The entry of multinational banks into Latin America: a source of stability or financial fragility?

This paper aims to contribute to the debate regarding the presence of foreign banks in Latin America. To clarify the discussion, we shall conduct a survey of the theoretical and empirical literature devoted to internationalisation in the banking sector so as to provide a better analysis of the determinants that currently underpin foreign banking investments. The international banks concerned come mainly from the European Union, particularly Spain, and primarily focus their investments in the region’s large emerging economies. They display profitability indicators that are on a par with those of domestic banks, generate a significantly lower level of operational efficiency, but are more efficient in their management of risk. Multinational banks can help reinforce banking stability by spreading new risk management methods, by introducing new control procedures and strengthening asset solidity. However, they are partly responsible for the credit squeeze from which Latin America is suffering. Foreign banks can be the cause of new sources of banking fragility such as the exposure to foreign exchange risks, the increase in market influence, persistently high intermediation spreads and the moral hazard.