Eduardo Jorge Prats, a legal advisor to former Central Bank Governor Frank Guerrero Prats, writes today in El Caribe on the perils contained within Law 92-04, which creates the Exceptional Program for Prevention of Systematic Bank Risk. He criticizes that the Monetary and Financial Administration (AMF) authorities backed a law that eliminates the limits on last-instance loans from the Central Bank to financial intermediaries, thus opening the doors for the Central Bank to become the ultimate guarantor of all deposits in commercial banks or financial institutions in the nation.
Jorge Prats says this merely sets the stage for a replay of the present economic crisis following the collapse of various commercial banks. The real cause of the present economic nose-dive, he says, was the advice the AMF gave to resolve the banking crisis: Payback 100% of the deposits of the collapsed banks, despite the fact that the monetary and financial laws established a RD$500,000 limit.
He comments that systematic bank risk cannot be properly implemented without healthy banking regulations, efficient supervision and clear-cut rules on internal control and corporate governance. ?The only ones who win by the unlimited governmental guarantee of the banking deposits are the bankers and the investors,? he emphasizes.
?It is not by luck that investors such as George Soros want a last-resort lender, an idea that Joseph Stiglitz is opposed to, as he well knows the pernicious effects of moral risk,? he concludes.
Recently, the National Council of Business (CONEP) and the Foundation for Justice and Institutionalism (FINJUS) joined forces to argue the unconstitutionality of Law 92-04 on Systemic Risks in the Financial Sector, as well as Article 77 of the Monetary Code. Law 92-04, which was approved last January, produced the Exceptional Program of Risk Prevention of Intermediary Financial Institutions. In the brief filed by CONEP and FINJUS with the Supreme Court, lawyers Juan Manuel Pellerano and Eduardo Jorge Prats deemed the case to be ?serious and important.? One of the major sticking points in the lawyers? arguments on the irrationality of the law is to do with Article 10, which orders the return of all deposits within 30 days from the time a financial institution that has been forced to undergo the Exceptional Program is declared unviable. According to the lawyers, this is one of the most unreasonable articles in the law because it creates a situation of even higher moral risk, since the bankers, knowing that the law will guarantee 100% of the deposits, have no incentive to manage their money in a prudent manner. This law was one of the prerequisites established by the IMF in order to resume the Standby Agreement.