Economix Blog: Pushing Latin American Banks to Lend

View From Latin America

Dispatches on the economic landscape.

MEXICO CITY — As economic turmoil whiplashes banks in Europe and poses new threats to American financial institutions, the view from Latin America is very different. Well off the radar screen of the global economic crisis, Latin America’s banks have proven their sturdiness, emerging relatively unscathed from the collapse.

The problem, according to a study released by the World Bank on Tuesday, is that they just don’t lend very much.

Latin America’s banking crises are well behind it, part of the detritus of economic mismanagement in the 1980s and 1990s. Since then, regulators, particularly in the region’s most developed countries, have focused on ensuring the banks’ stability and resiliency. Worries about a contagion effect on the Latin American subsidiaries of European and North American banks are held in check because they have to follow local capital requirements.

But the banks have failed when it comes to contributing to social welfare and economic growth, says Augusto de la Torre, the World Bank’s chief economist for Latin America and the Caribbean, and an author of the report. The problem now is how to keep the banks stable and make them “more useful,” he said in an interview.

Credit to the private sector is low by global standards, about half of what it should be, according to calculations based on benchmarks for middle-income countries. When the banks do make loans, they are tilted in favor of consumption – think credit cards – rather than investment or mortgages. Housing loans, for example, account for 14 percent of total credit in the region compared to 58 percent in China and 47 percent in the developed countries of the G-7.

When it comes to lending to small firms, the picture is more mixed. Lending to them lags sharply behind lending to large firms, but over all, small firms in the largest Latin American economies use bank credit at rates comparable to firms in Asia and Eastern Europe; they just pay more for it, the report found.
On top of that, bank users pay higher fees than anywhere else in the world.

Mr. de la Torre says there are three causes of the banks’ hesitation. The first is that the effects of a financial crisis tend to linger for as long as 15 years as banks and regulators act cautiously against any possibility of a relapse.

The second cause is that contract rights in Latin America are generally weak and hard to enforce. While systems to manage credit card risk are easily imported and adapted to the region, “legal innovations cannot be imported,” he said.

Lastly, there is a more amorphous reason that might explain why banks are not lending, particularly to businesses: low productivity, or what Mr. de la Torre calls insufficient prospects. There may simply not be that many bankable projects. “Finance is crucial, but it’s not the whole story,” he said.

The question now is whether banks can increase their lending without creating the sort of bubbles that have led to past crises.And they must do it in an increasingly fragile global environment. Drawing from the lessons of the subprime crisis, the authors warn against rushing to close the banking gap too quickly. A “slower but more sustainable, less fiscally risky catch-up is preferable to a more ambitious program of financial sector expansion that ends badly,” the report says.

Article source: http://feeds.nytimes.com/click.phdo?i=049dbe17bad0da919f4d8b38713c1e4e