ASUNTOS INTERNACIONALES Comments to Financial integration in Latin America,…. by Galindo, Izquierdo and Rojas-Suárez Enrique Alberola División de Economía Internacional Red IDB Washington

ASUNTOS INTERNACIONALES 2 Financial integration and crises in Latam Financial integration fosters financial deepening and strength Well-established and this paper is an additional contribution Financial integration makes economies vulnerable, more exposed to global turbulences Reluctance to admit…, now coming to terms with this Latam crises This global crisis –This paper is a good, rigorous contribution to back this idea Which type of financial integration provides a better trade-off? Banking biased integration? Fosters development of deposit base (relative to others), make the system more local More linked to parents’ financial health (see below) Implications for the paper Focus on financial deepening, not just credit growth (Claessens et al (2001): more long term view Control integration by banking bias (foreign banks)

ASUNTOS INTERNACIONALES 3 Nature of the crises and the relative LA position Financial integration cycle plagued by excess Too much of a good thing …not mostly in LA But note 0% real interest rate!!! Massive crises, everybody is shocked Latam not that bad: Vulnerability reduction Good luck + good policies Some hopeful signs: credit-deposit suggest domestic financing Banking buffers (provisions)…but bancarisation concerns on NPLs …magnitude + (mostly external) excesses lead to adjustment

ASUNTOS INTERNACIONALES 4 Nature of the crises and the relative LA position Mind the relative position

ASUNTOS INTERNACIONALES 5 Nature of the crises and the relative LA position Mind the relative position: compare to ‘old-Latin’ Europe

ASUNTOS INTERNACIONALES 6 Foreign banks and policy options Paper: Foreign banks makes credit and risks more procyclical More linked to home bank, local circumstances in home market Two different concerns in the case of negative shock: Host country shock: lack of support backward looking Latam ‘00s, Home country shock: retrieval of funds forward looking: this crisis paper seem to lead to this interpretation of the results Other reasons, not strategic, but `technological`? Better risk controls: problems are identified earlier and subsidiaries react consequently More deliquency identified = less profit = tightening credit and standards, earlier Mind the role of foreign banks in financial deepening (not just procyclical) This type of crisis: external banking crises LA market: complements or substitutes? (BE, May ’08). 2 stages Turbulence: banking difficulties + LA resilience = risk sharing Crises: banking crises + LA recoupling = exacerbate crunch? BIS QR December ‘08, anyway less than predicted by model. Risks of flow of fund reversals …but a great advanced economies banking crises

ASUNTOS INTERNACIONALES 7 Foreign banks and policy options Branches v. Subsidiaries (Sucursales v. Filiales) Latam`s foreign settlement through subsidiaries, paper refers to branches. Beyond semantics: important differences for policy options Subsidiary as firewall, provides partial insulation- as seen above- in both senses: Domestic shock: limits external rescues External shocks: limits external pullout BranchSubsidiaryLocal bank Supervision PartialDomestic/consol idated Domestic RegulationPartialDomestic FinancingDependentIndependentindependent StrategyExternalMore globalMore local Domestic ControlLowHighHighest

ASUNTOS INTERNACIONALES 8 Foreign banks and policy options Policy options Ring fencing to branches from foreign banks with problems Does not apply to subsidiaries: already ring-fenced to a large extent Early Warning Mechanism = close monitoring of operations in periods of stress Already being done, within the scope of supervision/regulation, already applies Letters of Agreement (MoU) BE Already exist Colleges of supervisors. Close the loop: Host supervisor ____ subsidiaryHome supervisor _____ parent bank Host-home supervisors (local subsidiary + parent bank) = consolidated view Risks of flow of fund reversals …but a great advanced economies banking crises