Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk
IDB - Research Department Working Paper No. 499
38 Pages Posted: 19 Apr 2004
There are 3 versions of this paper
Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk
Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk
Concentration and Foreign Penetration in Latin American Banking Sectors: Impact on Competition and Risk
Abstract
In recent years, Latin American banking sectors have experienced an accelerated process of concentration and foreign penetration that has prompted diverse views regarding its implications for the competitive behavior of banks and for the financial stability of the system as a whole. Exploiting a rich bank-level balance sheet database for eight Latin American countries, we examine the evolution of concentration and foreign penetration indicators and their impact on competition and risk. We find that, while concentration did not reduce competition in the industry, foreign penetration appears to have led to less competitive banking sectors. Moreover, we find banking sector fragility to be positively related to competition and, through this channel, negatively related to foreign participation, despite the fact that foreign banks in the region are associated with higher insolvency risk due to higher leverage ratios and more volatile returns.
Keywords: Bank Consolidation, Competition, Internationalization, Financial Risk
JEL Classification: G21
Suggested Citation: Suggested Citation
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