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.

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.

Figure 3.1
Figure 3.1

LA-7 Indicators of Banking Sector Growth, Size, and Concentration

Sources: Bureau van Dijk; IMF, International Financial Statistics; national authorities; and IMF staff calculations.Note: BRA = Brazil; CHL = Chile; COL = Colombia; MEX = Mexico; PAN = Panama; PER = Peru; URY = Uruguay.


Robust bank asset growth has led to an increased prominence of banking sectors in the LA-7 countries, resulting in greater macrofinancial linkages. Supported by solid economic growth, banking assets grew on average by 14 percent over the past decade, with the highest growth in Brazil and Peru, closely followed by Uruguay. In terms of size of assets, Brazil accounts for nearly two-thirds of Latin America’s banking assets, while Mexico contributes one-tenth (Table 3.1). Brazil’s share of private banks (45 percent) is closer to its share in regional GDP. Although banks are the largest financial intermediaries in the LA-7, there is still significant scope for growth, given relatively low levels of intermediation compared to advanced and other emerging market economies.

Table 3.1

Size of the Regional Market (Total assets in millions of U.S. dollars, public and private assets in percent of GDP)

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Sources: National authorities; and IMF staff calculations.Note: Data are as at year-end 2014 or latest available.

Credit expansion in recent years has been fostered by economic growth, stable macroeconomic policies, and reforms to deepen financial markets. Credit growth in Uruguay has been high, albeit from low levels, driven by economic growth as well as official attempts to increase financial access (Figure 3.2). Credit growth in Brazil decelerated to 11 percent in 2014 from a high rate of about 30 percent in 2010,1 driven by a slowdown in credit expansion by public banks, while private bank credit has continued to expand at a moderate pace (Figure 3.3). This slower credit growth likely reflects lower demand, given weaker economic activity. Since 2011, credit in Peru has been slowing gradually as a result of macroprudential measures, but growth rates still average about 15 percent. Credit growth in Mexico moderated to below 10 percent in 2014 from 17 percent in 2011, driven in part by a deceleration in construction lending after financial difficulties surfaced among the three largest builders. At the same time, lending by the publicly owned development banks is growing rapidly, given a new mandate of promoting microfinance and lending to underserved sectors. Credit growth in Colombia was also buoyant during this period and will likely continue to outpace nominal GDP growth, in line with the government’s financial inclusion policy.

Figure 3.2
Figure 3.2

Credit Growth, 2010–15

(Percent, annual average)

Source: IMF, International Financial Statistics.
Figure 3.3
Figure 3.3

Breakdown of the Largest Private Banking Assets


Sources: Country Superintendencies; and IMF, World Economic Outlook database.

Financial intermediation in the LA-7 remains limited compared with advanced economies and other emerging market economies; however, important heterogeneity exists. Chile has the highest credit-to-private-sector ratio among the LA-7, while banking sector intermediation in Mexico, Peru, and Uruguay remains relatively low. Chile’s credit to the private sector has more than doubled since 1995 (from 50 percent to more than 100 percent of GDP in 2014), while it has remained about 35 percent of GDP in Mexico, Peru, and Uruguay for the past two decades. Moreover, Chile is the only LA-7 country whose credit to the private sector is comparable to that of emerging Asia and G7 economies (that is, Canada, France, Germany, Japan, Italy, the United Kingdom, and the United States). Even Brazil’s credit-to-GDP ratio remains relatively low compared with those in emerging Asia and the G7. In terms of deposits, Brazil and Panama lead with ratios of 60 percent of GDP, although these ratios are much lower than in emerging Asia. Peru has the lowest ratio. Although Mexican financial institutions exhibit a low deposit ratio, they have access to other financial funding through corporate bond issuance and capital markets. Financial access in terms of number of branches per capita is lowest in Uruguay and Mexico.

Dollarization in some of the LA-7 countries has slowed in recent years. High dollarization was a response to hyperinflation episodes and past crises and consequent loss of purchasing power of domestic deposits (Figure 3.4). Dollarization slowed—and even reversed—after policy initiatives that included the adoption of inflation-targeting frameworks, macroprudential measures (including differential reserve requirements on local currency versus foreign currency deposits and capital requirements on foreign exchange loans), and the development of local currency capital markets. In Peru, foreign exchange corporate loans have decelerated sharply since de-dollarization measures were introduced at the end of 2014: new repos in domestic currency to support the growth of credit in local currency and encourage the substitution of foreign currency loans with local currency loans, higher reserve requirements on foreign currency deposits, and reserve requirements for banks that do not meet certain de-dollarization targets for credits. Uruguay, on the other hand, still has a highly dollarized financial sector, possibly associated with inflation persistently above the target range, with foreign exchange loans accounting for 60 percent of total loans and foreign exchange liabilities close to 80 percent of total liabilities. At the other end, Mexico and Colombia have much lower foreign exchange lending and foreign exchange liabilities. Mexico saw a significant reduction in dollarization recently, while dollarization in Brazil has been increasing.

Figure 3.4
Figure 3.4

Foreign Currency Loans and Liabilities

Source: IMF, Financial Soundness Indicators.

Most banking systems in the LA-7 are characterized by high concentration, which likely impacts loan rates and spreads. In Peru and Uruguay, the three largest banks account for about 70 percent of banking system assets, and in Uruguay, 40 percent of banking system assets are controlled by one government-owned bank. In Brazil, Chile, Colombia, and Mexico, the three largest banks hold 50 percent of banking system assets. Brazil also stands out with 45 percent of banking system assets controlled by public banks, with a high degree of earmarked and subsidized lending.

Bank spreads in several LA-7 countries are high compared with spreads in other regions (Figure 3.5). Brazil has the highest spreads at over 15 percent,2 and return on equity is reported to be about 20 percent for the largest banks. At the same time, Brazilian banks show high operating expenses owing to entrenched inefficiencies,3 especially in state-owned banks, which have a high share of directed lending and social projects. Brazil ranks poorly in terms of ease of doing business, and high administrative costs also increase overall costs for private banks. Uruguay too has high interest rate spreads and operating expenses. Although spreads are also high in Peru, the country benefits from one of the lowest rates for operating expenses. Spreads have been coming down in Colombia, Mexico, and Panama, hinting at increased competition in those markets.

Figure 3.5
Figure 3.5

Interest rate Spread, 2014

(Lending minus deposit rate, percent)

Source: IMF, International Financial Statistics.Note: LAC = Latin America and the Caribbean.

State of Play

Banking systems in the LA-7 countries have been liberalized since the 1990s. This liberalization process involved deregulation and opening to foreign bank entry and privatization. The market share of foreign banks is high in some of the LA-7 countries, but the cross-border share of regional banks remains minute (Figure 3.6). Panama is the only exception: regional banks hold 33 percent of bank assets in Panama (22 percent are held by Colombian banks). Foreign ownership of banks is highest in Mexico, with most bank assets held by North American and European banks. Seventy percent of bank assets are foreign-owned: 18 percent are owned by U.S. banks and 37 percent by Spanish banks. At the same time, Mexican banks, such as Banco Azteca, have a very small cross-border regional presence. Brazil and Colombia lie at the other end of the range, with bank assets predominantly held by domestic banks—mostly government-owned banks in Brazil and private banks in Colombia.

Figure 3.6
Figure 3.6

Commercial Bank Ownership

(Bank assets in percent of GDP)

Sources: Bureau van Dijk; national authorities; and IMF staff calculations.Note: Data are as at year-end 2014 or latest available. LA-7 = Brazil (BRA), Chile (CHL), Colombia (COL), Mexico (MEX), Panama (PAN), Peru (PER), and Uruguay (URY).

Foreign claims of some Bank for International Settlements (BIS)-reporting Latin American banks in the region provide some evidence of increasing regional integration since 2005.4 Claims on the region by Chilean banks represent 50 percent of total claims, the highest among BIS-reporting banks in Latin America, while Panama’s claims account for 30 percent of total claims (Table 3.2). Foreign claims by Brazilian banks on other LA-7 countries, although they have increased significantly since 2005, are still only about 13 percent of total claims: $18 billion, of which 12 percent are on Chile. Most foreign claims are on the United States and the United Kingdom. Foreign claims by Mexican banks on other LA-7 countries are small—only 3 percent of total claims.

Table 3.2

Consolidated Foreign Claims on the World by BIS-Reporting Banks in Four Latin American Countries

(Percent of domestic GDP)

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Source: Bank for International Settlements (BIS), Consolidated Banking Statistics.Note: LA-7 = Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay.

Mergers and acquisitions by Latin American banks of assets of international banks withdrawing from the region suggest a trend toward greater regional integration (see Annex Table 3.1). Regional banks, especially Colombian banks, acquired businesses of HSBC, Santander, BBVA, and Citibank, which were withdrawing particularly from Central America but also from Paraguay and Peru. The assets of Colombian banks’ subsidiaries abroad reached $50 billion, accounting for 24 percent of the total assets of the Colombian banking system. Colombian banks have attained a significant market position in Central America: 22 percent of assets on average. The share of Colombian bank assets in Panama has reached 23 percent; in El Salvador it is more than 50 percent. These regional integration trends can spur enhancements to supervisory, resolution, and tax system frameworks.

Citibank’s plan to sell its retail banking and credit card operations in Argentina, Brazil, and Colombia will open opportunities for acquisitions by regional players. In comparison with its U.S. competitors, Citibank used to get more profits from abroad than from its home market, and it had a presence in Latin America for more than 100 years. In light of the ongoing global regulatory changes and possibly the rather small scale of its business in markets such as Brazil, the bank is now increasingly focusing on corporate and institutional clients in an attempt to cut costs and boost profits from niche markets. At the end of 2015, Citibank had scaled back its global operations from 40 countries in 2012 to 24 and reduced its consumer lending in 11 markets, including Peru, Costa Rica, and four other countries in Central and South America. In Argentina, Banco Macro and BBVA are frontrunners for buying Citibank’s assets; in Brazil, private banks Itaú and Bradesco, and public bank Banco do Brasil are likely to be among the interested parties. The total deal value in the three countries could rise to as much as $400 million. Although the sale of Citibank’s consumer business brings opportunities for regional acquisitions, competition may be hurt through the likely consolidation of market shares by the acquiring bank. The acquisition of HSBC’s retail business by Bradesco in Brazil attracted a deeper review by the antitrust regulator, which ordered the disclosure of all offers the bank received in the past two years and an explanation of why it picked Bradesco.

The aim of the expansion of Colombian banks was to follow Colombian clients abroad as a first step and then diversify their portfolios to serve other clients too. The high capitalization of the banks and the acquisition opportunities arising from the withdrawal of foreign banks from Central America supported this expansion. Banco de Bogotá, based in Bogotá, has a very different loan portfolio in Colombia (leadership in corporate banking) than it has in its BAC subsidiary in Central America/Panama—much more emphasis on consumer credit and mortgage lending. This has enabled it to have a more diversified portfolio overall, as well as to benefit from cross-complementarities: bringing credit card technology from Panama to Colombia and exporting corporate lending know-how from Colombia to Panama. Bancolombia (based in Medellin) has a portfolio in Central America/Panama that includes all core banking products (corporate lending as well as consumer credit and mortgage lending); in Colombia, its portfolio is mostly corporate banking. Davivienda (based in Bogotá) has a portfolio in Central America/Panama that is increasingly focusing on consumer lending, while withdrawing from corporate lending (which had been HSBC’s main portfolio focus); its loan portfolio in Colombia has a high share of corporate lending and smaller shares of consumer and mortgage lending.

Corpbanca, based in Santiago, was the first Chilean bank to expand abroad. The bank invested in Colombia as a result of the high banking penetration rates and low opportunities to continue growing profitably in Chile. The bank had a 5 percent market share after 10 years in the Chilean market; the large difference between the profitability and cost of funding of the three biggest banks and the rest of the market made it hard for a bank with a smaller market share to sustain profits. After searching for a jurisdiction with policies similar to Chile’s, it bought Santander Colombia (which had a market share of 3 percent) and then Colombian Helmbank, as it felt it would be hard to have a profitable operation with such a small market share. Both banks were retail-focused, and together achieved a 6.5 percent market share in the Colombian market.

Banco de Credito del Peru, based in Lima, has a small presence regionally. The bank had older retail businesses only in Bolivia and Central America, and entered Chile and Colombia after the global financial crisis as an investment bank (with a microcredit business in Colombia), because it did not have the capital to expand to those markets as a universal bank.

Prospects for Further Regional Financial Integration

Two Brazilian banks (one of which is an investment bank) have a regional perspective and have established a significant presence across Latin America. Bank Itaú, based in São Paolo, has the strength and the ambition to become the major regional player. The size of the bank is close to that of the entire Mexican banking system ($420 billion in assets). It has expanded regionally mainly through mergers and acquisitions, but through a few greenfield investments in Colombia and Mexico as well. The bank is in corporate and investment banking in Colombia, Peru, and Mexico, and in retail and wholesale banking in Argentina, Chile, Paraguay, and Uruguay. With its most recent acquisition of Chilean Corpbanca5 (and merger with Corpbanca Colombia), the share of Itaú’s cross-border business will reach 13 percent, up from 7 percent in 2011. Its strategy is to diversify its retail and corporate portfolio to other markets. It considers it more challenging to develop a retail business abroad, given the need for funding, while following corporate clients abroad. Its ultimate corporate vision is to go global. Itaú encountered difficulties developing its credit card business in Mexico, so it is trying to develop an investment banking business using broker-dealers. In Colombia, given the consolidated banking market, the bank will try to develop in investment banking.

Similarly, investment bank BTG Pactual, based in São Paolo, aspires to be the investment bank of the region. Investment banks are likely to be more able than retail banks to establish operations abroad, owing to the lower cost structure and initial investment involved in their operations. BTG Pactual started expanding throughout much of Latin America after the global financial crisis, when global banks were seen to be withdrawing. It merged with Celfin Capital—a brokerage and asset manager with operations in Chile, Colombia, and Peru—and set up a greenfield brokerage in Mexico. It sees profit opportunities in these countries because of their underdeveloped capital markets and the capital markets integration initiative within the Pacific Alliance (PA). As a 100 percent wholesale funding bank, BTG Pactual sees its expansion through Latin America as providing a more diversified wholesale funding base; owing to high funding costs, it does not plan to enter into retail.6 However, other Brazilian banks focus on the domestic market. They see potential to expand domestically and appear to be consolidating their positions at home.

Conditions in other countries have so far precluded much regional integration. The large presence in Mexico of U.S. and Spanish banks means that any decisions on expansion to the Latin American region from Mexico are made by headquarters rather than by the Mexican subsidiaries. Among domestic banks, only Bank Azteca has decided to expand regionally, with a small presence in Brazil, Guatemala, Panama, and Peru, among others. Also, the more important real economy ties with North America and Europe have so far dampened pressures for regional financial integration. Furthermore, from a financial stability perspective (at least until the global financial crisis), global banks were considered by most countries to have advantages that made them preferable to regional Latin American banks: they were considered easier to discipline, less politically connected, and more accountable.

Although the Chilean, Mexican, and Peruvian banking systems are very open, equity prices appear to be a deterrent for acquisitions. Chile, Mexico, and Peru liberalized their banking systems in the 1990s, and they all attracted foreign capital, especially from North America and Europe. Only a few large Latin American banks can afford entry to these markets, given high equity prices compared with valuations. Large Colombian banks find these markets attractive, but prices of assets can be prohibitive, and concentrated markets represent a barrier to entry. Of the Colombian banks, GNB Sudameris acquired HSBC’s operations in Peru, while Brazil’s Bank Itaú and BTG Pactual entered the market as investment banks. Banco de Crédito del Peru has entered Chile and Colombia as an investment bank. In addition, Bank Itaú acquired Corpbanca in Chile and merged with Corpbanca Colombia.

In some countries, such as Brazil, high bank concentration and size of the market are potential barriers to regional bank entry. High bank concentration is likely due to the role played by family-owned and publicly owned banks. The power of incumbents, including financial conglomerates with linkages to the real sector, could be a strong deterrent to entry. The Brazilian banking system has been consolidating, and Bradesco, the second largest private bank, is acquiring the retail business of HSBC, increasing its market share from 11 percent to 14 percent. In addition, the three large government-owned banks have grown significantly since the global financial crisis. BNDES, the development bank, lends to large conglomerates at subsidized rates. The legal regime for entry by foreign banks in Brazil is relatively opaque, and entry requires presidential approval, which may have a chilling effect on potential entrants. In Uruguay, BROU has had a legal monopoly on public employee accounts, which has given the public bank a majority share of the peso deposit market. Since Banco do Brasil’s exit in 2005 after 20 years, the only regional bank in the Uruguayan market is Bank Itaú. Banking fees and rates in Uruguay are high compared with the rest of the region because banks’ operating costs are very high while profits are relatively low. Uruguayan banks have consolidated in an attempt to gain scale economies: in 2002, there were 20 private banks; today there are only nine.

Ease of doing business (getting credit, protecting investors, and enforcing contracts) is hampered by institutional and regulatory factors and lack of competition. For example, in Brazil there is no full depth of or access to credit information, especially distribution of positive data (repayment of loans and loans due performance) to build positive credit files for borrowers so they can benefit from lower interest rates. On the other hand, Mexico has achieved the highest rating in terms of full depth of credit information (see World Bank 2015). Colombia also has a high rating in terms of depth of credit information. All financial institutions supervised by the Financial Superintendency of Colombia, including small banks, have access from and report data to the credit bureau and must have well-defined credit-granting criteria; for example, they must take into account information on the debtor’s current and past payment performance, pay timely attention to his or her liabilities, and consider financial and credit history from credit bureaus and rating agencies. While supervised entities provide credit information to determine asset quality in monthly and quarterly financial statements, some credit exposures are not covered, such as off-balance-sheet exposures, letters of credit, and bank collateral and sureties.

High concentration and lack of competition are a likely explanation for high loan spreads in some of the LA-7 countries. Competition, low taxation and reserve requirements, strong creditor rights and legal framework, availability of information on borrowers, and a stable macro environment would reduce bank spreads. While some of the LA-7 banking systems have similar levels of concentration, they have diverging interest rate spreads, explained in part by institutional and regulatory factors,7 competition, level of foreign bank participation, and technological spillovers from foreign banks that lower costs and improve efficiency in the market. These factors, combined with a more stable macro environment, could help explain lower spreads in Mexico.

Another impediment to safer cross-border regional banking integration is the fact that countries are moving at different speeds to adopt the new regulatory agendas. There are big differences in the speed of adoption of enhanced supervisory and regulatory frameworks—such as a consistent capital definition (Basel III) and the International Financial Reporting Standard—which make it hard to establish a level playing field across countries during the (possibly protracted) transition period. Brazil and Mexico lead the region in the implementation of Basel III, closely following the international timeline. Peru is next, while Chile and Colombia have taken a more gradual approach. Colombia has enhanced its capital measure, bringing it closer to the Basel III definition.

A bank’s ownership structure could also be an impediment to regional acquisitions. When HSBC tried to sell its operations to GNB Sudameris (Colombian) in Uruguay, the deal fell apart reportedly because the banks owned by the owner of GNB Sudameris do not have the same holding structure in different jurisdictions, a situation that the Uruguayan supervisor considered inappropriate. The SFC affirmed that it performs supervision on a consolidated basis over its supervised entities and therefore requires GNB Sudameris to fulfill prudential regulations such as capital requirements, but this was not considered sufficient.

Global Financial De-Integration

Regulations in the home countries of global banks aimed at strengthening banks’ resilience have reduced the profitability of subsidiaries. These measures have discouraged bank subsidiaries from playing an active role in markets as intermediaries or liquidity providers. Liquidity in sovereign debt markets has fallen as certain big banks (mainly from the United Kingdom and the United States) have substantially reduced their presence in regional markets. Consolidation rules applied globally by parent banks on their subsidiaries appear in some cases to have come into conflict with the legal regulations in Latin American host countries and raised the costs of doing business in those countries, not only vis-à-vis previous requirements but also relative to local banks. Vigorous application of these regulations could further the deglobalization trend. In the new regulatory environment, the costs and benefits of subsidiaries operating in emerging markets are likely to shift, possibly initiating further downsizing or withdrawal from these markets.8

Bilateral and multilateral initiatives to increase the transparency of the international financial system have also contributed to a loss of correspondent banks in Latin America. U.S. agencies’ enforcement actions against breaches of compliance with domestic regulations on trade and economic sanctions, tax evasion, and anti-money laundering/combatting the financing of terrorism, as well as other post–global financial crisis developments, have led international banks operating under U.S. regulations to withdraw from activities seen as high risk. This has had a particular impact on correspondent banking relationships. A small number of large international banks dominate the provision of correspondent banking services for banks in the region, and some of them have been ending or reducing the provision of these services for local banks. For example, in Mexico, JPMorgan is maintaining its wholesale business but is withdrawing from providing correspondent bank services to small and medium-sized banks. For some local banks, Bank of America is the only major U.S. bank still offering correspondent banking facilities. This evolution overall is intended to increase transparency in financial transactions and financial institutions’ risk management policies; however, authorities in the region have raised concerns about these developments in various forms. They report the withdrawal of lines to medium-sized banks, which cater to small and medium-sized enterprises, raising the cost of finance for these enterprises and in some cases causing loss of access to credit from U.S. exporters, who fear for the safety of their payments in the future.

Regional Financial Integration as a Route Toward Global Integration

Opening domestic economies could favorably position Latin American countries for further global integration in the future. BBVA, based in Madrid, sees room for expansion in Latin America, given opportunities for profit and low banking intermediation rates. BBVA already has a well-diversified portfolio across Latin America, and 50 percent of the bank’s profits are derived from its business in Mexico (30 percent) and South America. BBVA’s business model is retail banking, with market shares of 22 percent in Mexico and Peru, and 9.4 percent and 6.7 percent in Colombia and Chile, respectively. BBVA is the only bank that operates in all four countries of the PA, which it views as a huge opportunity for growing its business. Its model is to establish subsidiaries autonomous in capital and liquidity, which would limit contagion risk among the group’s units and reduce systemic risk. The bank could be affected by the special ring-fencing rules issued in Mexico in 2014, according to which Mexican authorities can not only request full information on parent companies but can also stop dividends if they believe the parent company is in trouble. A further impediment for operating in Latin America is that, in consolidation with the parent bank in Europe, home country assets might receive a lower rating (for example, because they are in Mexican pesos). In general, more regulatory stringency by the European supervisory authorities may constrain BBVA’s regional activities.

Similarly, Santander, based in Madrid, has been diversifying its portfolio in the region: 38 percent of the bank’s profits are derived from its business in Brazil (19 percent), Mexico (8 percent), and the rest of South America (11 percent). In 2012, Santander sold a 24.9 percent stake in its Mexican bank through an initial public offering, following a similar sale in 2009 of part of its Brazilian subsidiary. The proceeds of these sales were used to reinforce the group’s core capital. Santander’s business model is mainly retail banking, focused on a few countries where it aims to reach at least a 10 percent market share (current market share is 17 percent in Chile, 14 percent in Mexico, and 8 percent in Brazil). In Brazil, the objective is to grow both its retail and corporate businesses. In Mexico, the objective is to grow more than the market, particularly with high-income clients and small and medium-sized enterprises, and to become one of the leading banks in financing the government’s infrastructure plans. Santander and BBVA seem to have largely divided the Latin American markets between themselves: where Santander is present, BBVA generally is not. Santander’s subsidiaries are completely autonomous in capital and liquidity, which limits contagion risk. There is also limited cross-funding among subsidiaries in Latin America, and excess liquidity cannot be moved easily (deposits cannot be shared across countries). Santander Brazil is not allowed to lend in dollars to Brazilian corporates, so the branch in the Cayman Islands is used for foreign currency lending to Brazilian firms.

Policy Recommendations

  • Move forward to harmonize regulatory frameworks across the region, as well as the legal framework for bank restructuring and resolution, toward international standards and best practices, with a view to promoting financial stability and establishing a level playing field across countries as well as across banks operating cross-border in the region.

  • Strengthen consolidated supervision. Supervisory agencies should have adequate powers over nonbank holding companies of banks, both domestically and cross-border.

  • Increase transparency regarding entry of foreign banks. To increase competition and lower the cost of financing, foreign banks should be allowed to enter the banking system through an explicit, open, objective, and nondiscriminatory statutory and regulatory framework.9 At this point, regional banks seem to be more likely than global banks to respond to such opening.

  • In dollarized economies, strengthen prudential requirements on dollar lending and encourage the private sector to hedge its foreign currency exposures, while further supporting the de-dollarization process and deepening financial and capital markets. Deepening financial markets has proven to be an effective way to achieve de-dollarization, including through an active policy of de-dollarizing public debt, deepening local currency bond markets, and promoting the development of markets for foreign exchange derivatives along with foreign exchange flexibility. When market conditions and financial stability considerations permit, Brazil and Colombia could consider relaxing the constraints on foreign exchange activities and adjusting net open foreign exchange position limits for settlements in other currencies where present limits are low.

  • Continue to promote best efforts to ensure strong direct home and cross-border supervision, including measures to ensure effective customer due diligence. Countries should work with key international financial center regulators and international bodies, such as the Financial Stability Board and the Financial Action Task Force, to ensure a clear understanding of regulations and policies relevant to their financial institutions. Countries should also be encouraged to assess the need to adapt their financial systems to the new regulatory environment and to consider public sector support in case of market failure.

Annex 3.1. Divestments following the Global Financial Crisis

Annex Table 3.1

Retrenchment from Emerging Markets by Global Banks since 2009

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Source: Bloomberg, L.P.


  • Beck, T., and A. Demirgüç-Kunt. 2009. “Financial Institutions and Markets across Countries and over Time: Data and Analysis.Policy Research Working Paper 4943, World Bank, Washington.

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  • International Monetary Fund. 2015. “International Banking after the Crisis: Increasingly Local and Safer?Chapter 2 in Global Financial Stability Report: Navigating Monetary Policy Challenges and Managing Risks. Washington, April.

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  • Jorgensen, O. H., and A. Apostolos. 2013. “Brazil’s Bank Spread in International Context: From Macro to Micro Drivers.Policy Research Working Paper 6611, World Bank, Washington.

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  • Organisation for Economic Co-operation and Development. 2011. OECD Economic Surveys: Brazil 2011. Paris: OECD.

  • Tecles, P., and B. M. Tabak. 2010. “Determinants of Bank Efficiency: The Case of Brazil,Working Paper Series 210, Central Bank of Brazil, Brasilia.

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  • World Bank. 2015. Doing Business Report. Washington: World Bank.


The high credit growth rate in 2010 was due to both demand (high economic growth—7 percent—and increasing financial inclusion) and supply factors, such as changes in regulations for housing loans, collateral, and payroll deductible loans.


The rate for Brazil averages spreads for nonfinancial corporations (10 percent) and households (26 percent). Jorgensen and Apostolos (2013), in “Brazil’s Bank Spread in International Context: From Macro to Micro Driver,” use the net interest margin to measure the bank spread and derive a pure spread (or margin) that is comparable across banks in a given country. This pure spread varies across countries and over time according to the extent of bank competition and macroeconomic (interest rate) volatility in each country. While their study looks only at the period 1995–2009, their measure could suggest lower spreads for Brazil in recent years.


See, for instance, the Organisation for Economic Co-operation and Development (OECD 2011) Economic Surveys and Tecles and Tabak (2010). According to the OECD, operating costs are three times higher in Brazil than the average for OECD countries and 40 percent above the average in Latin America (see also Beck and Demirgüç-Kunt 2009).


The Consolidated Banking Statistics (CBS) of the BIS capture the worldwide consolidated positions of internationally active banking groups headquartered in reporting countries. The data include the claims of reporting banks’ foreign affiliates but exclude intragroup positions; this approach is similar to that followed by banking supervisors. The CBS are designed to analyze the exposure of internationally active banks of different nationalities to individual countries and sectors. Exposures can take many forms; for example, cross-border claims, local claims of banks’ foreign affiliates, derivatives, guarantees, or credit commitments. Colombia, Peru, and Uruguay do not report to the BIS; thus, total foreign claims of the LA-7 on the region are likely underestimated.


Corpbanca had expanded its operations to Colombia, in part owing to the very low spreads and profitability and the high banking intermediation rates in Chile; however, it became vulnerable to takeover as a result of problems in the nonfinancial part of the conglomerate.


Since the arrest of its CEO on corruption charges in November 2015, however, BTG Pactual has experienced bouts of market pressure. Risk emanates from its relatively heavy reliance on wholesale funding, which has translated into noticeable swings in wholesale deposits. This could hinder the bank’s ability to further expand its operations in the region over the near term.


Jorgensen and Apostolos (2013) found that institutional and regulatory factors were the most significant factors in determining spreads in Brazil during the period 1995–2009.


Chapter 2 of the IMF’s April 2015 Global Financial Stability Report documents the decline in cross-border lending and finds that it can be explained by a combination of regulatory changes, weaknesses in bank balance sheets, and macroeconomic factors.


For instance, the process for meeting the requirement of presidential approval for a foreign bank to enter the Brazilian market could be made fully transparent.

A New Strategy for a New Normal