IDEAS home Printed from https://ideas.repec.org/p/cgd/wpaper/203.html
   My bibliography  Save this paper

Financial Integration and Foreign Banks in Latin America: Do They Amplify External Financial Shocks?

Author

Listed:
  • Arturo J. Galindo, Alejandro Izquierdo, and Liliana Rojas-Suarez

Abstract

This 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.

Suggested Citation

  • Arturo J. Galindo, Alejandro Izquierdo, and Liliana Rojas-Suarez, 2010. "Financial Integration and Foreign Banks in Latin America: Do They Amplify External Financial Shocks?," Working Papers 203, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:203
    as

    Download full text from publisher

    File URL: http://www.cgdev.org/content/publications/detail/1423751/
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carvallo, Oscar & Kasman, Adnan, 2017. "Convergence in bank performance: Evidence from Latin American banking," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 127-142.
    2. Hassan, M. Kabir & Ngene, Geoffrey M. & Yu, Jung-Suk, 2015. "Credit default swaps and sovereign debt markets," Economic Systems, Elsevier, vol. 39(2), pages 240-252.
    3. Chad P. Bown & Daniel Lederman & Samuel Pienknagura & Raymond Robertson, 2017. "Better Neighbors," World Bank Publications, The World Bank, number 25736.

    More about this item

    Keywords

    foreign banks; credit; interest rates; financial shocks;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cgd:wpaper:203. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Manager). General contact details of provider: http://edirc.repec.org/data/cgdevus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.