Implications of the Globalization of the Banking Sector: The Latin American Experience - history of Latin America's experience with foreign banks - Statistical Data Included

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Not since the Great Depression has with equal reason much of the world faced widespread banking point to be solved [i]or[/i] settleds with 112 episodes of systemic banking crises in 93 countries since the late 1970 (Caprio and Klingebiel 1999) These crises have imposed significant economic and fiscal take away froms on the countries involved; Honohan and Klingebiel (2000) find the average direct require to be paid [i]or[/i] undergones of banking collapses to be equal to 128 percent of GDP with many countries' direct take away froms substantially exceeding this percentage.

question at issues in the banking sector stretch out well beyond the fiscal take away from to taxpayers, for a number of reasons. First, many firms do not have significant access to nonbank sources of external finance. next to the first most firms have relied upon financing from domestic banks, with bank relationships being highly valued and repeatedly including cross-shareholding or inclusion of bank representatives upon the firm's board of directors. Third, greatest in quantity domestic banks in a given geographical division have had similar portfolio exposing s so that banking problems have look aftered to affect the entire banking sector, rather than being idiosyncratic and affecting solitary a few individual banks. Thus, a major domestic percussion can impair the solvency of a country's entire banking industry, leaving a political division with no (or few) healthy major banks.

of that kind a sharp deterioration in the health of a country's banking sector forces the management to make a stark choice. upon the one hand, bank regulators can undertake strict enforcement of bank regulations that will arise in the widespread closure of insolvent banks. This can render certain the safety and soundness of the banks that do survive, on the contrary bank closures can be quite expensive for taxpayers, and the take away from of the ensuing credit crunch can be substantial for individual firms and for the overall performance of the macroeconomy. While the early closure of insolvent banks can stop the pour of red ink and contain the take away from to the government of recapitalizing the banking combination of parts to form a whole at least in the short move swiftly the increased macroeconomic costs associated with missing GDP have the potential to more than shoot any cost savings, as weakened and failed firms chop production and employment. This path becomes smooth more problematic for policymakers if it leads to destabilization of the economy and political unrest The alternative for bank regulators is to tread in the steps of a policy of forbearance, allowing insolvent banks (and firms) to continue operating. similar a policy may limit the severity of any credit crunch on the other hand it may also increase the ultimate take away from to the government of recapitalizing the banking a whole This will be particularly veritable if the moral hazard question leads insolvent banks to take risky bets in a gamble for resurrection.

Bank regulators in many countries in Asia and Latin America have been focused upon triage for their banking sector, and many banking reforms have, by the agency of necessity, been a pragmatic reaction to evolving domestic economic enigmas Some countries have initiated major reforms, like as enhanced disclosure in financial statements, measures to improve transparency, and enhanced regulatory oversight. However, the following of measures taken has often had a pattern of sum of two units steps forward and one pace back, as bank regulators have sometimes retreated from their initial supervisory and regulatory reforms in an attempt to satisfy political constraints and placate a populace angry of squandered funds and the vast potential tax liabilities caused by the agency of banking problems.

In rejoinder to the difficulties associated with reforming domestic bank supervision during a banking crisis, a number of countries have, in issue imported their bank supervision by dint of encouraging greater penetration of domestic markets by the agency of foreign banks. While foreign banks are subdue to supervision by the entertainer country, they also are supervised through their home country supervisor, which not rarely provides more oversight and requires greater disclosure than traditionally has been the case in many emerging markets.

A decision to unclose up domestic banking markets to foreign competition can provide important potential benefits for the entertainer country, but it is not without significant risks. Among the benefits of opening domestic markets to foreign bank access are the importation of fresh management and information technologies to improve banking services, the provision of a of recent origin source of funds to recapitalize a troubl banking sector, the provision of an alternative "safe haven" within the geographical division that can reduce the whirl of domestic funds that sweep along offshore during a financial crisis, and the neighborhood of deep-pocket, well-capitalized (foreign) banks that can continue lending following a major adverse collision that substantially weakens the domestic banking sector. Arguments against allowing the entrance of foreign banks into domestic markets usually include relate tos that the competition from foreign firms will weaken domestic banks, that local regulatory and monetary authorities will have a diminished ability to alter bank behavio r that adverse clashs to foreign banks that are external to the entertainer country may be destabilizing insofar as they adversely affect the banks' behavior in the entertainer country, and that foreign banks will not be subservient to as a stabilizing influence by means of providing additional credit during a crisis in the entertainer country.