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Document Type

Case Study

Abstract

In 1998, Colombia entered a severe recession. GDP contracted by 4.2% in 1999, and the unemployment rate surpassed 20%. Political turmoil exacerbated trade and fiscal imbalances. The economic downturn led to credit contractions, particularly in the mortgage market. The nonperforming loan (NPL) ratio increased from 8% in December 1997 to 16.1% in November 1999. The NPL ratio for residential mortgages grew from 6% in December 1997 to 19.8% in January 2000.

In 1999, due to the continuous deterioration of credit institutions, the government, through FOGAFIN (the Financial Institutions Guarantee Fund—the state agency for bank resolutions and deposit insurance), initiated rescue policies to restore public confidence and solvency in the financial system. The government implemented a three-year economic recovery program that, among other measures, included capitalization of credit institutions. This authority was given through Resolution 006 of 1999, in which FOGAFIN granted loans to the shareholders of institutions to be used exclusively to recapitalize their institutions. Resolution 006 of 2001 gave the authority to further capitalize credit institutions specialized in mortgage lending.

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