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Laura Lorenzo and Wouter Bossu

Abstract

Legal frameworks shape the context in which economic transactions take place, both within a given economy and between economies. Laws and regulations allow private economic agents to establish and (re)organize themselves, to seek finance, to enter markets by selling products and services, to enforce payment claims when customers are entering into default on obligations, and to exit a market in an orderly way when so desired or required. It is widely accepted that well-designed legal frameworks for market entry, operation, and exit can promote economic growth and, from a cross-border perspective, integration of economies and financial systems.

Ms. Alla Myrvoda and Mr. Bennett W Sutton

Abstract

Market capitalizations in the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay) are moderate in size by emerging market standards; however, continued growth and development will depend on improving liquidity conditions across the region. At the end of 2015, capitalization of LA-7 equity markets was 32 percent of regional GDP, while the value of domestically traded bonds outstanding was about 62 percent of GDP (Figure 6.1). In dollar terms, the largest bond and equity markets are in Brazil and Mexico. Despite solid market capitalizations, low trading volumes are a growing concern. Shrinking liquidity is attributed to deteriorating macroeconomic conditions, high transaction costs, and the outsized role of institutional investors and their buy-and-hold strategies.

Ms. Alla Myrvoda

Abstract

Pension funds are becoming increasingly important in financial markets in the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay). The size of these pension funds has surpassed 17 percent of GDP in assets under management, largely driven by growing participation following legal changes in most of the region. Brazil dominates LA-7 pension fund assets in value terms, while the Chilean pension fund industry—whose framework has often been used as a model in the region—remains the largest in relation to the country’s size. Despite the rapid growth, total assets and participation rates within the LA-7 remain below those of advanced country averages, thus strengthening expectations that LA-7 pension fund growth will continue to outstrip that of regional GDP. Countries’ regulatory frameworks restrict most pension funds to largely domestic investments, although in many cases Latin American pension funds have outgrown domestic capital markets.

Mr. Charles Enoch, Wouter Bossu, Carlos Caceres, and Ms. Diva Singh

Abstract

With growth slowing across much of the Latin America as a result of the end of the commodity supercycle and economic rebalancing in China, as well as fragmentation of the international banking system, policies to stimulate growth are needed. This book examines the financial landscapes of seven Latin American economies—Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay—and makes a case for them to pursue regional financial integration. Chapters set out the benefits to the region of financial integration, the barriers to cross-border activity in banks, insurance companies, pension funds, and capital markets, as well as recommendations to address these barriers. Finally, the volume makes the case that regional integration now could be a step toward global integration in the short term.

Luc Eyraud, Ms. Diva Singh, and Mr. Bennett W Sutton

Abstract

After a period of endemic economic and financial crises during the 1980s to 1990s, many Latin American countries opened up their previously closed economies to international financial institutions at the turn of the millennium, aiming to attract capital, gain technical expertise, and cushion themselves against regional instability. In some extreme cases, such as Mexico and Uruguay, the financial system came to be completely dominated by global banks, with few or no domestic banks remaining. In addition, their experience with financial crises prompted most Latin American countries to implement stricter financial regulations. The strategy of importing global institutions and know-how, together with tighter regulations, appeared to have served the region well: with the exception of the Argentine and Uruguayan crises of 2001–02, none of the largest Latin American banking systems have suffered a financial crisis in the new century. Even the global financial crisis of 2008–09 caused relatively little harm, with high commodity prices fortuitously buffering exports and growth in this resource-rich region.

Ms. Alla Myrvoda and Mr. Bennett W Sutton

Abstract

In the countries that make up the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay), insurance penetration (measured by premiums in percent of GDP) remains low, ranging from 1 to 4 percentage points of GDP, although the sector has expanded at a significant rate over the past decade. In 2014, assets totaled almost 10 percent of regional GDP, influenced in many cases by changes in the domestic regulatory frameworks. Broadening of formal sectors and larger nominal losses from natural disasters are likely to fuel the non-life segment, whereas purchases of life and retirement products have been growing the life portion of the insurance sector for some time now. The sector’s growth is partly stymied by the limited availability of long-term financial instruments denominated in the domestic currency, given that their demand is often crowded out by pension funds.

Iulia Ruxandra Teodoru

Abstract

Banking systems are the largest financial intermediaries in the LA-7 countries (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay), amounting to about 100 percent of LA-7 GDP. Brazil’s banking system is by far the largest in absolute terms, while Panama and Chile have the largest as a share of GDP (Figure 3.1). Since the liberalization of financial systems in the 1990s, most assets in the LA-7 countries are with private banks (about 60 percent of LA-7 GDP), while assets in public banks remain high only in Brazil and Uruguay. Foreign banks also hold important market shares in some of the LA-7 countries (27 percent of LA-7 GDP). However, the integration of regional banking systems remains low. Despite liberalization, most banking systems are characterized by high concentration and, in some cases, high bank interest rate spreads.

Mr. Charles Enoch

Abstract

Many factors indicate that now may be the time for Latin American economies to work toward greater regional financial integration. This would not be a substitute for wider integration in the world economy; some Latin American economies are among the most active in global initiatives. However, given the recent economic slowdown in much of the region, limited progress in pursuing global agreements, and the widespread withdrawal of global financial institutions from emerging markets (including those in Latin America), regional financial integration could help buttress the economies of Latin America, enhance competition, and—over the medium term—lead the way toward global integration.

Mr. Charles Enoch and Iulia Ruxandra Teodoru

Abstract

This chapter takes stock of existing efforts at regional financial integration. Integration initiatives have a long history in Latin America; however, many have lost momentum after initial enthusiasm. This chapter looks in particular at two ongoing regional initiatives that—among other objectives—are aiming at financial integration. It finds that prospects are good for both of them, and that they may be the most suitable vehicles for taking the integration process forward at this time.

Mohamed Afzal Norat and Carlos Caceres

Abstract

Financial integration and the resulting interconnections among financial and nonfinancial institutions provide benefits and risks for countries. As articulated in earlier chapters in this book, financial integration can bring important benefits to both banks and clients, including lower funding costs, risk diversification, deeper liquid markets, increased competition, and efficiency in the financial system. At the same time, with conglomerates operating in multiple jurisdictions in the LA-7 countries (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay) and across the Central American region, country-specific weaknesses in regulatory and supervisory frameworks or insufficient regional coordination may allow regulatory arbitrage. Moreover, financial integration can increase spillover risks and lead to contagion across the region in the event of a crisis.