|PUSHING LATIN AMERICAN BANKS TO LEND|
Oranjestad, 1 December, 2011 — 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.
Since Latin America’s banking crises in the 1980s and 1990s, regulators, 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.
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.
Lending to small firms lags sharply behind lending to large firms, but overall, 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: low productivity, or insufficient prospects. There simply aren’t that many bankable projects. “Finance is crucial, but it’s not the whole story”.
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.