QWith numerous multinational banks and financial services corporations badly tarnished by
their role in the global economic meltdown, are Latin American countries’ attitudes toward foreign banks changing? If so, in what way? How might the current environment affect foreign financial services companies operating in Latin America? Should countries make regulatory changes in their banking systems? Have foreign banks been a good or bad thing for Latin American countries?
ABoard Comment: Thomas Morante and Yani R. Contreras: "Foreign banks play an important
role in the Latin American financial system given their substantial market presence. Although many global banks and financial services companies have sustained losses and struggled during the economic meltdown, this has not necessarily impacted the extension of credit by multinational bank subsidiaries operating in numerous Latin American markets. The subsidiaries of foreign banks in Latin America,much like locally owned banks in the region, have funded operations from deposits obtained from the local market rather than securing financing from crossborder transactions or international markets. This has provided a certain stability to their loan activities.While it is true that some international banks have adopted new internal policies restricting their lendlending activities to accommodate the lack of liquidity in the market by imposing stricter criteria for borrowers to obtain loans, it does not appear that foreign bank subsidiaries in select Latin American countries such as Brazil, Mexico and Peru have reduced their lending activity when compared to locally owned banks in the region. Further, Latin American countries do not appear to be imposing higher barriers to entry for foreign financial institutions, in part due to commitments under DR-CAFTA, and NAFTA and other bilateral FTAs. Banking system problems in Latin America appear to arise not from the competition between foreign and local banks, but rather, because the market is dominated by few participants, making it an oligopoly. This has increased the risk of instability (systemic risk) and introduced the possibility of contagion risk to other banks in a specific country. Furthermore, the decrease in money remittances has affected the availability of credit for both local and foreign banks in Latin America given that reduced remittances has meant reduced savings. In the context and spirit of the G-20 recommendations, it would appear that Latin American regulators will seek to ensure the continuation of credit and the strength of each local financial system. "
AGuest Comment: Carlos F. Gonzalez: "Although hard to believe now, there was a time in the
not too distant past when foreign banks greedily eyed Latin America’s largely untapped markets. In
those heady days, foreign banks were tempted by opportunities in retail and small and middle market business banking. These institutions also promoted mortgage and consumer lending, as well as various credit card products. Because of the pronounced lack of penetration of consumer-based financial services (as compared to the US and Europe), Latin America offered the promise of solid and consistent growth. By 2008, the same banks that once capitalized on burgeoning credit markets began to reduce, if notcancel, available credit lines. Although banks may be cutting back their services, a demand still exists. Who fills that demand needs to be carefully considered.
Absent a change in course, the gap created by retreating banks may be filled by other financial institutions looking for new market opportunities. This poses a real danger. The economic downturn in the US exposed serious structural defects in many banks and other financial institutions. Although better oversight may have lessened the blow, the fact remains that certain institutions pursued lending and other business strategies with catastrophic consequences.
It is not acceptable to simply allow these institutions to apply those same failed strategies in another market. Regulators throughout Latin America must carefully scrutinize foreign banks, particularly those looking to establish a first presence in the current economic climate. While there is a dire need for credit and other financial services, the lessons of the US and Europe make clear that strict regulation is essential if another collapse is to be avoided."
Thomas Morante is a member of the Financial Services Advisor board and partner at Holland & Knight where Yani R. Contreras is foreign legal counsel. Both are members of the firm’s Financial
Services Practice Group.
Carlos F. Gonzalez is a partner at Diaz, Reus & Targ in Miami.