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Financial Integration and Foreign Banks in Latin America: How Do They Impact the Transmission of External Financial Shocks?

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  • Arturo Galindo
  • Alejandro Izquierdo
  • Liliana Rojas-Suárez

Abstract

This paper explores the impact of international financial integration on credit markets in Latin America, using a cross-country dataset covering 17 countries between 1996 and 2008. It is found that financial integration amplifies the impact of international financial shocks on aggregate credit and interest rate fluctuations. Nonetheless, the net impact of integration on deepening credit markets dominates for the large majority of states of nature. The paper also uses a detailed bank-level dataset that covers more than 500 banks for a similar time period to explore the role of financial integrationcaptured through the participation of foreign banksin propagating external shocks. It is found that interest rates charged and loans supplied by foreign-owned banks respond more to external financial shocks than those supplied by domestically owned banks. This 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.

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Bibliographic Info

Paper provided by Inter-American Development Bank in its series IDB Publications with number 6780.

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Date of creation: Feb 2010
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Handle: RePEc:idb:brikps:6780

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Keywords: Financial Crises & Economic Stabilization; Financial Sector; IDB-WP-116;

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References

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  1. Nicolas Magud & Carmen M. Reinhart, 2007. "Capital Controls: An Evaluation," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 645-674 National Bureau of Economic Research, Inc.
  2. Marco Arena & Carmen Reinhart & Francisco Vázquez, 2006. "The Lending Channel in Emerging Economics: Are Foreign Banks Different?," NBER Working Papers 12340, National Bureau of Economic Research, Inc.
  3. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
  4. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 65-84, Fall.
  5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
  6. de Haas, Ralph & van Lelyveld, Iman, 2006. "Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1927-1952, July.
  7. repec:nbr:nberwo:9710 is not listed on IDEAS
  8. Dennis P. Quinn, 2003. "Capital account liberalization and financial globalization, 1890-1999: a synoptic view," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 189-204.
  9. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises," NBER Working Papers 12101, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sara G.Castellanos & Jesus G. Garza-Garcia, 2013. "Competition and Efficiency in the Mexican Banking Sector," Working Papers 1329, BBVA Bank, Economic Research Department.

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