Urugay Essay

3849 Words Jan 30th, 2013 16 Pages
The Uruguay Banking Crisis was a major banking crisis that hit Uruguay in July 2002. In this, 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 Central Bank of Uruguay had trusted international banks to regulate themselves properly and was too lenient and
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Banks that cannot service their liabilities as they fall due can borrow from banks with excess fund. On the other hand, banks with excess liquid assets above the liquidity requirement will lend money and receive interest on the assets. In order to regulate the money flow among the banks in the interbank market, the interbank rate is calculated and determined by an independent company. The rate is determined depending on the availability of money in the market, on prevailing rates and on the specific terms of the contract
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such as term length. Some of the prominent interbank rates include federal funds rate (USA), the LIBOR18 (UK) and Euribor (Eurozone).
Recent financial crisis, for example, shows how the strain in interbank lending markets during the 2007 exacerbated the financial crisis. It started in June 2007 when rating agencies downgraded over 100 bonds backed by subprime-mortgages. Soon after, the investment bank Bear Stearns liquidated two hedge funds that had invested heavily in Mortgage-Backed-Security (MBS) and a few large mortgage lenders filed for Chapter 11 bankruptcy protection. Tensions in interbank lending market became apparent on August 9, 2007 after BNP Paribas announced that it was halting redemptions on three of its investment funds. The day after the US

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