banco Comercial del Uruguay

In 1990, Chemical Overseas Holdings, Inc. (a subsidiary of JPMorgan Chase) acquired with Dresdner Bank Latinamerika and Credit Suisse First Boston the Banco Comercial del Uruguay (BCU), one of that country's oldest and largest national banks. As the years progressed, Uruguay developed as a large offshore banking center for Argentina and Brazil, largely as a result of its lax banking laws and the predominant view among Argentines that Uruguay was a stable place for their savings.

As a result of the banking crisis, some $800 million USD of assets were missing from the BCU alone. In the end, five financial institutions failed and hundreds of thousands in Uruguay, Argentina and Brazil were left in dire economic conditions after seeing their bank accounts literally disappear.

In January 2005, the Paris-based International Chamber of Commerce ruled that the Uruguayan government would have to pay $120 million USD to JPMorgan Chase & Co., Dresdner Bank AG, and Credit Suisse First Boston for failing to maintain the solvency of the BCU.

The crisis underscores the three banks’ difficulty in managing risk in developing countries and dealing with local partners during a time of financial crisis. As a result, a class of BCU's former depositors is suing the three international banks and the individual directors they appointed to BCU's board to recover the losses suffered as a result of the bank's collapse.

External links

* [http://news.bbc.co.uk/1/hi/business/2162956.stm Banking crisis grips Uruguay (BBC News)]
* [http://www.thebanker.com/news/printpage.php/aid/2752/Banking_reform_will_reinforce_recovery.html Banking reform will reinforce recovery] ("The Banker")
* [http://insidecostarica.com/specialreports/finance_south_america_bank_fraud.htm Bank Frauds Highlight Lax Controls, Possible Collusion by Officials (Costa Rica Daily Online News Magazine)]
* [http://mailman.lbo-talk.org/2002/2002-September/022885.html J.P. Morgan, Partners Sued Over Lost Argentine Funds (Bloomberg)]
* [http://llerena.com.ar/english/news/inthenews/jgr/jgr-04-10-02.html Banks risk legal action through involvement with Argentine Rohm brothers (Latin Lawyer: Argentina)]
* [http://bankrupt.com/TCRLA_Public/050117.mbx Banco Comercial: Creditor Wins First Round in Legal Battle (Bankrupt.com - Scroll down to find URUGUAY)]


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