In this light, Chile's response to its 1981-84 systemic banking crisis has been held up as one example. The cost was comparable relative to the size of its economy to that facing the U.S. Government today. In 1985, Central Bank losses to rescue financially distressed financial institutions were estimated to be 7.8% of GDP (equivalent to approximately $1 trillion in the United States today). The single most important lesson of the Chilean experience was that the Central Bank was able to restore faith in the credit markets by maintaining liquidity and bank capital structures through the extension of household and consumer loan maturities, the temporary purchase of substandard loans from the banks, and the prompt sale and liquidation of insolvent institutions. Substandard loans remained off bank balance sheets until the viable institutions could provision for their loss from future profits. The fiscal cost of the three policies discussed above was high.
Chile experienced a banking crisis from 1981-84 that in relative terms had a cost comparable in size to that perhaps facing the United States today. The Chilean Central Bank acted quickly and decisively in three ways to restore faith in the credit markets. It restructured firm and household loans, purchased nonperforming loans temporarily, and facilitated the sale or liquidation of insolvent financial institutions. These three measures increased liquidity in the credit markets and restored the balance sheets of the viable financial institutions. The Central Bank required banks to repurchase the nonperforming loans when provision for their loss could be made and prohibited distribution of profits until they had all been retired. Although the private sector remained engaged throughout the resolution of this crisis, the fiscal costs were, nonetheless, very high.