The report is based on the jointInternational Monetary Fund-World Bank Financial SectorAssessment Program (FSAP), and summarizes the quantitativedata through end-2000, although the quantitative discussionin this report has been updated to reflect salientdevelopments since then. The FSAP took place at an importantjuncture for the development of the financial sector, withmajor legal reforms being introduced, which for the mostpart, were consistent with FSAP recommendations.Consequences of the 1994/95 banking crisis have beenabsorbed, with the associated fiscal losses transparentlyallocated to the public sector, in the form of explicit IPAB(Instituto de Proteccion de Ahorros Bancarios) debt.Macroeconomic indicators strengthened significantly sincethe crisis, due to the improved policy management, andcloser links to the US economy. However, while the policy ofincreasing the share of domestic public sector debt hasgains in terms of reduced vulnerability, it is not withoutcosts, for regulations discourage loan dollarization, andlimit systemic liquidity risks, but may lead to lowercredit, and higher lending spreads. The Government is activein the financial system through a large network ofdevelopment banks (DBs), and funds, entailing a significantburden, in many cases, hampering market development. Thus, areform strategy to overcome tensions should aim atseparating subsidies from finance, at consolidating DBs, andat gradually transforming some DBs into developmentagencies. This report further looks at private bankingsystem trends, performance and stress testing, at stateownership in financial intermediation, and at policy issuesin prudential regulation, securities market development, andthe insurance sector.
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