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

Center for Global Development Working Paper No. 203

32 Pages Posted: 18 Aug 2010

See all articles by Liliana Rojas-Suarez

Liliana Rojas-Suarez

Center for Global Development

Arturo J. Galindo

affiliation not provided to SSRN

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

Date Written: February 8, 2010

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.

Keywords: foreign banks, credit, interest rates, financial shocks

JEL Classification: F36, G0, G21

Suggested Citation

Rojas-Suarez, Liliana and Galindo, Arturo J. and Izquierdo, Alejandro, Financial Integration and Foreign Banks in Latin America: Do They Amplify External Financial Shocks? (February 8, 2010). Center for Global Development Working Paper No. 203, Available at SSRN: https://ssrn.com/abstract=1660612 or http://dx.doi.org/10.2139/ssrn.1660612

Liliana Rojas-Suarez (Contact Author)

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

Arturo J. Galindo

affiliation not provided to SSRN

No Address Available

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

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