This paper evaluates the impact of foreign bank entry on the Latin America’s financial system. Over the latter half of the 1990’s, the size and the depth of financial sector increased, and there has been a substantial progress in terms of improving systemic efficiency and stability. This trend reflects a range of reforms often related to the need for strengthening local financial sectors in the wake of crises such as the Mexican peso crisis of 94-95, but also broader market trends of consolidation, integration, privatization, and liberalization. Among structural changes, increased foreign participation has attracted academic and public sector attention. Proponents of a policy of opening domestic financial sectors to foreign ownership argue that it would facilitate capital inflows, improve the quality, pricing, and availability of financial services, and improve financial sector infrastructure. These arguments are mirrored by a set of concerns over the potentially adverse effects of such a policy. Empirical analysis of the effects of broad foreign participation in emerging market financial systems has been relatively limited, however, in part reflecting the recent timing of these developments. Most recent empirical studies suggest that foreign entry can render national financial markets more competitive, and thereby can force domestic institutions to operate more efficiently. Whether broader strategic and operational differences exist across foreign and domestically owned institutions in developing countries remains open issue.
Our analysis focuses on banks because of the bank-based structure of the Latin American financial system. The paper first takes a quick look at the current state of foreign bank penetration in the region. Next it examines the factors behind an increased foreign participation in the Latin American financial sector. After reviewing the literature on foreign banks entry in emerging markets, we present some data that demonstrate changes in the Latin American banking system. Finally, the paper draws some conclusions.
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