Publish in Perspectives - Wednesday, May 24, 2017
Stefano D’Aniello, Senior Attorney at Hunton & Williams: Significant legal and regulatory barriers remain in place to make true Latin American integration possible. (Photo: Hunton & Williams)
Will the Latin American banking industry continue to consolidate?
BY STEFANO D’ANIELLO
In recent years, we have witnessed how global banks have left Latin America like a receding tide. The reasons for this trend vary, but include the increased prudential and capital requirements imposed on these banks by their home-country regulators in the aftermath of the global financial crisis. The tightening of these rules generated a need to raise capital via dispositions and lower exposures to riskier developing markets. The retreat of global banks from the region is also due in part to the deteriorating anti-money laundering and anti-corruption environments in the region, which have turned Latin America into a high-risk, low margin business, one scandal and fine at a time (especially after considering that a single enforcement actions can wipe out years of profit).
But Latin America’s promising demographics and fundamentals have largely remained constant. The withdrawal by the global banks from the region has been matched by a corresponding growth in market share by the local banks, which have also began expanding beyond their home-country borders.
Regional integration can create economies of scale (for example, in information technology) and, may breed larger, more stable regional banks that may finally compete with the global institutions that have departed. Regional integration also fulfills the growing, cross-border demands of corporations operating across the region (so-called multi-latinas). Moreover, financial integration, and the creation of banks with larger balance sheets, may facilitate the financing of the larger infrastructure projects that are imperative to the development of the region. Regional integration would also introduce increased competition in the banking sectors of local economies, spread best practices, foster innovation, and lessen the void left by the global banks after their withdrawal from the region.
Significant legal and regulatory barriers, however, remain in place to make true integration possible. These barriers can be classified in two broad categories:
1. Formal legal barriers to entry of foreign financial institutions into a country. Although some jurisdictions have created regulatory regimes to allow for the creation of branches and establishment of subsidiaries of foreign financial institutions, others have kept these restrictions, which usually have their origin in protectionist policies of decades past. Other countries, while maintaining a seemingly open regime, have obscure and often arbitrary processes that can discourage banks from entering a market. For example, Brazil to this date maintains a constitutional barrier restricting foreign banks’ access to the region’s largest market. Only through a special Presidential decree may a foreign bank establish a subsidiary in Brazil. Branches of foreign banks are not permitted.
2. The imposition of discriminatory rules, either in the law or in its application. Some jurisdictions impose rules that either explicitly or in fact discriminate against foreign banks. For example, Mexico requires that the majority of directors of a bank (whether domestic or foreign) be Mexican citizens or residents. Other examples include the imposition of capital adequacy requirements on foreign bank branches that are identical to those of local banks (as it is done in Peru, which ignores the fact that a branch has no legal personality distinct to that of its parent) or the imposition of “best interests” standards that government-appointed regulators often use to advance the political and ideological interests of the government in power. Other examples include the imposition of policies to restrict capital outflows, which have the effect of dissuading foreign banks from entering a market altogether. For example, Ecuador currently maintains a 5 percent “exit” tax on all capital outflows and a prohibition of dividends by banks to their shareholders, which make the cost of entering into this market prohibitive.
To remove these barriers and open domestic financial systems to competition from foreign banks, not only are domestic laws to be changed for a set of clear, nondiscriminatory rules allowing for branches and subsidiaries of foreign banks. Regional consolidation of the financial industry would also require some degree of multinational cooperation, both in the form of bilateral and multilateral treaties and in the form of formal and informal cooperation to harmonize the legislative and regulatory approaches throughout the region, rendering regional expansion a more predictable endeavor.
In the end, however, to harvest the benefits of regional integration and the creation of large, stable regional financial institutions with world-class products and customer service, what’s ultimately needed is political will. With the United States stepping to the sidelines of integration efforts, it is now the turn of regional leaders to spearhead this initiative. And, if the current wave of elections are a sign, they are an encouraging one.
Stefano D’Aniello is a Senior Attorney at Hunton & Williams LLP. He wrote this column for Latinvex.
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