The same financial system that the government had convened in 2002 to expand mortgage credit became, just a year later, the epicenter of the biggest bank failure in Dominican history
SANTO DOMINGO. – On May 13, 2003, the then governor of the Central Bank, José Lois Malkún, appeared before the country to announce that the Dominican banking system had been the victim of serious anomalies, an apocalyptic message, behind which was hidden a fraud that had been brewing for months within the Intercontinental Bank, Baninter, then the second largest commercial bank in the country, by volume of assets.
The decline had begun long before that date, according to the reconstruction made by economist Juan Temístocles Montás in a thesis presented at the University of Barcelona. Since September 2002, Baninter had been facing massive deposit withdrawals, which the Central Bank attempted to contain through rediscounts, understanding the problem as a simple, temporary lack of liquidity.
The situation, however, continued to deteriorate until, on March 24, 2003, the Monetary Board authorized talks for a possible merger of Baninter with Banco del Progreso, a considerably smaller institution. The negotiations failed, and in April the bank exhausted its capacity to provide collateral against the advances demanded by the Central Bank, leading to its formal declaration of bankruptcy.
But the collapse did not stop at Baninter; instead, it generated a domino effect, and in the following months, monetary authorities identified similar deficiencies at the National Credit Bank, Bancrédito, and the Mercantile Bank, both of which were also dissolved with the financial backing of the Central Bank.
According to the same study by Montás, the liquidity assistance intended to rescue depositors and enable the capitalization of the three banks represented, around September 2003, about 18% of the country's gross domestic product.
Initial estimates from the International Monetary Fund, cited in the same investigation, placed the amount of the fraud at between 12% and 15% of GDP, a figure equivalent to between 60% and 80% of the central government's budget for that year. The case resulted in criminal charges against Baninter's top executives, who were prosecuted by the Dominican justice system.
The macroeconomic cost was felt immediately. The economy, which had grown at a healthy pace during the 1990s and had only slowed to 2.7% in 2001 before recovering to 4.1% in 2002, contracted in 2003 for the first time in years. The Dominican peso devalued sharply against the dollar, inflation climbed to levels not seen in over a decade, and the International Monetary Fund ended up intervening with a bailout program for the country, as the newspaper Hoy later recounted in an anniversary analysis of the collapse.
The Central Bank's response to contain the flight of deposits and exchange rate pressure was a markedly restrictive monetary policy: it raised the legal reserve requirement for banks and placed investment certificates at considerably higher interest rates than those in force until then, in an effort to absorb the excess of currency in circulation generated by the crisis itself.
Central Bank of the Dominican Republic. (External source).
That combination of measures, necessary to stem the bleeding, had a direct side effect on any family that at that time tried to access a loan: credit, in general terms, became more expensive and scarcer, just when the country needed it most.
The institutional irony is hard to ignore. Just fourteen months before Malkún's announcement, Decree 45-02 had created the National Council for Affordable Housing, relying, according to its own text, on the government's fiscal measures enabling lending institutions to "increase their portfolio of real estate loans.".
The Association of Commercial Banks and the League of Dominican Savings and Loan Associations, called upon to join that council as partners in the State's housing policy, instead found themselves managing, or surviving, the biggest crisis of confidence that the Dominican financial system has ever faced.
The official figures collected by the Economic Commission for Latin America and the Caribbean, ECLAC, in its economic study corresponding to that biennium allow us to measure the blow: construction, one of the sectors most sensitive to the cost of credit, contracted 8.5% in 2003, a collapse comparable to that of electricity generation and surpassed only by the collapse of trade.
The country's gross domestic investment fell 12.4% in the same year, and private consumption declined 9.1%, dragged down by ever-rising interest rates: the average lending rate went from 21.3% in 2002 to 27.8% in 2003, with quarterly peaks reaching 29.5%, while the deposit rate rose from 16.4% to 20.6% in the same period, according to the same report.
The Central Bank itself, forced to absorb the liquidity that the bankruptcy of the three banks had put into circulation, placed investment certificates whose balance went from just RD$6,905 million at the end of 2002 to RD$60,000 million in 2003, and almost RD$81,000 million in April 2004, with rates that in some auctions reached 60%.
This competition for available savings, coupled with the establishment of limits on private credit that the authorities adopted in 2004, left commercial banks with less room to maneuver and less incentive to place long-term mortgage loans, precisely the instrument that Decree 45-02 had sought to multiply.
The terrain on which any housing program of the Mejía government had to operate from mid-2003 onwards was thus defined: a construction sector in decline of almost 9%, a cost of money that doubled from one year to the next and a State that, at the same time, was trying to sustain the institutional framework described in the previous installment of this series.
This contrast—between the government's policy of expanding access to housing and a financial crisis that narrowed precisely that avenue—marked the remainder of Hipólito Mejía's four-year term. The next installment picks up the thread of Invivienda, the housing project that had been dragging on for three consecutive administrations, to see how it was ultimately shut down, or abandoned, under these same conditions.
Sources: El Día, “The 2003 Banking Crisis, 20 Years Later” (May 26, 2023). | Montás Domínguez, Juan Temístocles, “The Dominican Banking Crisis of 2003,” Master's thesis in Foreign Trade and International Finance, University of Barcelona. | Hoy, “Baninter: 23 Years Since the Financial Collapse That Shook the Dominican Republic” (May 13, 2026). | Economic Commission for Latin America and the Caribbean (ECLAC), “Economic Survey of Latin America and the Caribbean 2003-2004,” chapter on the Dominican Republic.
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