Financial Integration and Foreign Banks in Latin America: Do They Amplify External Financial Shocks?
AbstractThis paper explores the impact of international financial integration on credit markets in Latin America. Using a cross-country dataset covering 17 Latin American countries between 1996 and 2008, the authors find that financial integration amplifies the impact of international financial shocks on aggregate credit and interestrate fluctuations. Despite this pernicious effect, the net impact of integration on deepening credit markets is positive and dominates for the large majority of states of nature. The paper also uses a detailed bank-level dataset covering more than 500 banks in Latin America for a similar time period to explore the role of financial integration—captured through the participation of foreign banks—in propagating external shocks. The authors find that interest rates charged and loans supplied by foreign-owned banks respond more to external financial shocks than those supplied by domestically owned banks. However, this result does not hold for all foreign banks: Spanish banks in the sample behave more like domestic banks and do not amplify the impact of foreign shocks on credit and interest rates. Important policy recommendations to avoid foreign banks’ amplification of external financial shocks include the establishment of ring-fencing mechanisms, the development of early-warning systems, and the incorporation for agreements between domestic and foreign supervisors.
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Bibliographic InfoPaper provided by Center for Global Development in its series Working Papers with number 203.
Length: 32 pages
Date of creation: Mar 2010
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Web page: http://www.cgdev.org
foreign banks; credit; interest rates; financial shocks;
Find related papers by JEL classification:
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G0 - Financial Economics - - General
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-28 (All new papers)
- NEP-BAN-2010-08-28 (Banking)
- NEP-CBA-2010-08-28 (Central Banking)
- NEP-IFN-2010-08-28 (International Finance)
- NEP-MON-2010-08-28 (Monetary Economics)
- NEP-OPM-2010-08-28 (Open Economy Macroeconomic)
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