Implications of the Globalization of the Banking Sector: The Latin American Experience - history of Latin America's experience with foreign banks - Statistical Data Included

New England Economic Review, Sept-Oct, 2000 by Joe Peek, Eric S. Rosengren

A more open banking market that allows well-capitalized, internationally diversified banks to enter has several substantial potential benefits. First, such firms are likely to be able to provide bank financing to creditworthy borrowers, even in the presence or aftermath of a significant, adverse domestic shock. While local banks with only (or primarily) domestic operations may be severely impaired by domestic shocks, a large global bank with operations in many countries (and with the host country representing a small share of its exposure) is much less likely to be affected. This is particularly true because the impacts of recent international shocks have been localized. The recent problems in both East Asia and Latin America did little to dampen the European and American economies, enabling banks headquartered in those countries to be well positioned should good lending opportunities arise.

Second, global banks are often an important source of new capital for a devastated banking sector following a crisis. Foreign banks have been a major source of funding in the aftermath of the banking crises in Argentina, Mexico, and Brazil, and these crises have been one of the major catalysts for allowing foreign bank entry. A severe banking crisis rarely leaves domestic banks well capitalized, and recapitalizing banks with private sector funding frequently requires finding investors who have not been heavily exposed to the domestic shock. Allowing foreign banks to enter a previously closed market or substantially increasing the foreign bank presence in the market can provide additional sources of private sector funding for bank recapitalization plans, thus reducing the costs to the government relative to the costs incurred if only domestic investors can bid for the good assets of failed banks. In addition, the presence of international banks may encourage other foreign (nonbank) firms to consider investing in the host country, in much the same way that banks have been shown to follow their customers abroad (Seth and Nolle 1996).

Third, global banks bring to the host country practices consistent with the financial and regulatory reporting requirements of their home country. For example, for U.S. banks, Securities and Exchange Commission (SEC) requirements for reporting material events and even stock exchange listing requirements frequently provide significant improvements in disclosure compared to those in an emerging market host country. Similarly, the reporting of host country activities to the home country regulator often requires information systems and details that may not be standard in the host country. These improvements in financial reporting are likely to have positive spillover effects, as personnel switch to domestic competitors and as regulators, investors, and depositors become aware of differences between the operations of domestic and foreign banks.

Fourth, many of the globally active banks are among the most efficient in their home country, and they are likely to introduce improved management and information technologies to the host banking market (Focarelli and Pozzolo 2000). Entry of foreign banks is one way to quickly transfer the best practices currently in use in more developed banking markets (Levine 1996), thus improving the efficiency and range of intermediation services in the host country.