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Is Latin America’s Financial Sector on a Strong Footing?

November 29, 2011

NEW YORK, November 29, 2011- While the economic crisis relentlessly ravages Europe and the United States, Latin American countries anxiously wait on the sidelines. The crisis could dampen the regional trend of solid growth during the past decade.

In this context, the question is whether Latin American banking and financial systems are sufficiently solid to withstand an extension –for which they must be prepared– and a hypothetical intensification of the current global economic situation.

The response to this question is positive, according to the study Financial Development in Latin America and the Caribbean: the Road Ahead. In light of their improved macroeconomic policy frameworks and quality of financial oversight, the study concluded that these systems are stable and solid. However, the report states that several challenges remain, both at the level of consumers and the system.

“As regards of the underlying financial oversight, important gaps remain in traditional bank administration, particularly with respect to the independence of bank supervisors and their legal protection, the regulation of capital adequacy and the consolidated management of financial conglomerates (both domestically and across borders),” according to the report.

Despite having solid cushions to protect them, Latin American financial and banking systems have several weaknesses: Banks lend little and charge a lot for their services to consumers; long-term financing for homes and businesses is problematic; mortgage loans are out of reach for most citizens; and capital markets –which drive worth in developed societies– suffer from a lack of liquidity.

These are some of the findings of the flagship research, which analyzes the evolution of financial systems in Latin America and focuses on the region’s capacity to maneuver regulation of financial systems in order to succsessfully apply the lessons learned from the global crisis.

“Although financial inclusion has broadened in recent years, when we looked at the banking systems of Latin America, we found them to be even more underdeveloped than expected. A major gap in the region is the expansion of bank lending. Not only does Latin America have smaller credit systems in relation to its economic development, but these systems are also biased in favor of consumption,” said Augusto de la Torre, World Bank chief economist for Latin America and the Caribbean.

The report indicates that Latin American financial systems still do not invest in the private sector with the same vigor as financial systems in Asia. This gap is partially explained by the fact that the region’s financial systems have traditionally been at the epicenter of crises.

“Latin America is in a strong position, but it has gaps in financial development that cause financial systems of the region to be less useful to society than one would hope,” said de la Torre.

Consumers end up paying

“I went to the bank because I was going on vacation and wanted them to increase my credit card limit. After several discussions, they refused, so I had no choice but to take cash.” Martín’s experience in Buenos Aires exemplifies a practice firmly rooted in the region’s banking systems.

Víctor Castillo, a resident of Lima, is also not fully satisfied with his bank’s service. “They never told me exactly what my obligations were when they gave me the loan. The bank’s charges were outrageous. It took a long time before I could make the payments.”

Although they have achieved considerable stability in recent years and have helped to contain the economic crisis, the financial systems of Latin America still have a pending debt with consumers.