Back Matter

Back Matter

Author(s):
Charles Enoch, Wouter Bossu, Carlos Caceres, and Diva Singh
Published Date:
April 2017
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    Appendix 1. Brazil1

    Brazil’s financial system is by far the largest in Latin America. Commensurate with the size of its overall economy, Brazil’s total financial sector assets dwarf those of other regional peers. Brazil’s nominal GDP amounted to about $2.4 trillion in 2014 (Appendix Figure 1.1), comparable to that of the next five largest economies in Latin America combined. Accordingly, Brazil’s banking system is the largest in absolute terms. Furthermore, at total assets close to $2.4 trillion, the banking sector is also one of the largest in percent of GDP, representing close to 117 percent.

    Appendix Figure 1.1Brazil’s GDP and Banking Sector Assets Compared with Regional Peers

    Sources: Bankscope; Haver Analytics; national statistics; and IMF staff calculations.

    The banking system in Brazil remains dominated by large public banks. Publicly owned banks represent about half of the entire banking system. Furthermore, the banking sector remains highly concentrated, with the eight largest banks accounting for about 85 percent of the banking sector (Appendix Figure 1.2). Moreover, the financial system is characterized by a high degree of conglomeration. Interest margins are high, which are partly reflected in high profitability, particularly for the large banks. However, the system appears to be still stuck in a “high interest rate and short duration” equilibrium, which limits capital market development and thus potential growth.

    Appendix Figure 1.2Ownership in the Brazilian Banking System

    Sources: Bankscope; national statistics; and IMF staff calculations.

    In terms of nonbanks, the insurance sector appears to be performing well. Profitability in the insurance sector has been relatively high over the past few years, likely benefiting from high interest rates, which has translated into solid solvency ratios. Mutual funds and banks appear to be highly interconnected through repo operations and the holding of deposit and bank-issued bonds by the funds. Pension funds are sizable in Brazil, with assets under management close to $280 billion. Nevertheless, essentially all these assets are invested domestically.

    Itaú is the only universal Brazilian bank with a significant presence in the region. Most Brazilian banks tend to be inward looking. This reflects in large part the significant share of publicly owned banks, as well as a large domestic market to service. Itaú, which is the largest privately owned bank in Brazil, has nevertheless sizable stakes in the region, representing almost 10 percent of the banks’ total assets. The bank is present in Argentina, Chile, Colombia, Mexico, Paraguay, and Uruguay. In terms of more specialized Brazilian banks, BTG Pactual is trying to position itself as a regional investment bank. These banks have the advantage of operating with smaller balance sheets, hence the potential ability to be profitable without the need for large scale. This is also reflected in terms of their capital costs, with capital requirements (that is, risk-weighted assets) mainly driven by market risk considerations rather than credit risk.

    However, foreign claims of banks in Brazil remain concentrated in a few advanced economies. Claims of Brazilian banks on countries such as the United Kingdom or the United States completely dwarf claims on other Latin American countries (Appendix Figure 1.3). The only exception is Chile, where Itaú has a significant presence. Interestingly, the Cayman Islands appears to have a noticeable share of Brazilian foreign claims. However, most Brazilian banks establish operations there so they can offer their Brazilian clients investments denominated in foreign currencies.

    Appendix Figure 1.3Claims of Brazilian Banks on Banks in Other Countries

    Sources: Bank for International Settlements (BIS); and IMF staff calculations.

    Note: Figure shows consolidated foreign claims of BIS-reporting banks in Brazil on the top 10 individual countries, sorted by 2013.

    Foreign financial claims on Brazil have been growing rapidly for most of the 21st century. Indeed, foreign claims have more than quadrupled since 2005, and stand at about $442 billion (roughly 18 percent of GDP). Spain has the highest foreign claims, representing close to 7.5 percent of GDP, reflecting the significant presence of Spanish banks in the country, most notably Santander. In recent years, however, the total amount of foreign claims seems to have stabilized. This would be consistent with the slowdown in growth observed in the domestic economy over this recent period. Furthermore, Brazilian financial institutions present a relatively low ratio of foreign liabilities to credit to the economy (about 10 percent). This suggests a relatively low reliance on foreign funds as a source of funding, limiting the effects of any potential global liquidity squeeze.

    Banking sector flows appear to be present in places where real activity linkages exist. There are likely a large number of drivers behind Brazilian cross-border financial flows. However, most banks report the desire to establish operations in those locations where Brazilian clients are present or have any significant interest. Indeed, there is some evidence that cross-border banking sector flows in Brazil tend to be associated with trade linkages as well as foreign direct investment. Furthermore, there has been a noticeable increase in bank as well as nonbank issuance abroad by Brazilian corporations.

    Brazil’s regulatory framework is broadly adequate. The last IMF Financial Sector Assessment Program (which took place in 2012) characterized financial sector oversight as strong, but there is room for improvement in some areas to stay ahead of a rapidly evolving system. Compliance of banking supervision vis-à-vis the Basel Core Principles is one of the highest in the region (100 percent of principles were found to be “Compliant” or “Largely Compliant”).

    Significant regulatory barriers exist, potentially hindering Brazil’s further integration into the region and elsewhere. For instance, foreign banks need special presidential approval to operate in the country, even under the subsidiary model. This is not the case for domestic banks. Furthermore, Brazilian banks are not allowed any significant position in their balance sheet (loans or deposits) denominated in foreign currencies. Although this clearly minimizes potential foreign exchange–associated risks (both market and credit risks), most countries tend to allow some small open foreign exchange position on banks’ balance sheets. In addition, natural barriers such as Brazil’s large relative size and the degree of market concentration represent further hurdles for regional players to enter the domestic market.

    Appendix 2. Chile1

    Chile has a deep financial system with a large presence of institutional investors. Assets of the banking system amount to about 125 percent of GDP. Pension funds account for about 75 percent of GDP, while mutual funds and insurance companies are significantly smaller (20–25 percent of GDP). All institutions combined, the financial sector is close to 250 percent of GDP.

    Chile is a very open economy with large cross-border financial linkages. Chile’s net international investment position has hovered around –15 percent of GDP since 2008, and is stronger than other countries in the region. Chile has a net negative foreign direct investment (FDI) position, reflecting large inflows in the mining sector, and a net positive equity position, with the financial sector (pension funds, mutual funds, and insurance companies) being the main holders of foreign assets. FDI inflows are an important source of investment in Chile, in particular for the mining, financial, and utilities sectors. FDI inflows have increased from an annual average of 6 percent of GDP in the early 2000s to 8½ percent in recent years. The Netherlands, Spain, and the United States represent the main source markets. Portfolio investment amounted to 30 percent of GDP in 2014 (based on international investment positions stock data). U.S. residents hold nearly half of total portfolio investment assets (both equity and debt) vis-à-vis Chile, followed by Luxembourg and the United Kingdom (each 10 percent). Nonresidents hold about 5 percent of Chile’s sovereign bonds.

    The Ministry of Finance (MoF), the Central Bank of Chile (BCCh), and the three supervisory agencies are responsible for financial regulation and supervision. In addition to their responsibilities for the issuance of norms, particularly concerning corporate governance, credit classification, and provisioning, the three supervisory agencies are responsible for the supervision of financial entities: the Superintendencia de Bancos e Instituciones Financieras supervises banks, the Superintendencia de Valores y Seguros supervises insurance companies and security companies, and the Superintendencia de Pensiones supervises pension funds. The MoF is responsible for the preparation of financial sector laws. In addition to having an advisory role regarding the preparation of laws, the BCCh is directly responsible for the determination of liquidity requirements, regulation and supervision of derivative operations, and the payments system. The BCCh conducts twice-a-year top-down stress tests that focus on both credit and market risk for the banking sector, and shares these results with the supervisory agencies. Coordination among all these entities has been improved through the creation of a Financial Stability Council in 2011.

    The Banking Sector

    There is a large foreign presence in the banking sector in Chile. Foreign banks account for 35 percent of total banking sector assets, including Chile’s largest bank, Banco Santander-Chile, which is a subsidiary of the Spanish banking group. BBVA, Itaú, and Scotiabank are also subsidiaries of foreign banks. Banco de Chile is a domestic bank but it is jointly owned by U.S.-based Citigroup and a Chilean conglomerate. The share of foreign banks, however, is not unusually high and is close to the average of LA-5 countries. Itaú-Corpbanca (whose merger is expected to be finalized in 2016) has become a regional bank with a presence in Brazil, Colombia, and Chile.

    Conversely, Chilean banks do not have a large presence abroad. Corpbanca was an exception, with its acquisition of two Colombian banks a few years ago. One explanation is the small size of the financial sector relative to Chile’s neighbors. Chilean banks are too small to compete with Brazilian banks, for instance, particularly because Chilean banks are not allowed to invest more than 40 percent of common equity in a single market (in shares of a foreign bank).2 In any case, there are few potential candidates (only four large domestic banks, of which one is public). In addition, if subsidiaries of foreign banks are willing to expand outside Chile, they will proceed from their headquarters, not from Chile.

    The banking sector appears generally healthy. Bank capitalization is adequate. Banks’ profitability remained strong in 2014, although it declined in 2015 mainly because of a smaller positive impact of inflation. Banks’ nonperforming loans have decreased slightly from already low levels, and capital ratios are above regulatory thresholds. Domestic deposits are the main funding source; the banks’ reliance on external funding sources is relatively moderate (at 12¼ percent of their total funding needs, up from about 9½ in August 2012).

    The authorities are in the process of adapting Basel III standards to the Chilean banking system. Currently, banks operate under an amended Basel I framework with additional capital requirements for market risk. A leverage ratio is already imposed, but there is no capital charge for operational risk. A new banking law was submitted in March 2016. The new law will adapt Basel III capital standards to Chilean banks on a transitional basis and introduce a capital surcharge for domestic systemically important banks. Basel III capital guidelines should be published in 2016 to ensure compliance by the 2019 deadline. In addition, a new liquidity regulation became effective from August 2015. It improves the quality and frequency of information provided to regulators and specifies the minimum requirements for monitoring the liquidity coverage ratio and net-funding stable ratio.

    Pension Funds

    Pension funds, with total assets above 70 percent of GDP, are key players in Chile’s financial system. Chile has a three-pillar defined contribution system. Under the mandatory contribution pillar, employees are required to contribute 10 percent of their wage or salary to an individual account and choose one of the six private pension funds (Administradoras de Fondos de Pensiones or AFPs) to manage their account. Employees also choose between five portfolios (A to E) depending on their desired level of risk. Two pension funds were bought by U.S. groups in 2013. Today, four AFPs are foreign owned and two are Chilean. AFP assets are managed by international and domestic fund managers, who invest mainly in mutual and exchange traded funds, with a strong focus on emerging markets. The authorities plan to establish a new public pension fund to increase competition and coverage.

    In recent years, pension funds pressured by the low-yield environment have been restructuring their portfolios toward riskier, foreign, and/or less liquid assets. Expansion abroad has mainly been in response to the lack of investment opportunities in the domestic market. Most foreign investment is in mutual funds and equities, mainly in the United States and emerging Asia assets.

    AFPs are subject to a number of limits on their allocations of risky assets. These limits are intended to encourage diversification and protect pensions from contagion and spillover problems. In the past AFPs could invest in only fixed-income securities, but limits have been relaxed over time, and gradually the scope was extended to riskier and more diversified instruments.

    For each type of portfolio (A to E), there are limits on how much the AFP can invest in “restricted instruments” (non-investment-grade fixed income and stocks that exchange in a market with a rating lower than AA). For instance, for the riskiest portfolio (type A), the limit is 20 percent of assets under management. The assessed risk of direct equity holdings is assigned to the sovereign risk rating of the country where the firm is domiciled; however, this can be somewhat circumvented by purchasing mutual funds or exchange traded funds through investment-grade financial centers such as New York or Luxembourg. AFPs are not allowed to invest directly in alternative assets (such as private equity or real estate) but are required to invest through a mutual fund.

    In addition, AFPs are subject to two types of limits on their foreign investment. The first limit is specific to each portfolio (for instance, 90 percent of portfolio B can be invested in foreign assets). The second limit concerns the aggregate portfolio: AFPs are allowed to allocate up to 80 percent of their total assets under management abroad; currently, the actual share is 45 percent on average, up from 35 percent at end-2011.

    Insurance and Mutual Funds

    The insurance sector is the largest sector after banks and pension funds. This competitive market (60 companies) is dominated by life insurance companies, which represent 90 percent of assets. Its growth has been spurred by the pension system.3 In life insurance about a third of the market share is held by foreign companies. International companies need to be based in Chile to operate in the domestic market, and their risk rating needs to be equal to or above BBB. Most insurance companies are part of conglomerates.

    Pressured by the low-yield environment, like pension funds, insurance companies have increased their asset allocations in real estate, as well as lower-rated domestic and foreign corporate bonds. Insurance companies cannot invest more than 20 percent of their assets abroad (and 5 percent for foreign high-yield bonds), which makes the limit significantly more binding than that applied to pension funds. The 20 percent limit has recently become binding for several life insurers and is an active constraint on portfolio management. A new regulation introduced in 2015 requires insurance companies to define their risk appetite and introduces “own risk and solvency assessment” (an internal procedure for risk assessment). The draft law that introduces risk-based supervision for insurance companies (and risk-based capital requirements) is still in Congress.

    The mutual fund sector has grown very rapidly in recent years. Its share of GDP has tripled since the early 2000s. Mutual funds are often affiliates of banks, such as Banco de Chile, Santander, or BCI. Investment abroad is relatively low: about 10 percent of assets under management are foreign (mostly in the United States). Mutual funds invest mostly in money market funds, although the share of bonds in their asset portfolios is increasing. Mutual funds do not have to comply with standardized liquidity requirement but they are subject to restrictions on foreign investment abroad (depending on the quality of the foreign market’s supervision and regulation).

    The Stock Market

    Market capitalization is quite large, at about 90 percent of GDP.4 This is partly because of the role and importance of pension funds in Chile. Since the mid-1990s, the stock market has gone through several rounds of modernization via the adoption of “MK laws.” The last round in 2010 (MK III) included numerous provisions to foster the openness of capital markets to international investors. It exempted capital gains obtained by foreign institutional investors on the sale or transfer of some securities (which was previously seen as a factor behind the low participation of foreign investors in the fixed-income market in Chile). The law authorized representative offices of foreign banks to advertise in Chile the products or credit services offered by the parent company. The law also promoted the local trading of registered foreign securities by allowing their denomination in Chilean pesos (such peso-denominated foreign securities are now payable in an authorized foreign currency or in Chilean pesos).

    The liquidity of the Chilean stock market has declined over the past few years and is relatively low compared to other economies. Compared to other emerging markets, since the global financial crisis Chile’s stock market has gone from being one of the most liquid to being one of the least liquid. This is reducing the attractiveness of the Chilean market for foreign investors. Several reasons have been provided. Pension funds, which are large market players in Chile, are to a large extent buy-and-hold investors. Large conglomerates also reduce the amount of float (because of the large intro-group debt). The tax system may have encouraged companies to issue debt rather than equity. Another factor is poor corporate governance: informational asymmetries (corporate insiders using private information to extract rents from other market participants) may discourage trading activities.

    Financial Conglomerates

    Both financial and mixed conglomerates have a strong presence in the financial sector. According to the Chilean authorities, conglomerates comprise 16 systemically important domestic institutions, with assets totaling 125 percent of GDP as of the end of December 2011 (the last time the authorities measured these assets on a consolidated basis). Conglomerates held more than one-third of the assets of local pension funds and life insurers, which totaled some 60 percent of GDP at the end of December 2011, as sign of the concentrated holdings among these conglomerates.

    Most conglomerates operate in the financial sector. Out of the 16 conglomerates, as measured by their asset holdings with respect to total assets, five conglomerates focus on banking activities, four concentrate in the insurance and pension sectors, and four focus on both the banking and insurance sectors. Many banks operate within conglomerates, perhaps because of the required separation of financial activities.

    Conglomerates are well integrated into international financial markets. Out of the 16 conglomerates, two are led by major international banks and four by major international insurance companies. In addition, four local mixed conglomerates have significant operations in both the financial and nonfinancial sectors of neighboring countries, underlining the importance of establishing coordination with other regulators in the region.

    Improving the supervision of conglomerates is on the agenda of the Chilean authorities. Currently, the supervision of conglomerates relies on a sector or silo approach, with each type of financial institution (banks, pension funds, insurance companies) being supervised by a separate superintendency. Nonetheless, the Financial Stability Council law has strengthened consolidated supervision of financial conglomerates. The law removed all barriers to information sharing among supervisors, expanded their power to request information from the final owners of financial institutions within the conglomerate, and established solvency requirements for the controlling shareholders of banks and insurance companies. However, supervisors still lack the powers and authority to conduct comprehensive group-wide supervision (including setting risk-based minimum prudential standards and monitoring conglomerates’ compliance with limits on risk exposure). The 2011 Financial Sector Assessment conducted by the IMF recommended stronger coordination among supervisors and the identification of a group-level supervisor with enhanced powers, including that of establishing risk-based minimum prudential standards for financial conglomerates.

    Appendix 3. Colombia1

    Robust growth of financial assets has led to an increased importance of the financial sector in Colombia resulting in greater macro-financial linkages. Financial assets were equivalent to about 150 percent of GDP at end-2015 (Appendix Figure 3.1). Assets of the banking system are about $175 billion, or 65 percent of GDP. Nonbank financial intermediaries (largely private pension funds, trust companies, and insurance companies) account for another 90 percent of GDP. The financial system has continued to grow and deepen macrofinancial linkages recently despite lower oil prices and large depreciation shocks.

    Appendix Figure 3.1Financial Assets (in U.S. Dollars)

    Source: Financial Superintendency of Colombia.

    Note: IOE = Instituciones Oficiales Especiales.

    Colombia has a concentrated financial system, dominated by complex financial conglomerates. Large domestic complex conglomerates dominate the financial landscape, with 10 holding about 80 percent of total financial sector assets. Many bank and nonbank entities are part of the same conglomerate. In the banking sector, the top three banks (Bancolombia, Banco de Bogota, and Davivienda) hold about 50 percent of banking system assets. Loan portfolio concentration is high, given that banks extend 90 percent of their commercial loans to 7 percent of borrowers. Foreign banks hold only 24 percent of banking system assets (one of the smallest shares in the LA-7), of which regional banks hold 8 percent.

    Financial intermediation is among the lowest in the LA-7, but financial deepening and inclusion has been improving, including last year. Credit to the private sector and bank deposits (49 and 39 percent of GDP, respectively), and ATMs are low compared to the region, reflecting in part the large informal sector. Most credit is commercial credit (about 30 percent of GDP), while another 20 percent of GDP is consumer and housing credit. In 2015, credit institutions’ loans and macro-financial linkages to various real economic sectors continued to increase; only loan growth to the mining, quarrying, and oil sectors fell, reflecting lower commodity prices, large losses, and some defaults in the sector. In terms of financial access and inclusion, 75 percent of all adults in households having access to some type of financial products (especially banking products). Mobile banking and correspondent banking have been growing rapidly too.

    Colombia’s capital markets reflect mainly activity in government debt and equity markets, with capitalization reaching 45 percent of GDP at end-2014. Nongovernment fixed income remains undeveloped (4 percent of GDP). The investor base for government debt comprises mainly domestic investors—banks, pension funds, insurance companies, and mutual funds. Foreign investors’ ownership of government debt rose to 14 percent of the total at end-2014, fueled by a reduction in the withholding tax charged on foreign investors’ income and capital gains. The authorities intend to raise foreign investors’ participation in the government debt market to 15–20 percent to diversify the investor base.

    The main nonbank financial intermediaries are the private pension funds, which manage IRA-type pensions, while insurance companies are much smaller. Since 2008, assets under pension funds’ management increased by about half through a combination of healthy returns and rising contributions. Industry concentration is high, as the two largest private pension funds in Colombia, Porvenir and Proteccion, manage more than 70 percent of industry assets. Pension funds remain under the sole stewardship of domestic asset managers, and foreign pension funds are nonexistent due to legal restrictions. In the insurance sector, premium growth, one of the highest in the LA-7, was 24 percent for the life segment, and 4 percent for the non-life segment in 2012–13. Premiums per capita (at $200) and insurance penetration are below other Latin American countries, but similar to Mexico’s premiums per capita and insurance penetration. The insurance sector is relatively concentrated. The 10 largest companies account for almost 80 percent of the market. Foreign insurance companies are virtually nonexistent. Recently, the pension, insurance and trust funds sectors have grown less rapidly, partly reflecting poorer asset performance due to larger volatility in asset prices and limited availability of higher-yielding longer-term assets.

    Colombia has important and growing financial linkages with the rest of the world, including recently with Chile. Foreign claims on Colombia have increased nine times since 2005 and twice since 2008, and are now $45 billion (11 percent of GDP). These foreign claims originate mostly from European banks ($21 billion)—of which $18 billion are from Spanish banks—U.S. banks ($10 billion), and Japanese banks. Most foreign claims are on the non-bank private sector.

    High bank concentration made it hard for regional banks to break into the Colombian market when foreign banks withdrew. High bank concentration and tight linkages of conglomerates to the private sector hinder entry of big foreign players. A Colombian bank, GNB Sudameris, acquired HSBC’s assets in 2014, which resulted in a consolidation of the market. However, efforts were made to open up, and Chilean Corpbanca acquired the business of Banco Santander, as well as Helm Bank in 2012–13. Currently Bank Itau is merging with Corpbanca, which will place it fifth in terms of market share.

    Beyond banking, regional financial integration started through broker dealer acquisitions. Brokerage firms are less concentrated than banks or pension funds, allowing entrance of new players more easily. A Peruvian broker bought Correval, as the two countries integrate their securities markets, and a Chilean broker is planning to enter the market. However, concentration in terms of issuers and the investor base is high in each of the four MILA capital markets (two to three conglomerates are the main issuers, and they are the same buyers), which will be hard to break to allow more players on both sides. BTG Pactual, a Brazilian investment bank, acquired Bolsa y Renta, Colombia’s biggest brokerage firm, attracted by a high return on equity and underdeveloped capital markets, including the need to for instruments to finance large projects in the energy and infrastructure sectors.

    In terms of outward regional expansion, Colombian financial institutions have a significant presence in Central America and, to a lesser extent, South America (Appendix Table 3.1). The expansion was due to a combination of factors: withdrawal of foreign banks since 2008, increased economic integration with Central America, as well as similarities in culture and language that fit with Colombian banks’ business plans to expand in geographically proximate regions. Colombian banks have attained a significant market position in Central America (on average: 22 percent). Banco de Bogota acquired Panama-based conglomerate BAC International and Guatemala-based Grupo Reformador, and focuses on consumer credit and mortgage lending in these markets. Bancolombia bought El Salvadorian-based Banco Agricola and HSBC’s assets in Panama, as well as a minority stake in Guatemala-based Grupo Agromercantil, and its portfolio comprises corporate lending as well as consumer credit and mortgage lending. Banco Davivienda acquired most of HSBC’s operations in the region, notably those in Costa Rica, El Salvador, and Honduras, and provides consumer lending. Banco GNB Sudameris bought HSBC’s remaining operations in Latin America, specifically in Paraguay and Peru, and focuses on corporate lending. There has also been expansion by Grupo Sura, which is the largest shareholder of insurance company Suramericana and asset management company Sura Asset Management (76 percent of assets are in the rest of Latin America).

    Appendix Table 3.1Assets of Colombia Banks in the Region (Percent of parent banks’ assets)
    Bancolombia29.1%
     in CA and other Caribbean7.5%
     in Panama21.6%
    Banco de Bogota43.0%
     in CA and other Caribbean26.7%
     in Panama16.3%
    Davivienda21.6%
     in CA and other Caribbean17.1%
     in Panama4.5%
    Occidente9.3%
     in CA and other Caribbean1.9%
     in Panama7.4%
    Sudameris24.5%
     in Peru15.9%
     in Paraguay8.6%
    Source: Financial Superintendency of Colombia.

    Going forward, Colombian banks are planning to consolidate their acquisitions in Central America, while seeing limited scope for going elsewhere, at least in the short run. They cite consolidation and size of the market, as well as language, as significant impediments to establishing in Brazil. While considering Peru and Chile as attractive markets, they see current prices of assets as prohibitive and markets as extremely concentrated.

    Financial integration through foreign investment by pension funds is picking up. The share of foreign assets held by pension funds in their portfolios in Colombia is still less than half of that in Chile and Peru, but comparable to that in Mexico, and has been picking up in recent years. An easing of regulatory restrictions allowed, for instance a multifund system, which allows risk profile differentiation and thus larger shares of investments in variable rate instruments and higher limits on foreign securities investments. Investments abroad are about 30 percent of total assets, close to the 40 percent statutory limit for the Conservative Fund. In December 2015 investments in pesos in domestic public debt represented 50 percent of total investments, followed by investments in dollars, which were 30 percent (Appendix Figure 3.2). Recently, there has been a sizeable portfolio shift toward investments in dollars. Insurance companies largely choose to invest in debt securities, where about three fourths of investment portfolio allocations of life insurers are held in bonds, and not at all in foreign assets.

    Appendix Figure 3.2Investments by Pension Funds

    Source: Financial Superintendency of Colombia.

    Note: UVR = Unidad de Valor Real.

    The Colombian authorities have finalized legislation that would help address cross-border risks. Laws granting independence and legal protection of the supervisor have come into effect in January 2016 and laws awarding regulatory powers over holding companies of financial conglomerates currently lie before Congress. The Financial Superintendency of Colombia continues to consolidate and make consistent its risk-based supervision to enable the supervisor to tailor prudential requirements of banks and nonbanks to the risks that their operations entail.

    Appendix 4. Mexico: Financial System Overview1

    Financial System Overview

    The Mexican financial system continues to remain relatively open and competitive, while growing at a significant rate. This helped turn Mexico into a top-tier destination for foreign investors seeking emerging market returns with advanced economy ease of entry and exit. The rebirth of Mexico as an open and modern financial market dates to the aftermath of the 1994 “tequila” crisis. Its response, which was cemented in both domestic reforms and international treaties like NAFTA, opened the financial system to foreign participation in order to attract needed investment and managerial expertise, as well as to develop the moderating virtues of markets that could reduce the extent and frequency of public sector interventions when economic volatility rises.

    Today, while Mexico’s financial system remains small relative to its size and the level of development, it continues to expand robustly. Over the period 2010–14, the Mexican financial system increased on average by 2.5 percentage points of GDP annually, with total assets accounting for about 83 percent of GDP in 2014.2 Banks account for slightly less than half the assets of the financial system. With the relatively low lending-deposit spreads and a large number of banking institutions—which stood at 44 at end-2015—the market appears fairly competitive. The bulk of financial sector growth, however, has largely concentrated in the nonbank financial sector, where private pension funds and insurance funds in nominal terms together about tripled between 2005 and 2015. Private pension funds are rapidly developing in size and sophistication. Each pension manager maintains four funds comprising different risk tolerances that progressively and automatically reduce risk exposure based on the age of the contributor. Managers can invest in currencies, equities, Mexican private equity funds and real estate trusts, structured assets, and more recently swaptions and Real Estate Investment Trusts (REITS) (up to certain prudential limits), among others. The insurance market, however, remains a relatively small component of the financial sector. There are about 100 insurance companies that jointly capture premiums of about 2.7 percent of GDP3 and hold nearly 6 percent of GDP in assets. With an expanding middle class, demand for insurance is growing fast, though penetration still remains well below the Organisation for Economic Co-operation and Development (OECD) countries’ average, and among the lowest in Latin America. Mexican capital markets are the second largest, behind Brazil, in the LA-7. They are well regarded in Latin America for the ease with which investors can enter and exit the market, the robust liquidity conditions, and the wide array of securities that can be traded, including bonds, foreign and domestic equities, exchange traded funds (ETFs), mutual funds, REITS, and derivatives tied to stocks, indices, interest rates, bonds, and currencies.

    Regional Integration in the Banking Sector

    In efforts to recapitalize the banking system, after the 1994–95 crisis, Mexican regulators lifted important restrictions on foreign investment in domestic banks and developed a regulatory regime that strongly favors domestically supervised subsidiaries (to the exclusion of the branch model), which operate as autonomous financial institutions with significant operational independence and funding structures that rely almost entirely on local deposits and Mexican wholesale markets. Today about 70 percent of banking assets are controlled by subsidiaries of foreign institutions. Large international players include the Spanish banks BBVA Bancomer (22 percent of assets) and Santander (15 percent); Banamex (a subsidiary of Citibank at 15 percent); and HSBC (7 percent).4

    With its high participation of foreign banks, the Mexican banking market can be described as highly integrated globally, but the activity of regional banks is quite limited. The regional banking sector players regard the inherent structure of the market as a significant barrier. In order to justify in terms of profitability a new market entrance, the institution needs to obtain on average a top 10 ranking. However, in an environment of larger banks holding a competitive advantage, obtaining the desired 7–10 percent market share proves challenging either via greenfield investment or through the acquisitions of smaller banks. At the same time, valuations of top five banks are often regarded as too expensive (justified by substantial market share and profitability) to lure regional competitors. Nevertheless, at a time when global banks may be divesting from some emerging markets (for reasons discussed in Chapter 3), going forward, Mexico may see some valuation growth deceleration given the dominance of foreign subsidiaries. In terms of Mexican investment abroad, the expansion of domestic banks into other countries so far has been limited, largely since banks recognize the growth potential domestically and also given the fact that few domestic banks in Mexico possess the necessary size to make substantial acquisitions abroad. At the end of 2015, only one Mexican bank, Banco Azteca, which held about 1.6 percent of the market share in Mexico, operates subsidiaries in other countries of the region (Panama, Guatemala, Peru, and Brazil).

    Regional Financial Integration in the Pension Fund Sector

    Mexican pension funds represent the second-largest segment of the financial system. Assets under management have well outpaced the growth of the capital markets, more than doubling in percent of GDP and growing by about 260 percent in USD terms between 2005 and 2015. This is largely the result of increasing numbers of participants since the establishment of the pension scheme in 1997 and reforms to the participation of public sector employees in 2007. By end-2015, assets under AFORES’ (pension fund managers) management constituted about 14 percent of GDP. Rapid asset and management fee growth has partly spurred substantial mergers and acquisitions activity, including by foreign fund managers. The number of administrators peaked at 21 at end-2007, but stands at 11 as of end-2015. The acquisition of ING Afore in 2012 by a Colombian asset manager—Grupo Sura—was the first entrance of a regional player into the Mexican pension fund market. By mid-2015, Sura AFORE held 15 percent of the industry assets and was the third-largest pension fund in Mexico. The three afores managed by the U.S. entities constituted about 26 percent of the market share, while the remaining 60 percent of the assets fell under the management of domestic pension funds.

    The degree to which the Mexican pension fund system can further regional integration through its asset allocations is limited by a ceiling (20 percent) of foreign assets (Appendix Figure 4.1). Originally instituted to stimulate domestic financial deepening (especially capital markets) and to protect contributors from excessive risk concentration, many funds have reached the cap as growth in assets under management has outpaced the supply and issuance of new instruments in the domestic capital market. Moreover, within the foreign securities segment, the composition of investments is dominated by instruments from the United States and Europe. Efforts to reduce high transaction costs including brokerage fees and currency conversion and to increase capital market liquidity in the LA-7 need to advance more quickly in order for Mexican pensions to broaden their regional holdings. Domestically, both pension fund regulators and pension fund managers agree on the urgency of increasing the foreign security holding limit, but the process is complicated by the required approval of Congress. Nevertheless, raising the foreign securities cap would facilitate optimal portfolio allocation and potentially increase regional cross holdings. Given the vibrant domestic debt market and the stalled Mexican equities market, AFORES report a greater need for diversification of equities, rather than debt instruments, through foreign holdings. The current shares of debt instrument holdings remain significantly larger than in other OECD countries, while domestic holdings of equity remain relatively low, given the small size of the equity market in Mexico. This is exacerbated by the growth of AFORES, whose demand for assets may have inflated bubbles in the domestic capital markets. Thus, any further increases in the foreign security holding limits are likely to be largely used for equity diversification. Currently, holdings of securities from other Latin American markets are reported to be limited. While investments in Brazil are stalled due to the perceived excess volatility in the market, investments in Chile, Colombia, and Peru are restrained by the relatively small size of these markets. Investments in individual markets, and particularly other LA countries, are reportedly discouraged by the need to employ specialists for stock picking due to insufficient familiarity with these markets, thus encouraging investment in mutual funds. The Mexican market, on the other hand, provides an attractive opportunity for the Chilean and Peruvian pension funds, among others, for diversification purposes, given the disparate business cycles between Mexico and Latin American commodity exporters.

    Appendix Figure 4.1Mexico: Pension Funds’ Composition of Investments

    Sources: CONSAR; and IMF staff estimates and calculations.

    Note: SB (siefore basica) refers to the type of fund, which varies by the degree of riskiness of the portfolio. Estimates as of June 2015.

    Regional Financial Integration in the Insurance Sector

    Liberalization of the Mexican financial sector has resulted in an open insurance market with about 100 insurance companies providing life insurance policies (40 percent of the market), damages (19 percent), and auto insurance (19 percent). The unrealized potential of the domestic insurance market, along with a strong regulatory framework—Mexico implemented the Solvency II-type standard in 2015—constitute the main drivers of entry, including cross-border. Nevertheless, the structure of the distribution channels generates some implicit impediments, since the life insurance products are mainly distributed through agents (nearly half of the market), and developing a sound agent base can be expensive and lengthy and potentially serve as a deterrent for market entry.

    Most insurance companies in Mexico have ties to foreign institutions, mostly in the United States and Europe. Thus, among the largest 10 institutions, which comprise about 70 percent of the market, 60 percent of premiums are captured by foreign-owned entities. The five largest institutions—MetLife Mexico (U.S.), Grupo Nacional Provincial (domestic), AXA Seguros (France), Seguros Banames (U.S.), and Seguros Banorte Generali (domestic)—control nearly half of direct premiums. The expansion of the Mexican insurance companies abroad, on the other hand, has been limited, arguably due to the sizable unrealized potential for growth of the domestic market. Expansion to other Latin American (LA) countries is also dampened by the elevated levels of market concentration of the insurance industry in LA-7 countries.

    Financial integration through holdings of foreign assets is rather limited in the Mexican insurance sector. The investment strategy of the Mexican insurance companies is largely dictated by the structure of the offered insurance products and the associated liabilities they incur. At present, insurance companies invest a large share of assets in the domestic debt securities. Given the small size and the low turnover and liquidity of the domestic equity market, access to domestic equities remains limited. Maturity matching for long-term products like annuities and life insurance products demands long-term Mexican peso–denominated assets. Ideal instruments with long maturities of 20 or 30 year are rarely available in local markets. While longer-dated instruments are available in foreign markets, insurers generally abstain from them to avoid currency mismatches. Consequently, the share of foreign investments is often well below the regulatory limits and rarely comprises regional securities. However, adoption of Solvency II-type regulation is expected to slightly increase the foreign asset holding limit in order to accommodate the expected rise in non-life products denominated in foreign currency.

    Regional Financial Integration in Capital Markets

    Development of the foreign exchange and debt markets has advanced with an increasing number of listings and liquidity in the past few years, while growth in the domestic equity market has stalled. The Bolsa Mexicana de Valores (BMV), on which stocks and bonds are traded, is a demutualized, publicly traded company and is the second-largest trading house by volume of trades and market capitalization in Latin America, trailing only Brazilian BM&F Bovespa. The number of listed firms has increased only marginally (135 to 143 between 2010 and 2015) while the overall domestic market capitalization remains relatively small at about 35 percent of GDP. The low level of new issuance is explained by a preference for debt financing among Mexican corporates with tightly controlled ownership structures. While the fairly small pool of retail investors limits broad market appreciation, the bond market plays a much more important role in sovereign and corporate financing. According to Bank for International Settlements (BIS) statistics, the value of domestically issued bonds outstanding in 2014 was 46.0 percent of GDP, making it smaller (relative to GDP) than in Brazil (81.6 percent), Chile (50.9 percent), and Uruguay (51.2), though liquidity measured by the number of trades is considerably higher than in any other LA-7 country. Banks and the general government are the primary beneficiaries of domestic bond financing, with only about 15 percent (each) of their bonds outstanding being placed abroad. Nonfinancial corporate, however, sought 72 percent of their bond financing from foreign markets. Derivatives trading is dominated by interest rate swaps, largely TIIE swaps (Tasa de Interes Interbancaria de Equilibrio, the equilibrium interbank interest rate), as the volume of forward rate agreements, options, and other products remains rather limited. The over-the-counter single currency interest rate derivatives turnover in Mexico stood at U.S.$2.4 billion as of April 2013, representing about 0.1 percent of the global interest rate derivatives market. This is the second-largest market in Latin America, trailing only Brazil. Most OTC single currency interest rate derivatives trading denominated in Mexican pesos, however, occurs in the U.S. markets, with only 18 percent executed domestically. This is not unusual in Latin America, as OTC derivatives of other LA-7 countries are largely traded on the U.S. and U.K. markets as well.

    The Mexican peso has been among the 10 most traded currencies since 2013, largely against the U.S. dollar and in the form of foreign exchange swaps and spot transactions. The Mexican peso is convertible and free floating, with turnover reaching U.S.$135 billion in 2013, raising its market share in the global FX trading to 2.5 percent, from 1.3 percent in 2010. The U.S. dollar vis-à-vis Mexican peso currency pair trading comprises the majority of Mexican peso trading, and constitutes about 2.4 percent of the global foreign exchange (FX) market transactions. Since the vast majority of these transactions take place offshore, the Mexican domestic market only manages about 0.5 percent of global foreign exchange market turnover. Exchange-traded derivatives are traded on the Mercado Mexicano de Derivados (MexDer, the Mexican derivatives exchange platform) and are cleared through a central counterparty clearing house (CCP) ASIGNA, both of which are subsidiaries of the BMV. MexDer’s turnover remains small, with a reported market share in the low single digits. The establishment of MexDer has not resulted in a significant shift of OTC transactions to the Mexican electronic platform, largely because trading OTC is more cost competitive than MexDer, which is in need of higher trade volumes to drive down the higher fees to cover its technical and technological costs. Activity on MexDer is also hindered by the high foreign presence in the Mexican markets, the close trade and financial ties of Mexican companies to the United States, and regulatory bias toward trading on recognized exchanges, which have also pushed the derivatives market outside of Mexico, mainly to the United States, United Kingdom, and Europe.

    The global financial crisis prompted changes in the regulatory frameworks in many countries, including Mexico, aimed to provide transparency and reduce counterparty risk. Regulatory adjustments to the G20 frameworks, the Dodd-Frank law in the United States, and European Market Infrastructure Regulation (EMIR) in the European Union, in line with the Basel III standards, introduced largely comparable regulatory modifications aimed to eliminate counterparty risk, increase price and valuation transparency, and collect information. The new regulations call for all standardized OTC derivative contracts to be traded on exchanges or electronic trading platforms and cleared through CCPs, while non-centrally cleared contracts would be subject to higher capital requirements. In the spirit of improving transparency and strengthening the derivatives market, and largely in line with the global regulatory changes, the Mexican authorities introduced a new regulation, scheduled for gradual implementation. In April 2016, compliance with the new regulation will be required for transactions between Mexican entities, while November 2016 is the start date for transactions involving foreign financial institutions. The new Mexican regulation will require derivative trades to take place on exchanges or through interdealer brokers, and call for a mandatory clearance of standardized derivatives through a CCP—Mexican (established in Mexico and authorized by the SHCP) or foreign (if recognized by Banco de Mexico).

    Higher CCP clearance volumes will also generate competition between ASIGNA and global CCPs, such as CME (Chicago Mercantile Exchange). While the volume on ASIGNA is expected to be driven largely by Mexican pension funds, clearance through CME is likely to remain significant given the large share of transactions involving multinational institutions headquartered in the United States. A large share of counterparties involved in derivatives trading are subsidiaries of foreign entities or have ties to other countries, as testified by the overwhelming majority of foreign subsidiaries among the “eight market makers”—the most active participants in the Mexican capital market. By clearing through a CCP in the parent country, foreign multinationals are able to consolidate operations through netting their derivative positions, thereby decreasing capital requirements. Thus, ASIGNA may maintain its domestic market share, and could become the primary vehicle for trading with regional participants, including through Latin American Integrated Market (MILA), while foreign CCPs, such as CME, would largely handle the business involving the global multinationals.

    Appendix 5. Panama1

    Panama is an important regional financial center, especially for Central America and part of South America. Banking assets are over US$100 billion, or about 240 percent of GDP at end-2015, with over 30 percent held by regional banks (and another 20 percent held by other foreign banks). Panama’s banking center includes a sizeable offshore sector. Of the 76 banks licensed in Panama, 49 operate with a general license (onshore; includes two state owned), and 27 have an international license (offshore). Offshore banks’ assets are 40 percent of GDP. The offshore sector is largely disconnected from the rest of the Panamanian financial system, and serves for such operations as foreign currency lending to Latin American or international corporates by banks outside their home jurisdiction. Domestic capital markets are the smallest in the LA-7 (bonds outstanding are 12 percent of GDP), compared to 33 percent of GDP for international bonds outstanding, and the domestic stock market capitalization is 33 percent of GDP. The range of activities undertaken by Panamanian financial institutions is relatively narrow: there is no significant activity on derivatives, structured products, or foreign exchange.

    Both insurance companies and pension funds are small compared to the size of the banking sector, but are expanding rapidly. Insurance companies’ assets account for roughly 5 percent of GDP, and foreign insurance companies own about half of the assets. Premium growth has been 12 percent for the life segment annually, and 8 percent for the non-life segment. Premiums per capita and insurance penetration figures are high relative to other LA countries (premiums per capita are US$320 and premiums amount to about 3 percent of GDP). The insurance sector is relatively concentrated. There are 33 companies, of which the three leading companies are of similar size and jointly account for 49 percent of total premiums. Insurance brokers monopolize the distribution of insurance products, and commissions are relatively high, making micro-insurance and other low cost products unattractive. The two local pension funds, one public and the other private, account for about 0.7 percent of GDP. Since 2008, assets under pension funds’ management increased by about half.

    Panama has important and growing financial linkages with the region and the rest of the world. According to the BIS, international banks have significant claims on Panamanian borrowers. Foreign claims (ultimate risk basis) on Panama have doubled since 2005 and were US$40 billion in 2014 (90% of GDP). Claims by the United Kingdom, which were among the highest until 2013, have dropped (likely due to the exit of HSBC), and foreign claims by Germany and Spain (likely due to the exit of BBVA) also fell that year.2 Most foreign claims are on the nonbank private sector. Foreign claims of Panamanian banks on other countries have more than doubled since 2002 (US$21 billion in 2014), with lending to the remaining LA-6 representing 30 percent of total claims on others (Appendix Figure 5.1).

    Appendix Figure 5.1Consolidated Foreign Claims of Reporting Banks in Panama on Top 10 Individual Countries

    Source: BIS; and IMF staff calculations.

    The withdrawal of global banks starting in the 1990s first led to a consolidation of the market and, more recently, to mergers and acquisitions by Latin American banks. Foreign banks (that is, Bank of America, Societe General, seven Japanese banks, as well as some Swiss, Dutch, and Spanish banks), controlling 70 percent of assets in the 1970–80s, withdrew in the 1990s. Their assets were mostly acquired by domestic banks, which led to a consolidation of the market (for example Primer Banco del Istmo doubled its market share to 12 percent of total assets between 2000 and 2008). Since 2008, banks from Colombia acquired assets of withdrawing banks and institutions (that is, HSBC, BBVA, and GE). In 2010, Colombian Grupo Aval, through Banco de Bogota, bought GE’s 75 percent share in BAC International. In turn, BAC International acquired BBVA in 2013. The same year, the largest Colombian bank—Bancolombia—acquired HSBC’s assets. Colombian banks own 22 percent of assets in Panama.

    Cross-border credit to the region is important. Credit to GDP is 90 percent (one of the highest in the LA-7), but credit growth has remained in line with nominal GDP growth in the past four years. Credit to nonresidents is 30 percent of total credit and 30 percent of GDP, and has recovered following a sharp deceleration associated with HSBC’s departure. Costa Rica, Brazil, Mexico, and Colombia are among the largest borrowers, and receive 45 percent of foreign credit (Appendix Figure 5.2). Foreign investments, foreign loans, and deposits in foreign banks (as many banks hold sizable deposits at their parent banks or other banks abroad) are about 40 percent of total bank assets. Half of the securities bought are foreign (US$7.5 billion), and most investments are made in securities in the United States (30 percent of total foreign securities), Costa Rica, Mexico, Colombia, and Brazil.

    Appendix Figure 5.2Foreign Credit by Country, 2014 (percent)

    Acquisitions by regional insurance companies and pension funds remain limited. Only the Colombian insurance company Suramericana has expanded to Panama, and several other Central American countries, and has a strategy of expansion to LA. Foreign investments by insurance companies and pension funds are very small. Investments by pension funds are concentrated in local bank deposits (50 percent) and domestic fixed-income securities (less than 10 percent). Only 2 percent of total investments are invested abroad (most in Latin America). The rest is invested in equity and nonfinancial institutions. Investments by insurance companies are concentrated in equities (80 percent), while 20 percent is invested in bonds, and similarly only about 2 percent abroad.

    Challenges for Financial Stability in the Context of Increased Regional Integration

    Complex conglomerates with cross-border operations raise important challenges for effective supervision and the assessment of macro-financial stability. The conglomerates operating in Central America have complex corporate structures, including overlapping layers of holding companies (one of which could be in Panama) and entities (bank, nonbank, and real sector) in several financial sectors (including in Panama), and thus fall under different supervisory authorities that may not cooperate sufficiently. In Panama, there appeared in the past to be incentives to attract financial business through laxer regulation and requirements. This model is obsolete, with outside supervisors increasingly imposing home country requirements across the whole financial institution, and with the threat of large fines on the institution in the event of lack of full compliance with the requirements of the home country authorities. Coordination among supervisory agencies in the region has been improved through the establishment of a Council of Supervisors (FCC) for all supervisors in Central America and Colombia, and efforts are under way to further enhance supervisory capacity.

    Slow progress in implementing Basel III, including capital definitions, liquidity and leverage rules, and capital buffers, could lead to inadequate identification of cross-border and interconnected risks and insufficient capital held against such risks. The absence of a well-articulated framework and available capital buffers (Pillar 2, D-SIB buffers) could result in lower levels of loss absorbency and risk mitigation exposing complex conglomerate structures to own risks, but given their size and the complexity of their cross-border operations could lead to systemic risks as well.

    Appendix 6. Peru1

    The financial system in Peru is relatively small, but growing solidly. Between 2006 and 2014 the broad financial system including insurance and pension funds grew from US$52.3 billion (58.1 percent of GDP) to US$175.8 billion (90.8 percent of GDP). Most of the financial system (except for the stock exchange) is under the consolidated purview of the superintendent for banks, insurance, and pensions (SBS). The banking system is assessed to be largely Basel II-compliant, with SBS reporting that Basel III compliance expected in the next few years. Some of the larger, particularly foreign-owned, banks have already adopted many Basel III principles. All firms traded on the Bolsa de Lima must file IFRS-compliant annual reports to the securities regulator. Even with a high level of dollar deposits, the banking system maintains relatively low foreign asset exposure (2 percent of assets) though the share of foreign liabilities is on the rise, but still less than 15 percent of the system’s balance sheet (Appendix Figure 6.1). The importance of insurance and pension funds deposits in the banking system has declined markedly, but they still account for 11 percent of total deposits.

    Appendix Figure 6.1Peru: Selected Indicators of the Financial System, 2015

    (Percent of GDP)

    Sources: SBS financial supervisor; and IMF, International Financial Statistics.

    There are no legal impediments to foreign financial institutions entering, operating in, or exiting Peru. The legal regime provides for equal treatment of foreign and domestic entities. Foreign institutions are free to operate as either branches or subsidiaries, though currently there are no branch operations of foreign banks. Within the four largest banks, accounting for about 85 percent of total assets and credit, two (Banco del Credito and Interbank) are controlled by domestic conglomerates and two are foreign-owned institutions. BBVA (Spain) purchased half the controlling interest in Continental bank in 1995 to become the second-largest bank by assets. Scotiabank (Canada) purchased the operations of two smaller banks in 2006 and is now the third-largest bank. The SBS supervisor reports strong interest from many foreign financial firms to obtain operating licenses. The insurance sector in particular has seen many new applications and entrants from abroad.

    Highly concentrated market structures as well as tax and supervisory issues are the most commonly cited impediments to foreign investors. As in other countries of the region, the dominant market shares of the largest firms in the banking, brokerage, and pension management sectors mean potential targets for acquisition are either too small or too expensive. As noted in the financial system chapters, the difficulty of building market share organically leads most international banks to target only the largest three to four institutions in a country for acquisition. The top four banks are sufficiently large and profitable that buying into Peru is considered to have become cost prohibitive, while the small market share of remaining banks would require significant business development to achieve critical mass. Also, the SBS’s exhaustive efforts to document ownership structures to ensure compliance with a prohibition against multiple licenses to subsidiaries of the same parent may draw out the licensing process, and dissuade some potential buyers. Moreover, the 30 percent tax on dividend repatriation may weaken the incentive for foreign institutions to operate in the country.

    Divestiture of regional operations by global banks, and the special skills developed by Peruvian banks, may present expansionary opportunities for some Peruvian banks. Banco del Credito del Peru, a subsidiary of the Creditcorp conglomerate, the largest bank by assets and deposits in Peru, already owns the fourth-largest private bank in Bolivia and an asset management/insurance company in Chile, and is likely seeking opportunities in other countries. Interbank, the fourth-largest bank, and its conglomerate parent, Intercorp, are focused on developing organic growth in Peru, though Interbank’s strength in retail banking and reaching underserved segments could be leveraged in other countries with high informality.

    Private pension funds have been successful at drawing out domestic savings and broadening the formal financial system. About 5 million adults (out of nearly 20 million ages 15–64) are enrolled in Peru’s private pension fund system. The system caters to formal sector employees, who are required to contribute 10 percent of their salaries to funds administered by one of four fund managers (AFPs).2 Under each administrator there are three age-determined, risk-tolerant funds. Funds for the youngest workers have the highest risk tolerance, while the risk profile for funds reserved for people closer to retirement is less aggressive. Younger participants may elect to save in the more conservative pool, but older subscribers are prohibited from moving into riskier funds. Unlike pension funds in other LA-7 countries, upon retirement, a lump sum is not paid to the individual. Rather, the AFP is charged with a fiduciary responsibility to provide a stream of income for the remaining years of life proportionate to the accumulated savings of the individual. Strong domestic growth has increased both the number formal employees and their salaries such that in 2015 participants paid in over US$230 million each month (US$115 million net of fees and paid benefits).

    The supervisors penalize funds that do not yield a minimum level of returns, and organize a competitive auction every two years to contain management fees. Minimum financial returns are determined as the average systemic return less 2 percent over the previous 36 months. Fund managers must “top up” returns from their own capital if they fail to meet minimum returns. As in other countries with minimum return requirements, AFPs tend to mimic each other’s asset class holdings yielding very similar risk/return profiles. Consequently, it is considered that competition to attract competitors’ clients is based more on marketing than net returns. All new subscribers are enrolled with the same AFP; however, every two years, the SBS solicits proposals for this designation in which the winner is the one with the lowest proposed management fee. If the lowest fee is lower than the current rate, the new lower rate is then applied to all of its subscribers. After the initial two years, subscribers are free to move their savings to a different AFP.

    The rapid growth of assets under management now exceeds the capacity of domestic capital markets to provide a sufficient portfolio of securities. While about 180 shares and over 350 bonds are listed on the Lima exchange, the aggregate value of stocks and bonds traded in 2014 was about US$5.8 billion, or 3.7 times annual net contributions. The universe of investable domestic securities for pension funds shrinks further once small cap and infrequently traded listings are excluded. Deposits in the banking system have also become less attractive as easier external financing conditions and solid fiscal and macro-management have combined to push down treasury and deposit yields. With increasingly limited domestic investment options, the supervisor has had to increase the limit on foreign asset holdings several times; it now stands at 50 percent3 and the limits are effectively binding on nearly all funds. Financial market participants and regulators are looking to raise the foreign asset limits, if implemented gradually, to avoid abrupt sales of nuevo soles in the onshore market.

    As in other countries of the region, insurance markets in Peru are small, but developing steadily (Appendix Figure 6.2). In 2014, the industry collected about US$3.4 billion in premiums and held $11.1 billion in assets (1.8 percent and 5.8 percent of GDP, respectively). The sector is fairly concentrated, with six of 18 firms accounting for about 75 percent of premiums and 72 percent of assets. While several foreign firms are active through local subsidiaries (Mapfre and Sura being the two largest foreign subsidiaries), most insurers are domestically owned. Premiums between life insurance and property/casualty policies segments are evenly split at about US$1.7 billion. Insurance policy issuance is largely marketed to formal, high-wage earners, so deeper penetration is considered dependent on higher incomes generated by macroeconomic development and a larger share of the workforce joining the formal sector. Most policies are written in nuevo soles: thus, for currency matching reasons firms generally have fewer foreign holdings than the statutory limit of 40 percent of assets. Insurance companies reportedly face difficulties finding sufficient long-term local currency assets in domestic capital markets in order to match the long-term liabilities in the life policy segment.

    Appendix Figure 6.2Peru: Insurance Market Development, 1996–2015

    (Percent of GDP)

    Sources: Superintendencia de Banca, Seguros y AFP (SBS); and IMF staff calculations.

    Peruvian equity markets are modest in size; domestic bond markets are significantly smaller than in LA-7 counterparts (except Panama and Uruguay), and both suffer from falling liquidity. At end-2015, equity markets had 212 domestically listed firms and a market capitalization of nearly 30 percent of GDP. Liquidity concerns are also apparent in the low frequency of IPO issuance, the muted volume of shares traded, and the large number of infrequently traded firms. In 2015, the authorities introduced exemptions on capital gains and other reforms related to short-selling, automated trading, and market makers to encourage higher trading volumes. Domestic bond markets are characterized not only by their small size and low trading volumes, but also by the limited number of long-term bonds. While trading in the money market is quite active, especially for corporate issuers, only a small number of securitized instruments are listed on the Bolsa de Valores de Lima (BVL), and derivative products are not traded domestically.

    Appendix 7. Uruguay1

    Uruguay’s financial system assets amount to about 92 percent of GDP, making it larger, in GDP-weighted terms, than the financial systems of Colombia and Peru, but smaller than Brazil, Chile, and Panama. While the size of the system relative to the economy does not draw attention, there is much scope for financial deepening, as Uruguay’s private credit intermediation ratio is one of the lowest in the region. Banks dominate the financial landscape, but pension funds have grown in recent years and are the main institutional investors. The state plays a predominant role in Uruguay’s financial sector, with public institutions controlling 45 percent of banking system assets, 60 percent of pensions, and 80 percent of the insurance market.

    Credit to the private sector in Uruguay, at just 25 percent of GDP, is among the lowest in the region. The high degree of financial dollarization in Uruguay (80 percent of deposits and 60 percent of loans are in U.S. dollars) is a key factor. Given the history of high inflation and currency devaluations, people have a preference for holding their savings in U.S. dollars, but the majority of lending to households is in pesos. Since the bulk of banks’ liabilities are in dollars, they limit their peso lending to avoid currency mismatches on their balance sheets. Dollar credit is stifled by high reserve requirements for foreign currency deposits on the supply side, and high transaction costs coupled with easy access to direct lending, bond markets, and high levels of foreign direct investment on the demand side.

    The crisis of 2002 left a legacy for Uruguay’s financial system. The role played by foreign banks, FX deposit withdrawals (especially by nonresidents) and relatively lax regulations during the crisis have shaped the current policy mindset and supervisory framework. When the crisis erupted in 2002, key prudential regulations for FX-related risks (liquidity, reserves, capital requirements) were virtually nonexistent, even though almost 50 percent of total deposits were from nonresidents. By the end of that year, the banking system had lost 46 percent of total deposits, and the level of nonresident deposits had fallen by 65 percent; the bank run had led to the closing of one bank and the intervention/restructuring of three. The government provided US$2.4 billion in liquidity support. In December 2002, a new banking law was passed that strengthened regulations to limit liquidity and FX risks significantly. The system remains heavily regulated. At the same time, the 100 percent backing of U.S. dollar demand and savings deposits—but not time deposits—in 2002 likely still impacts the choices of Uruguayans when putting their money in banks (90 percent of total deposits today are in short-term demand or savings deposits). The legacy of 2002 has led to a preference for caution and liquidity—which to a certain extent may have worked against deepening.

    The banking system in Uruguay comprises two public banks and nine private banks—all of which are foreign owned. Commercial banks account for almost three-quarters of total financial system assets. The banking system is concentrated with the large public bank, Banco del Republica Oriental de Uruguay (BROU), holding 40 percent of total banking assets, and the top four banks holding three-quarters of assets. There is only one large regional bank: Banco Itaú of Brazil. The sector is marked by a high degree of segmentation between the public and private banks. Until recently, BROU enjoyed a monopoly on public employee accounts by law,2 which has given the large public bank a majority share of the peso deposit market (largely at zero cost), and thereby facilitated its strong presence in the high-spread peso retail lending market. The foreign banks, on the other hand, have highly dollarized deposit bases, and cater to commercial, higher-income, and some retail segments, in a highly competitive environment.

    High operating costs and relatively low profitability have led to a process of consolidation in Uruguay’s banking sector. Banking fees and rates in Uruguay are high compared to the region because labor and operating costs are very high, while the high degree of competition among private banks operating in a dollarized environment has constrained their profitability. Consolidation of the sector, from 20 private banks in 2002 to just nine private banks today, has been driven at least in part by the search for efficiency gains through greater scale in this environment. Most of the consolidation has taken the form of mergers between foreign-owned banks’ operations in Uruguay: in 2008, Santander and ABN Amro merged; in 2011, BBVA and Credit Agricole merged. Most recently, in December 2014, Scotiabank signed an agreement to buy Israel’s Discount Bank Latin America, Uruguay’s ninth-largest bank, that will make Scotiabank the fourth-largest bank by assets. Given the need for scale, it is likely that regional banks wanting to enter the Uruguayan market would have to do so through similar mergers rather than as greenfield entrants.

    The absence of private domestic banks in Uruguay, and the lack of focus of the BROU on regional opportunities, has dampened the extent of cross-border and regional activity by Uruguayan banks. When Scotiabank entered Uruguay in 2011, it did so by acquiring Banco Comercial, the last private domestic bank operating in Uruguay. Following this acquisition, Uruguay was left with only foreign private banks. This has had a material impact on cross-border regional banking activity. While Banco Comercial (and other private domestic banks) had historically maintained significant cross-border business ties with Brazil and Argentina, as well as non-negligible investments in regional banks, the entrance of Scotiabank severed these ties. The foreign private banks must abide by parent country regulations and compliance standards that are becoming ever more stringent. Many of these global banks have subsidiaries in various countries in the region, which operate as independent entities and are not allowed to pool their capital for projects. As a result, foreign assets of the banking system have reduced considerably in the past decade, as have nonresident deposits (which have shrunk to just 15 percent of total deposits, from 50 percent during the 2002 crisis).

    Banks’ financial soundness indicators are adequate but there is heterogeneity, and overall banking profitability is low compared to the region. Uruguayan banks have adequate capital levels and ample liquidity. Resilience indicators are generally strong, with NPL ratios at less than 2 percent of total loans, loan-loss provisions on average three times larger than NPLs, and net foreign exchange positions below 1 percent of capital.3 Nevertheless, a few soundness indicators have weakened slightly in recent years—in particular, foreign currency lending to un-hedged borrowers has risen steadily, from 26 percent of total private sector loans in 2010 to 31 percent in 2014.4 Bank profitability on the whole remains subdued given the high levels of deposit dollarization and dollar liquidity, low interest rates on U.S. dollar assets, and high operating costs. That said, there is significant heterogeneity between BROU and the private banks, with the former enjoying higher profitability aided by its predominant position in the peso market.

    Pension funds are the main institutional investors in Uruguay. There are four pension fund managers, with collective assets under management amounting to US$11 billion (20 percent of GDP). The defined-contribution pension system is characterized by two funds (an accumulation fund and a retirement fund). The largest of the fund managers is the publicly-owned Republica AFAP, with almost two-thirds of pension assets (US$6.2 billion). The three private AFAPs are all regionally owned: AFAP SURA from Colombia (US$1.99 billion); Union Capital, owned by Itaú (US$1.82 billion); and AFAP Integracion, owned by the Venezuelan Banco Bandes (US$998 million). Given the small size of Uruguay’s private capital markets, nearly 80 percent of the pension system’s assets are invested in government bonds and held to maturity. The investment regulations governing the funds currently permit only 15 percent of assets under management to be invested abroad. Expanding this limit would not only diversify the investment portfolio of the pension funds from a risk management perspective, but also mitigate against the present crowding out of retail investors in the face of the limited investment opportunities in the domestic market. Enhancing regional integration and perhaps including a separate investment limit for regional investments could be a solution—particularly as the three private AFAPs are owned by regional pension fund managers and could capitalize on the expertise of each for regional investments.

    The insurance market in Uruguay is small and dominated by the large state insurance company. Total assets of insurance companies in Uruguay amounted to US$3.2 billion at end-December 2014 (6 percent of total financial system assets, or 5 percent of GDP). There are 15 insurance companies operating, but the sector is dominated by the state-owned Banco de Seguros del Estado, which controls 82 percent of the insurance market.

    The capital markets in Uruguay are small but there is purportedly a large informal market and much scope for deepening. While total risk capital managed by brokers in Uruguay is projected at about US$5 billion (10 percent of GDP), only 5 percent of this goes through the formal Bolsa de Valores. There is a large informal market a significant volume of direct placements of securities between securities issuers and the pension funds. Given high brokerage fees, it is less costly for private companies to go directly to banks for private placements than to go through brokers. Formal capital market activity has also been dampened as the global banks have withdrawn their brokerage activities in Uruguay. Becoming an integrated member of a regional capital market initiative could be beneficial to Uruguay given the relatively small size of its market, need for scale, and room for deepening.

    Index

    A

    • Administradoras de Fondos de Pensiones (AFPs), 163, 188

    • AFORES, 175–76

    • AFPs. See Administradoras de Fondos de Pensiones

    • AML/CFT. See Anti-money laundering/combat the financing of terrorism

    • Ananchotikul, S., 89

    • Antidumping measures, 119

    • Anti-money laundering/combat the financing of terrorism (AML/CFT), xiii

    • Apostolos, A., 45n2

    • Arellano-Bond GMM, 28

    • Argentina, 7

      • Citibank in, 48

      • convertibility plan in, 120

      • financial crisis of 2001–02, 9

      • hyperinflation in, 120

      • Mercosur and, 121–23

      • taxes in, 10

      • See also Mercosur

    • Arregui, N., 146

    • Articles of Agreement, xivn6

    • ASEAN. See Association of Southeast Asian Nations

    • Asigna, 102–3, 178, 179

    • Association of Southeast Asian Nations (ASEAN), xvi, 3, 124, 127

    • AXA Seguros, 176

    B

    • BAC International, 169, 182

    • Baele, L. A., 11

    • Banco Agricola, 170

    • Banco Azteca, 46–47, 174

    • Banco Davivienda, 170

    • Banco de Bogotá, 49, 169

    • Banco del Credito del Peru, 49, 186

    • Banco del Republica Oriental de Uruguay (BROU), 51, 192–93

    • Banco de Mexico, 101

    • Banco Itaú, xv, 6, 49–50, 93

      • in Chile, 157–58

      • Corpbanca and, 51

    • Bancolombia, 169–70

    • Banco Santander-Chile, 162

    • Bank deposit insurance, in PA, xvi

    • Banking system

      • assets of, 41, 42f, 43t, 44f

      • branches in, 107, 112–13

      • in Brazil, 4–5, 6, 41, 45n2, 49–50, 51, 110, 120–21, 121f, 136, 157–60, 158f, 159f

      • CARs in, 112

      • in Chile, 41, 49, 50, 50n5, 51, 110, 113, 144, 161–62

      • in Colombia, 47–49, 51, 113, 136, 145, 154, 168–70, 169t

      • concentration of, 4, 41, 42f, 45, 51, 168

      • conglomerates in, xii, 6, 51

      • consolidation of, vi

      • contagion spillovers in, 132–36, 134t, 135f

      • credit growth in, 41–43, 41n1, 43f

      • ease of doing business in, 51–52

      • financial flows in, 113–14

      • financial integration of, 41–55

      • GDP and, 41, 44

      • global financial crisis and, 56t–57t

      • interest rate spreads in, 45–46, 46f, 52

      • inward openness for, 110–11

      • legal frameworks for, 107–16

      • level playing field for, 54

      • liberalization of, 46–49

      • liquidity in, 2, 3, 6, 52–53

      • Mercosur and, 120–21, 121f

      • mergers and acquisitions in, 47–48, 113

      • in Mexico, 46–47, 51, 140, 174

      • outward openness for, 110

      • in Panama, 41, 112, 181–83, 182f

      • in Peru, 49, 51, 113, 186

      • policy recommendations for, 54–55

      • ring-fencing rules in, 112–13, 113n21, 115, 143

      • subsidiaries in, xii, 107

      • systemic risk in, 140

      • transparency for, 55

      • in Uruguay, 51, 191–93

      • VI for, 134–36

      • See also Global banks; Regional banks

    • Bank of Credit and Commerce International, xii

    • Bank of International Settlements (BIS), 15, 20f, 47, 48t

      • Brazil and, 120n2

      • capital markets and, 96

      • CBS of, 47n4

      • Mexico and, 177

    • Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision of, 144–45, 144n8

    • Basel III, 52

      • Chile and, 162

      • for level playing field, xi

      • liquidity and, 145

      • Peru and, 185

      • risk mitigation and, 141–43, 141f–142f, 155

    • BBVA, 53–54

      • Banco Santander-Chile and, 162

      • in Colombia, 47–48

      • Mexico and, 53, 174

      • Panama and, 20, 182

      • Peru and, 53, 185

    • BCCh. See Central Bank of Chile

    • Beck, T., 27

    • Berlinski, J., 121n3

    • Berndsen, R., 140

    • BIS. See Bank of International Settlements

    • BM&F Bovespa, 92, 93, 124

      • Mexico and, 177

    • BMV. See Bolsa Mexicana de Valores

    • BNDES, 51

    • Bolivia, 186

      • See also Mercosur

    • Bolsa de Buenos Aires, 93

    • Bolsa de Colombia, 92

    • Bolsa de Lima, 21, 92

    • Bolsa de Santiago, 92

    • Bolsa de Valores de Lima, 189

    • Bolsa Mexicana, 21, 92

    • Bolsa Mexicana de Valores (BMV), 177

    • Bolsa y Renta, 169

    • Bond, S., 28n12

    • Bond markets

      • in Brazil, xiv–xv

      • MILA and, 1

      • taxes on, 108

      • World Government Bond Index, 100

    • Bradesco, 4–5, 63

      • HSBC and, 48, 51

    • Branches, in banking system, 107, 112–13

    • Brasilprev, 63

    • Brazil

      • banking system in, 4–5, 6, 41, 45n2, 49–50, 51, 110, 120–21, 121f, 136, 157–60, 158f, 159f

      • BIS and, 120n2

      • bond markets in, xiv–xv

      • capital markets in, 91

      • Citibank in, 48

      • conglomerates in, 136

      • currency foreign exchange turnover for, 97

      • currency of, 123

      • dollarization in, 45

      • FCC for, 154

      • FDI in, 16

      • financial crisis of 1999 in, 119

      • foreign currencies in, 2, 45, 45f

      • GDP of, 157

      • HSBC in, 4–5

      • hyperinflation in, 120

      • insurance companies in, 59, 61, 63, 68n3, 157

      • interest rate spread in, 45–46, 46f

      • inward openness in, 111

      • legal frameworks in, 110

      • life free benefits generator in, 68n3

      • Mercosur and, xv, 120–21, 120n2, 121f, 123

      • PA and, xv

      • pension funds in, 72, 73, 74–75, 76n4, 157

      • Real plan in, 120

      • Santander in, 54

      • Standard Chartered in, 20

      • stock exchange of, xv, 1, 92, 124, 136

      • trade with, 5

      • See also Mercosur

      • BROU. See Banco del Republica Oriental de Uruguay

      • BTG Pactual, 50, 50n6, 51

      • BVM, 93

    C

    • Caceres, C., 133n3

    • Camdessus, Michel, 2

    • Capital adequacy requirements (CARs), 112, 150

    • Capital definitions, 153

    • Capital markets

      • BIS and, 96

      • in Brazil, 91

      • CCPs for, 92

      • in Chile, 92

      • clearinghouses for, 92

      • in Colombia, 167

      • financial depth for, 93

      • financial integration in, 89–103, 91f

      • GDP and, 89

      • growth and size indicators of, 89, 90f

      • IFRS for, 96

      • investor protection programs for, xvi

      • IOSCO and, 96

      • Mercosur and, 128

      • in Mexico, 91, 92, 177–79

      • MILA and, 125–26

      • PA and, 124

      • in Panama, 92

      • pension funds in, 95

      • in Peru, 91

      • PFMI for, 92, 92n2

      • policy recommendations for, 95–96

      • taxation and, 96

      • in Uruguay, 91, 91n1

      • See also Equity markets; Stock exchanges

    • Capital requirements, 153–55, 154f

    • Caribbean Regional Financial Project, 149–52, 151f

    • CARs. See Capital adequacy requirements

    • CBS. See Consolidated Banking Statistics

    • CCPs. See Central counterparties

    • CDS. See Credit default swap

    • Central and eastern Europe (CEE), currency foreign exchange turnover in, 97

    • Central Bank of Chile (BCCh), 161

    • Central counterparties (CCPs)

      • for capital markets, 92

      • for derivatives trading, 146

      • for interest rate derivatives, 101–3

      • in Mexico, 178, 179

      • systemic risk of, xiii–xiv

      • transparency and, 146

    • Chicago Mercantile Exchange (CME), 102, 179

    • Chile

      • Banco Itaú in, 157–58

      • banking system in, 41, 49, 50, 50n5, 51, 110, 113, 144, 161–62

      • Basel III and, 162

      • BBVA in, 54

      • capital markets in, 92

      • Citibank in, 93

      • Citigroup in, 162

      • Colombia and, 49, 168

      • conglomerates in, 136, 165–66

      • Corpbanca in, 20

      • credit-to-private-sector ratio in, 43–44

      • FCC for, 154

      • FDI in, 16, 161

      • foreign currencies in, 45f

      • global openness of, 21

      • insurance companies in, 59, 61, 69, 114n28, 163–64

      • interest rate spread in, 46f

      • legal framework in, 110, 114n24

      • MILA and, 126

      • mutual funds in, 163–64

      • pension funds in, 20, 73, 76n3, 162–63, 164n3

      • regulatory reforms in, 4

      • Santander in, 54

      • stock exchange of, 92, 93, 164–65

      • trade with, 5

      • See also Pacific Alliance

    • China

      • economic rebalancing in, ix

      • slowdown in, 4, 9

    • Citibank, 47–48, 93, 174

    • Citigroup, 100, 162

    • Claessens, S., 26

    • Clearinghouses

      • for capital markets, 92

      • Mexican interest rate derivatives and, 101–3

    • CME. See Chicago Mercantile Exchange

    • Colombia

      • assets in, 168f

      • banking system in, 47–49, 51, 113, 136, 145, 154, 168–70, 169t

      • BBVA in, 54

      • capital markets in, 167

      • Chile and, 49, 168

      • Citibank in, 48

      • concentration in, 168–69

      • conglomerates in, 167

      • credit cards in, 49

      • credit growth in, 43

      • FCC for, 154

      • financial depth in, 167

      • FMIs in, 140

      • foreign currencies in, 45, 45f

      • HSBC in, 47–48, 93

      • insurance companies in, 61, 63, 167–68

      • interest rate spread in, 46, 46f

      • inward openness in, 110

      • LAMR in, 116

      • mergers and acquisitions in, 154

      • MILA and, 169

      • pension funds in, 20, 74–75, 167–68

      • regional banks in, 47–48

      • risk mitigation in, 171

      • Santander in, 20, 47–48

      • Standard and Poor’s and, 154

      • technical reserves in, 114n23

      • See also Pacific Alliance

    • Commercial Mercosur, 123

    • Committee on Capital Markets Regulation, 132n2

    • Committee on Payment and Settlement Systems (CPSS), xiv, xivn5

    • Committee on Payments and Market Infrastructure (CPMI), 92, 92n2

    • Commodity super-cycle, ix, 4, 9

    • Compulsory auto insurance, in Mexico, 59, 59n1

    • Concentration

      • of banking system, 4, 41, 42f, 45, 51, 168

      • in Colombia, 168–69

      • of insurance companies, xii, 61

      • of pension funds, xii, 73, 75

    • Conglomerates

      • in banking system, xii, 6, 51

      • in Chile, 165–66

      • in Colombia, 167

      • risk mitigation by, 51, 131, 132–33, 136, 139f, 143–45

    • Consistent Information Multivariate Density Optimizing Methodology, 133–34, 133n3

    • Consolidated Banking Statistics (CBS), of BIS, 47n4

    • Contagion spillovers, 132–38, 134t, 135f

    • Convergence

      • in financial integration, 11, 33t

      • of taxes, xi

    • Convertibility plan, in Argentina, 120

    • Coordinated Direct Investment Survey, of IMF, 15

    • Coordinated Portfolio Investment Survey, of IMF, 15, 90–91

    • Core Principles for Effective Banking Supervision, of Basel Committee on Banking Supervision, 144–45, 144n8

    • Corpbanca, 49, 50, 50n5, 162

      • Banco Itaú and, 51

      • in Chile, 20

    • Correval, 169

    • Counterparty risk, 126

    • CPMI. See Committee on Payments and Market Infrastructure

    • CPSS. See Committee on Payment and Settlement Systems

    • Credit cards, 49

    • Credit default swap (CDS), 140

    • Credit growth, in banking system, 41–43, 41n1, 43f

    • Credit-to-private-sector ratio, in Chile, 43–44

    • Currency

      • of Brazil, 123

      • double fees for, xiv

      • foreign exchange turnover of, 97–100, 97n7, 98f, 99f

      • IMF and, xiv, xivn6

      • Mercosur and, 128

      • in Mexico, 178

      • in Panama, xvii

      • See also Dollarization; Foreign currencies

    D

    • Davidienda, 49

    • Dee, P., 121n3

    • Degryse, H. O., 26

    • Delivery-versus-payment settlement (DvP), 125–26

    • Derivatives trading

      • CCPs for, 146

      • in Mexico, 101–3, 102f, 177–79

      • U.S. and, 3

    • Detragiache, E., 26

    • Dollarization, 44–45, 55

      • hyperinflation and, 44

    • Double fees, for currency, xiv

    • Double taxation, 96, 126

    • DvP. See Delivery-versus-payment settlement

    E

    • Eastern Caribbean Currency Union (ECCU), 149–50

    • Economic rebalancing, in China, ix

    • Eichengreen, B., 89

    • Equity markets

      • financial depth of, 89

      • MILA and, 1, 125–26

      • pension funds and, 75, 75f, 78

      • in Peru, 189

      • value traded in, 93–94, 94f

    • ETFs. See Exchange traded funds

    • European Central Bank, monetary policy of, 11n1

    • Exchange traded funds (ETFs), 174

    • Expenditure-to-GDP ratio, 27

    • Exporters, Mexico and, 7

    • External liabilities, financial integration and, 28, 31t, 33t

    • External liability-to-GDP ratio, 12

    F

    • FATF. See Financial Action Task Force

    • FCC. See Fitch Core Capital

    • FDI. See Foreign direct investment

    • Fernández, A., 27

    • Financial Action Task Force (FATF), xiii, xiiin4, 55

    • Financial depth

      • for capital markets, 93

      • in Colombia, 167

      • of equity markets, 89

      • financial integration and, 23, 28, 34t

    • Financial flows, legal framework for, 113–14

    • Financial integration

      • of banking system, 41–55

      • baseline composite index for, 12, 13t, 27, 32t

      • benefits of, 8–30

      • in capital markets, 89–103, 91f

      • convergence in, 11, 33t

      • deficit of, 14–23

      • defined, 11–12

      • examples of, 132t

      • external liabilities and, 28, 31t, 33t

      • financial depth and, 23, 28, 34t

      • financial stability with, 183–84

      • GDP and, 11, 12, 15, 16f, 17f, 18f, 19f, 20t, 21–22, 26–29

      • indicators of, 12–14, 13t, 38t–39t

      • of insurance companies, 59–70

      • international treaties and, 109

      • legal frameworks for, 105–16

      • macroeconomic gains from, 27–29

      • measurement of, 21–23

      • of pension funds, 71–83

      • pros and cons of, 23–27

      • regional initiatives for, 119–29

      • regional openness and, 14, 23, 28–29, 35t

    • Financial market infrastructure networks (FMIs), 140

    • Financial openness, financial integration and, 31t

    • Financial Sector Assessment Program (FSAP), of IMF, 143, 159–60

    • Financial Stability Board, 55

    • Financial stability-openness frontier, 106, 106f

    • Fitch Core Capital (FCC), 154–55, 155f

    • FMIs. See Financial market infrastructure networks

    • Foreign asset cap

      • for pension funds, 75–76, 77f, 79, 85t–86t

      • in Uruguay, xvii, 76

    • Foreign currencies, 44–45, 45f

      • in Brazil, 2

      • in Mexico, 2

    • Foreign direct investment (FDI),15–16,17f, 18f,19f

      • in Chile, 161

      • Mercosur and, 122f, 123

    • Foreign exchange turnover

      • of currency, 97–100, 97n7, 98f, 99f

      • liquidity in, 97, 100

      • in Mexico, 178

    • Free trade agreements (FTAs), 109, 113n21

    • FSAP. See Financial Sector Assessment Program

    • FTAs. See Free trade agreements

    G

    • Garcia, Alan, 124

    • GATS. See General Agreement on Trade in Services

    • GDP

      • banking system and, 41, 44

      • BIS and, 20f

      • of Brazil, 157

      • capital markets and, 89

      • financial integration and, 11, 12, 15, 16f, 17f, 18f, 19f, 20t, 21–22, 26–29

      • growth of, 2

      • IIPs and, 15

      • insurance companies and, 59

      • of Mexico, 173

      • of PA, 124

      • pension funds and, 71

      • of Uruguay, 191

    • GDP per capita, 21, 28, 28n12

    • General Agreement on Trade in Services (GATS), 109, 119–20

    • Generalized method of moments (GMM), 28, 29

    • Giannetti, M., 26

    • Giansante, Simone, 137n6

    • Global banks

      • in global financial crisis, ix, 3, 4–5, 9

      • in Mexico, 9

      • regional banks as replacement for, 25

      • in Uruguay, 9

      • withdrawal of, vi

    • Global financial crisis

      • banking system and, 56t–57t

      • global banks in, ix, 3, 4–5, 9

      • Mexico and, 178–79

      • systemic risk in, 137f

    • Global openness, 14, 21

    • GMM. See Generalized method of moments

    • GNB Sudameris, 51, 52, 93, 168–69

    • Goodhart, C., 133n3

    • Grupo Agromercantil, 170

    • Grupo Financiero Inbursa, in Mexico, 20

    • Grupo Nacional Provincial, 176

    • Grupo Reformador, 169

    • Grupo Suramericana de Inversiones, 74–75

    • Gupta, P., 26

    • Guzzo, V., 133n3

    H

    • Helmbank, 49

    • Hoeffler, A., 28n12

    • Hoekman, B., 121n3

    • Holding company subsidiaries, banks as, xii

    • Hong Kong, currency foreign exchange turnover in, 97

    • HSBC

      • Bradesco and, 48, 51

      • in Brazil, 4–5

      • in Colombia, 47–48, 93

      • GNB Sudameris and, 52, 168–69

      • Mexico and, 174

      • Panama and, 182

      • in Peru, 51

    • Hyperinflation

      • in Argentina, 120

      • in Brazil, 120

      • dollarization and, 44

    I

    • ICRG. See International Country Risk Guide

    • IFRS, for capital markets, 96

    • IIPs. See International investment positions

    • IMF. See International Monetary Fund

    • Infrastructure

      • CPMI and, 92, 92n2

      • FMIs, 140

      • pension funds and, 25–26, 79, 79n6

      • PFMI and, xiv, xivn5, 92, 92n2

    • Insolvency regimes, xiii

    • Instrumental variable (IV), 27, 29

    • Insurance companies

      • in Brazil, 59, 61, 63, 68n3, 157

      • in Chile, 59, 61, 69, 114n28, 163–64

      • in Colombia, 61, 63, 167–68

      • concentration of, xii, 61

      • diversification of, 6–7

      • expansion of, vi

      • financial integration of, 59–70

      • GDP and, 59

      • growth of, ix, 5, 59–61

      • legal frameworks for, 107–16

      • for level playing field, xi–xii

      • mergers and acquisitions of, 63–64, 68

      • in Mexico, 59, 59n1, 69, 176–77

      • ownership of, 63, 63f

      • in Panama, 61, 183

      • pension funds and, 69–70

      • in Peru, 61, 185, 187f, 188–89

      • policy recommendations for, 69–70

      • premium distribution in, 60f

      • premiums of, 64f

      • ranking of top 10, 65t–67t

      • regulatory restrictions on, 3, 4

      • reinsurance by, 64, 68

      • restricted exposure to, ix

      • size, penetration, and density of, 60f

      • Solvency II and, 62, 69

      • technical reserves for, 113, 114n23

      • transparency for, 70

      • in Uruguay, 61

    • Inter-American Development Bank, PA and, 127n1

    • Intercorp, 186

    • Interest rate derivatives, in Mexico, 101–3, 102f, 177–79

    • Interest rate spreads, in banking system, 45–46, 46f, 52

    • International Country Risk Guide (ICRG), 21, 27

    • International Financial Reporting Standards, 52

      • for level playing field, xi

      • for pension funds, 80

    • International investment positions (IIPs), 15, 16f

    • International Monetary Fund (IMF)

      • adjustment programs of, 2, 2t

      • Coordinated Direct Investment Survey of, 15

      • Coordinated Portfolio Investment Survey of, 15, 90–91

      • currency and, xiv, xivn6

      • FSAP of, 143, 159–60

      • PA and, 127n1

      • World Economic Outlook of, 14

    • International Organization of Securities Commissions (IOSCO), xiv, xivn5, 92, 92n2, 129

      • capital markets and, 96

      • Multilateral Memoranda of Understanding of, xvi

    • International treaties, 109

    • Investment-to-GDP ratio, 27

    • Inward openness, 110–11

    • IOSCO. See International Organization of Securities Commissions

    • IV. See Instrumental variable

    J

    • Jeon, B. N., 26

    • Joint Forum, Principles for Supervision of Financial Conglomerates of, 144–45, 144n8

    • Jorgensen, O. H., 45n2

    K

    • Kose, A., 27

    L

    • Laeven, L., 26

    • LAMR. See Local asset maintenance requirements

    • Larrain Vial, 93

    • Latin American Integrated Market. See Market Integration in Latin America

    • Legal frameworks

      • for acquisitions in banking system, 113

      • analysis of, 107–9

      • for banking system, 107–16

      • in Brazil, 110

      • in Chile, 110, 114n24

      • for financial flows, 113–14

      • for financial integration, 105–16

      • for insurance companies, 107–16

      • inward openness in, 110–11

      • outward openness for, 110

      • overly broad provisions in, 111–12

      • restrictive or discriminatory conditions in, 112–13

      • strengthening, 115–16

    • León, C., 140

    • Level playing field, xi–xii

      • for banking system, 54

    • Levine, R., 27

    • LHC. Clearnet Ltd., 102

    • Life free benefits generator, in Brazil, 68n3

    • Light touch supervision, xii, xvii

    • Lima Agreement, 124

    • Liquidity, v, xi

      • in banking system, 2, 3, 6, 52–53

      • Basel III and, 145

      • in capital markets, 89, 93–94

      • of Chilean stock exchange, 165

      • in foreign exchange turnover, 97, 100

      • MILA and, 125

      • in pension funds, 78

      • regulation of, 145

    • Local asset maintenance requirements (LAMR), 116

    M

    • Macri, Mauricio, 123

    • Macroprudential measures, 6

      • for risk mitigation, 145–46

    • Market Integration in Latin America (MILA), vi, 1

      • BVM and, 93

      • capital markets and, 125–26

      • Chile and, 126

      • Colombia and, 169

      • equity markets and, 125–26

      • limited results from, 7

      • liquidity and, 125

      • Mexico and, 179

      • PA and, xvi, 124–29

      • stock exchanges and, 20–21, 20n6, 94–95

    • Markose, Sheri M., 137n6

    • Memorandums of understanding (MOUs), 6

    • Mercado Mexicano de Derivados (MexDer), 101–3, 178

    • Mercosur, vi, x, 7, 10, 136

      • Argentina and, 121–23

      • banking system and, 120–21, 121f

      • Brazil and, xv, 120–21, 120n2, 121f, 123

      • capital markets and, 128

      • FDI and, 122f, 123

      • GATS and, 119–20

      • goods trade with, 120f

      • for level playing field, xi

      • Paraguay and, 123

      • policy recommendations for, 128

      • SGT-4 of, 120, 120n1, 123

      • Uruguay and, xvii, 123

    • Mergers and acquisitions, 20

      • in banking system, 47–48, 113

      • in Colombia, 154

      • of insurance companies, 63–64, 68

    • MetLife, 74, 176

    • MexDer. See Mercado Mexicano de Derivados

    • Mexico

      • banking system in, 46–47, 51, 140, 174

      • BBVA in, 53, 174

      • capital markets in, 91, 92, 177–79

      • CCPs in, 178, 179

      • Citigroup in, 100

      • compulsory auto insurance in, 59, 59n1

      • conglomerates in, 136

      • credit growth in, 43

      • credit-to-private-sector ratio in, 44

      • currency foreign exchange turnover for, 97–100

      • currency in, 178

      • derivatives trading in, 101–3, 102f, 177–79

      • exporters and, 7

      • financial crisis of 1994, 2

      • foreign currencies in, 2, 45, 45f

      • foreign exchange turnover in, 178

      • GDP of, 173

      • global banks in, 9

      • global financial crisis and, 178–79

      • Grupo Financiero Inbursa in, 20

      • insurance companies in, 59, 59n1, 69, 176–77

      • interest rate derivatives in, 101–3, 102f, 177–79

      • interest rate spread in, 46, 46f, 52

      • inward openness in, 111

      • MILA and, 179

      • OECD and, 173

      • pension funds in, 20, 73, 74–75, 174–76, 175f

      • Santander in, 54

      • stock exchange of, 92, 93, 124

      • systemic risk in, 140

      • tequila crisis in, 173

      • trade with, 5

      • See also Pacific Alliance

    • Microprudential exposure limits, 145

    • MILA. See Market Integration in Latin America

    • Ministry of Finance (MoF), in Chile, 161

    • Monetary policy, of European Central Bank, 11n1

    • Montevideo Protocol, 119, 120

    • Morgan Stanley Capital International, 12

    • MOUs. See Memorandums of understanding

    • Multilateral Memoranda of Understanding, of IOSCO, xvi

    • Mutual funds, in Chile, 163–64

    N

    • NAFTA, 173

    • Network analysis

      • for risk mitigation, 136

      • of systemic risk, 138

    • Nier, E., 132n1

    O

    • OECD. See Organisation for Economic Co-operation and Development

    • Olivero, M. P., 26

    • Openness

      • financial integration and, 31t

      • financial stability-openness frontier, 106, 106f

      • global, 14, 21

      • inward, 110–11

      • outward, 110

      • regional, 14, 23, 28–29, 35t

    • Organisation for Economic Co-operation and Development (OECD), 46n3

      • Mexico and, 173

      • pension funds and, 72, 81, 114n27

    • OTC. See Over-the-counter

    • Outward openness, 110

    • Over-the-counter (OTC)

      • derivatives, 146

      • interest rate derivatives, 101–3, 102f, 178

      • MILA and, 125

    P

    • Pacific Alliance (PA), vi, x, xv–xvii, 7, 10, 127n1, 136

      • ASEAN and, 3, 124, 127

      • Brazil and, xv

      • capital markets and, 124

      • GDP of, 124

      • for level playing field, xi

      • MILA and, 124–29

      • Panama and, xvii

      • pension funds and, 128

      • policy recommendations for, 128–29

      • regular meetings of, 1

      • secretariat of, xvii, 127–28

      • tranches and, xvi

      • See also Market Integration in Latin America

    • Pagano, M., 95n5

    • Panama, xvii

      • banking system in, 41, 112, 181–83, 182f

      • BBVA and, 20, 182

      • capital markets in, 92

      • credit cards in, 49

      • global openness of, 21

      • insurance companies in, 61, 183

      • interest rate spread in, 46, 46f

      • inward openness in, 110

      • overly broad legal provisions in, 112

      • pension funds in, 183

    • Paracas Declaration, 1, 127

    • Paraguay, 120, 123

      • See also Mercosur

    • PCA. See Principal component analysis

    • Pension funds

      • assets of, 71–72, 72f, 73f, 74f

      • BBVA and, 20

      • in Brazil, 72, 73, 74–75, 76n4, 157

      • in capital markets, 95

      • in Chile, 20, 73, 76n3, 162–63, 164n3

      • in Colombia, 20, 74–75, 167–68

      • concentration of, xii, 73, 75

      • diversification of, 6–7

      • equity markets and, 75, 75f, 78

      • expansion of, vi

      • financial flows in, 114

      • financial integration of, 71–83

      • foreign asset cap for, 75–76, 77f, 79, 85t–86t

      • GDP and, 71

      • growth of, ix, 5

      • infrastructure and, 25–26, 79, 79n6

      • insurance companies and, 69–70

      • International Financial Reporting Standards for, 80

      • for level playing field, xi–xii

      • liquidity in, 78

      • in Mexico, 20, 73, 74–75, 174–76, 175f

      • OECD and, 81, 114n27

      • operating costs and fees for, 81–83, 82f, 83f, 84f

      • PA and, 128

      • in Panama, 183

      • in Peru, 20, 74–75, 185, 187–88

      • policy recommendations for, 79–80

      • portability for, 80

      • regulatory restrictions on, 3, 4

      • restricted exposure to, ix

      • savings rates and, 78

      • in Uruguay, xvii, 72–75, 114n28, 193–94

    • Peru, 186f

      • banking system in, 49, 51, 113, 186

      • Basel III and, 185

      • BBVA in, 53, 185

      • capital markets in, 91

      • credit growth in, 43

      • credit-to-private-sector ratio in, 44

      • dollarization in, 44

      • equity markets in, 189

      • global openness of, 21

      • HSBC in, 51

      • insurance companies in, 61, 185, 187f, 188–89

      • interest rate spread in, 46, 46f

      • inward openness in, 110

      • LAMR in, 116

      • pension funds in, 20, 74–75, 185, 187–88

      • stock exchange of, 93, 124

      • taxes in, 185

      • See also Pacific Alliance

    • PFMI. See Principles for Financial Market Infrastructure

    • Poledna, S., 140

    • Political Mercosur, 123

    • Principal component analysis (PCA), 12, 12n2

    • Principal Financial Group, 74

    • Principles for Financial Market Infrastructure (PFMI), xiv, xivn5, 92, 92n2

    • Principles for Supervision of Financial Conglomerates, of Joint Forum, 144–45, 144n8

    • Production-possibility frontier, 106, 106f

    • PRS Group, 21

    • Prudential measures, for risk mitigation, 145–46, 147t

    • Public-private partnerships, 4

    R

    • Race to the top, xii

    • Rancière, R., 26

    • Real Estate Investment Trusts, 173

    • Real plan, in Brazil, 120

    • Regional banks, vi, 24–26

      • Bank Itaú as, xv

      • in Colombia, 47–48

    • Regional credit bureau, xin3

    • Regional openness, 14, 23, 28–29, 35t

    • Reinsurance, 64, 68

    • Renneboog, L., 140

    • Resolution frameworks, 125, 140, 141, 146, 147t

    • Restructuring colleges, xii–xiii

    • Ring-fencing rules, in banking system, 112–13, 113n21, 115, 143

    • Risk mitigation, xii–xiii

      • Basel III and, 141–43, 141f–142f, 155

      • capital requirements and, 153–55, 154f

      • by Caribbean Regional Financial Project, 149–52, 151f

      • in Colombia, 171

      • by conglomerates, 51, 131, 132–33, 136, 139f, 143–45

      • for contagion spillovers, 132–36, 134t, 135f

      • for financial flow, 114

      • for financial integration, 131–55

      • macroprudential measures for, 145–46

      • network analysis for, 136

      • policy recommendations for, 148

      • prudential measures for, 145–46, 147t

      • recent network approaches to, 140

      • regulatory oversight for, 140–41

      • VI and, 134–36

    S

    • Sahay, R., 27

    • Santander, 49, 54

      • in Colombia, 20, 47–48

    • Savings rates, pension funds and, 78

    • Scott, H., 132n2

    • Secretariat, of PA, xvii, 127–28

    • Segoviano, A., 133n3

    • Segoviano, M., 133–34, 133n3

    • Seguros Banames, 176

    • Seguros Banorte Generali, 176

    • SGT-4, of Mercosur, 120, 120n1, 123

    • SIFIs. See Systemically important financial institutions

    • Singapore, currency foreign exchange turnover in, 97

    • Sistema de pago en Moneda Local (SMLs), 123n4

    • Solvency II

      • insurance companies and, 62, 69, 176

      • for level playing field, xi

    • Standard and Poor’s, 154

    • Standard Chartered, in Brazil, 20

    • Stock exchanges

      • of Brazil, xv, 1, 92, 124, 136

      • of Chile, 92, 93, 164–65

      • commission costs of, 95, 95n5

      • declining volumes of, ix

      • of Mexico, 92, 93, 124

      • MILA and, 20–21, 20n6, 94–95

      • of Peru, 93, 124

      • strategic alliances for, 92–93

      • of Uruguay, xvii

    • Strategic alliances, for stock exchanges, 92–93

    • Subsidiaries, in banking system, xii, 107

    • Suramericana, 63

    • Systemically important financial institutions (SIFIs), 145

    • Systemic risk

      • in banking system, 140

      • of CCPs, xiii–xiv

      • counterparty risk and, 126

      • in global financial crisis, 137f

      • in Mexico, 140

      • MOUs and, 6

      • network analysis of, 138

    T

    • Tabak, B. M., 46n3

    • Taxes

      • in Argentina, 10

      • on bond markets, 108

      • capital markets and, 96

      • convergence of, xi

      • double, 96, 126

      • in Peru, 185

    • Technical reserves, for insurance companies, 113, 114n23

    • Tecles, P., 46n3

    • Temple, J., 28n12

    • Tequila crisis, in Mexico, 173

    • Tornell, A., 26

    • Towers Watson, 71n1

    • Tranches, PA and, xvi

    • Transparency

      • for banking system, 55

      • CCPs and, 146

      • for insurance companies, 70

      • for interest rate derivatives, 102

    • Treaty of Asuncion, 119

    • Tressel, T., 26

    U

    • Unibanco, 63

    • United Kingdom, currency foreign exchange turnover in, 97

    • United States (U.S.)

      • currency foreign exchange turnover in, 97

      • derivatives trading and, 3

      • See also Dollarization

    • Uruguay, xvii

      • banking system in, 51, 191–93

      • capital markets in, 91, 91n1

      • credit-to-private-sector ratio in, 44

      • financial crisis of 2001–02, 9, 191

      • foreign asset cap in, 76

      • foreign currencies in, 45, 45f

      • GATS and, 120

      • GDP of, 191

      • global banks in, 9

      • insurance companies in, 61

      • interest rate spread in, 46, 46f

      • inward openness in, 111

      • Mercosur and, 123

      • pension funds in, xvii, 72–75, 114n28, 193–94

      • See also Mercosur

    • U.S. See United States

    V

    • van Horen, N., 26

    • Venezuela, 123, 193

      • See also Mercosur

    • Vulnerability index (VI), 134–36

    W

    • Werner, Alejandro, vi–vii

    • Westermann, F., 26

    • World Bank, 89–90

      • FSAP and, 143

      • PA and, 127n1

    • World Economic Outlook, of IMF, 14

    • World Government Bond Index, 100

    • World Trade Organization (WTO), 109, 119

    • Wu, J., 26

    Z

    • Zervos, S., 89–90

    Comprises Argentina, Brazil, and Uruguay, as well as Paraguay and Venezuela.

    Comprises Chile, Colombia, Mexico, and Peru.

    In the long run one might envisage a pooling of information across credit bureaus, or a single regional credit bureau. There would also be benefit in harmonizing deposit insurance across the countries of the region, to avoid risk of arbitrage by financial institutions or their customers.

    The FATF is an intergovernmental organization established by the Group of Seven countries during their 1989 Summit in Paris to combat money laundering.

    PFMI, established by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO), are intended to “ensure that the infrastructure supporting global financial markets ‘is even more robust and thus even better placed to withstand financial shocks’” (quoted from the website of the International Capital Market Association).

    IMF involvement is important for any measures in this area, given the countries’ obligations under the Articles of Agreement to not maintain multiple currency practices.

    Prepared by Carlos Caceres.

    Prepared by Luc Eyraud and Diva Singh.

    The 40 percent limit applies to each country, meaning that a bank could invest up to 80 percent of its regulatory capital in two countries, for instance.

    At retirement, a retiree has the choice between either buying an annuity from an assurance company or leaving the money in the pension fund and drawing it on a monthly basis. In most cases, retirees chose the first option and pension funds are converted into annuities.

    As measured by the World Federation of Exchanges.

    Prepared by Iulia Ruxandra Teodoru and Mohamed Afzal Norat.

    Prepared by Alla Myrvoda and Bennett Sutton.

    Based on Banco de Mexico, Secretaría de Hacienda y Crédito Público (SHCP), Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR), and Comisión Nacional de Seguros y Fianzas (CNSF) data.

    March 2015 CNSF data.

    As at end-2015; CNBV statistics.

    Prepared by Iulia Ruxandra Teodoru.

    Colombian banks, significant holders of important claims on Panama, do not report their foreign claims to the BIS.

    Prepared by Bennett Sutton.

    However, it is estimated that only about half the 5 million contribute regularly as the others are independent or contract workers. Reforms are under consideration to facilitate contributions by independent, contract, and other workers in the informal sector.

    Fifty percent is the statutory limit, though the regulator currently limits holdings to 42 percent as the effective cap is raised slowly to stem large capital outflows and volatility in the onshore FX market.

    Prepared by Diva Singh.

    The new financial inclusion law allows public employees to choose private banks for their payroll accounts.

    Staff Report for the 2014 Article IV Consultation, No. 15/81.

    Ibid.

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