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

  • Arturo Galindo

    ()

  • Alejandro Izquierdo

    ()

  • Liliana Rojas-Suarez

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 integration—captured through the participation of foreign banks—in 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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File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=IDB-WP-116&pub_file_name=pubIDB-WP-116.pdf
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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4651.

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Date of creation: Feb 2010
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Handle: RePEc:idb:wpaper:4651
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  1. Reinhart, Carmen & Magud, Nicolas, 2007. "Capital controls: An evaluation," MPRA Paper 14097, University Library of Munich, Germany.
    • 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.
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  3. 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.
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  6. Francisco F. Vázquez & Carmen Reinhart & Marco Arena, 2007. "The Lending Channel in Emerging Economies; Are Foreign Banks Different?," IMF Working Papers 07/48, International Monetary Fund.
  7. 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.
  8. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
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