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

36 Pages Posted: 5 Feb 2015

See all articles by Arturo José Galindo

Arturo José Galindo

Inter-American Development Bank

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

Liliana Rojas-Suarez

Center for Global Development

Multiple version iconThere are 2 versions of this paper

Date Written: January 2010

Abstract

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.

Keywords: Foreign Banks, Credit, Interest Rates, Financial Shocks

Suggested Citation

Galindo, Arturo José and Izquierdo, Alejandro and Rojas-Suarez, Liliana, Financial Integration and Foreign Banks in Latin America: How Do They Impact the Transmission of External Financial Shocks? (January 2010). IDB-WP 116, Available at SSRN: https://ssrn.com/abstract=2559853 or http://dx.doi.org/10.2139/ssrn.2559853

Arturo José Galindo

Inter-American Development Bank ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Alejandro Izquierdo

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

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

Liliana Rojas-Suarez (Contact Author)

Center for Global Development ( email )

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

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