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Document Type

Case Study

Case Series

Bank Holidays & Other Suspensions

Abstract

After a series of exogenous shocks hit Ecuador’s economy in 1997 and 1998, foreign creditors reduced external credit lines to the country, draining liquidity. The newly created Deposit Guarantee Agency (Agencia de Garantía de Depósitos, AGD) administered deposit insurance and a new blanket guarantee and had the authority to resolve failing banks. Despite these actions, bank runs continued. After depositors reportedly withdrew USD 400 million from banks over a two-week period, on Monday, March 8, 1999, one hour before banks were supposed to open, the bank superintendent declared a surprise bank holiday effective that day; banks reopened a week later on, March 15, 1999. On Thursday, March 11, the president and finance minister announced a one-year partial freeze on different types of deposits (demand, savings, time), repurchase transactions, and mutual funds. The freeze significantly contracted liquidity and virtually halted all financial activity. Runs and bank failures continued throughout 1999, and the government adopted the US dollar as Ecuador’s official currency in early 2000 to stabilize the system and prevent hyperinflation. The government gradually unfroze many accounts earlier than planned, including savings and checking deposits. In November 1999, the Constitutional Tribunal declared account freezes unconstitutional. In early 2000, the government proposed a schedule for unfreezing time deposits, starting in mid-March. The central bank later said that the holiday and deposit freezes had failed to restore confidence in the banking system.

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