Ponzi schemes and the financial sector: DMG and DRFE in Colombia

• Published in: Journal of banking & finance 2018-11, Vol.96, p.18-33
• Main Authors: Hofstetter, Marc, Mejía, Daniel, Rosas, José Nicolás, Urrutia, Miguel
• Format: Article
• Language: English
• Subjects: Banking; Colombia; Loan ratings; Ponzi schemes; Pyramids; Savings and loans
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2018.08.011

•Over half a million people participated in two Ponzi schemes investing 1.2% of GDP.•Investors acquired 39% more loans compared to similar individuals who did not invest.•Deposits in the banking sector fell in municipalities affected by the schemes.•After the pyramids were shut down, nonperforming loans of investors increased by 36%.•After the pyramids were shut down their loan stocks in the banking sector fell. We use a novel dataset to estimate, for the first time in the literature, the effects of Ponzi schemes on the formal financial sector. DMG and DRFE, two Ponzi schemes that were shut down by the Colombian government in November 2008, had over half a million customers, who invested funds corresponding to 1.2% of Colombia's annual GDP. We find that pyramid costumers’ obtained more loans from the financial sector and their credit standings were better than those in the respective control groups while the schemes were operating. Afterwards, their loan stocks started to decrease and their ratings with the banking sector deteriorated. Prior to November 2008, deposits in the financial sector fell more in the municipalities more affected by the schemes.