Systemic Risk in the United States, Europe and Latin America

In response to the dire financial affectations suffered by bank customers in the United States and Europe as a result of the crisis that began in 2008, the authorities in those regions considered it necessary to restore confidence to savers by increasing the security of deposits, strengthening prudential regulations and increasing banking supervision.

Another measure to protect and reassure savers of banks and to ensure the stability of the banking system as a whole is the increase in the Deposit Guarantee Fund coverage limit. In the United States, this limit moved in 2009 from $100,000 to $250,000 per depositor. In the European Union, coverage in the 28 member states moved from an average of 25,000 euros to 100,000 euros per depositor.

Note that the Eurozone will establish a common Deposit Guarantee Fund, which will have a system of contributions based on the total volume of deposits in the banking system and the risk profile of each of the contributing banks. In Latin America, several countries have increased the coverage limit, including Argentina, Brazil, Mexico, Uruguay and Venezuela. Unfortunately, Central America has had a very conservative performance and finds itself lagging behind in this area.

On the other hand, some decisions have damaged the confidence of savers, as in the case of Cyprus that, during the March 2013 negotiations for their rescue, when they threatened to apply an “acquittance” of 6.75 percent to savers guaranteed by the Deposit Guarantee Fund. For savers with funds above 100,000 euros, they applied a mandatory “acquittance” of 40 percent. In addition, Cyprus also applied a “small enclosure” without a run on deposits to justify it. These three decisions, which have common elements in other Eurozone countries, significantly increased the systemic risk in Europe.

In the case of Nicaragua, after the banking “affairs” (1999-2001), the coverage per depositor did not increase but rather was reduced from $20,000 (January 2001-November 2005) to $10,000 starting in November 2005. The decrease in Deposit Guarantee Fund coverage and the lack of a minimum coverage goal (a certain percentage) of the total deposits of the banking system are two elements that negatively impact Nicaragua’s systemic risk, in accordance with international parameters.

Finally major steps have been taken — the United States, with the Dodd-Frank Act’s implementation (2010) underway and Europe, with the European Systemic Risk Council (ESRC) that was approved in 2011 — to monitor the stability of the financial system, identify and prioritize systemic risk, issue risk warnings and take corrective action to prevent crises like that of 2008.