“Confidence in the daily operations of the bank survived because of the way the business elite has covered the deficit with their own resources,” President Fernández told the FT.

Even so Banco del Progreso’s difficulties have been an uncomfortable reminder of the crisis in 2003 at Baninter, then the country’s third biggest bank. Baninter’s collapse, brought about by lending issues and allegations of fraud and embezzlement that are still subject to legal proceedings, triggered the failure of two smaller institutions – Banco Mercantil and Banco Nacional de Crédito. The crisis was one of the largest in Latin America.

Overall losses of more than $2bn – and equal to 20 per cent of GDP – were covered by a massive government bail-out and Mr Fernández’s government is still dealing with the consequences. After savers withdrew funds the central bank opted to guarantee 100 per cent of deposits up to $16,000. As a result it has on its books $4bn of certificates of deposit issued to soak up liquidity resulting from the bail-out. Mr Fernández and his ministers are still working out how to deal with that so-called “quasi fiscal” burden.
By contrast, the government emerged unscathed from the problems at Banco del Progreso. But the affair will raise questions about the effectiveness of regulatory changes introduced since 2003. The main thrust of these measures has been to bring Dominican practice closer to international standards. Banks are being forced to increase capitalisation, making much greater provisions against potential bad loans, for example. Accounting rules have been modified, to bring greater transparency to the relationship between a holding group and its bank.

And banks are now obliged to analyse credit risks rather than relying on personal relationships with customers. But many of these changes have had little time to bed down, especially since, according to critics at least, some banks were reluctant to implement the changes. “Changing the rules is not enough. You need to change practices at the shop floor level,” says one Washington-based official at a multilateral agency.

Even so, local analysts say regulation is better. “It has improved a lot,” says Mr Luis Núñez Santana, a Santo Domingo-based analyst. “The central bank has used the experience to make the rules better.”

Manuel Peña-Morros, president of Banco León, agrees, arguing that banking has “become a much more disciplined process”. Banks are under much more pressure not to lend to affiliated companies, he says. For example, Banco León cannot lend to the brewery that makes the famous Dominican Presidente beer, because both are owned by the wealthy León family of Santiago. “Vincular [to link up in Spanish] is a dirty word,” says Mr Peña-Morros.

Mr Peña-Morros blames a lack of professionalism among owners and managers who presided over a rapid expansion of the system in the 1990s. “The owners of the banks weren’t bankers. There was no professional management and a big lack of banking discipline,” he says.

That is beginning to change. Over the past couple of years, for example, Banco León has changed virtually every aspect of the failed institution – Banco Nacional de Crédito – that it took over. “We have done everything. We have new clients, new products, a new platform [computer and IT system] and a new building. We have new personnel and they have all been given fresh training,” he says.

The other impact of the crisis has been to increase the overseas presence in the sector. Nova Scotia of Canada and Republic Bank of Trinidad and Tobago have reorganised Baninter and Banco Mercantil.

Nova Scotia Bank took over one-third of Baninter’s branches as well as its credit card business and its portfolio of personal and commercial loans.

With fresh capital committed and confidence restored, credit volumes grew significantly last year. After a decline of 6.6 per cent in 2004, bank loans grew by 13.5 per cent. Consumer loans rose 58.8 per cent compared with just 21.3 per cent in 2004. Banco León – like other local operators – is focusing on big tourism projects.

Even so, scale, and limited access of the dominant domestic groups to capital, restrict the scope for expansion. Mr Peña-Morros says no bank in the republic is yet able to offer commercial loans over longer than three months.

Remittances sent home by Dominicans in the US amount to $3bn and represent a potential source of business.

Mexican banks, for example, have begun to offer services to migrants, helping channel these flows into the booming housing market. Mr Peña-Morros, however, says Dominican banks cannot meet the cost of complying with US regulation.