Post on 11-Jan-2016
description
June 7th, 2007 1
Ample Stable Credit & Adequate Financial Regulation: Finding the Balance for Emerging Countries.
José Luis Escrivá
Chief Economist BBVA Research Department
June 7th 2007
June 7th, 2007 2
Outline
1. From turmoil to stability: linkages between the macroeconomy and the financial sector .
2. Financial Regulation and performance: assessing the links.
a. Institutional challenges to regulatory success.
3. Priorities for regulatory reform
June 7th, 2007 3
A VOLATILE ECONOMIC PATH
In the past, drastic credit expansions have been
associated with boom-bust cycles in the region, which
shows a greater tendency to suffer crises…
Countries with recurrent crises 1974-2003 (%)
0
10
20
30
40
Lata
m
Sub.
Sah
aran
Afr
ica
East
ern
Euro
pe &
Cent
ral A
sia
East
Asi
a an
d Pa
cific
MEN
A
Sout
h As
ia
Hig
h in
com
e O
ECD
Hig
h in
com
e no
n-O
ECD
1,25*
0,380,40,380,890,83 0,090,21
* Average crises per region
Source: BBVA from World Bank data
GDP Growth Volatility (std deviation)
0
0.5
1
1.5
2
2.5
3
3.5
4
1980-1989 1990-1999 2000-2005
East Asia & Pacific High income Latin America & Caribbean South Asia Sub-Saharan Africa
…and higher volatility on its macroeconomic aggregates,
particularly growth.
June 7th, 2007 4
Financial Sector Effects
This pattern of economic growth has constrained the stability and development of the financial sector, which has inherited the same
volatile pattern...
Argentina: Credit over GDP
0
5
10
15
20
25
30
35
40
45
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
Mexico: Credit over GDP
0
5
10
15
20
25
30
35
40
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Venezuela: Credit over GDP
0
5
10
15
20
25
30
35
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
* Latest data December 2004
Brazil: Credit over GDP
0
10
20
30
40
50
60
70
80
90
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
June 7th, 2007 5
…and a tendency to suffer crises.
Financial Sector Distress in Latin America Financial Sector Crisis Financial System
Distress Argentina 1980, 1989, 1995, 2001
Bolivia 1986, 1994 2003 Brazil 1990, 1994, 1998 2002 Chile 1976, 1981
Colombia 1982, 1999 Costa Rica 1987 1994 Dominican
Rep. 2003
Ecuador 1982, 1996, 1998 2002 El Salvador 1989
Mexico 1981, 1994 Nicaragua 1990, 2000 Panama 1988 Paraguay 1995 2002
Peru 1993 2002 Uruguay 1981, 2001
Venezuela 1994 1978, 1985, 2002 Source: BBVA; Carstens et al. (2004)
Financial Sector Effects
June 7th, 2007 6
Crises have also had a persistent deferring effect over the growth of the financial sector, taking several years to recover.
Credit Index (real terms)
0
100
200
300
400
500
600
1 3 5 7 9 11 13 15 17 19 21 23 25
(years after crises)
Chile
1981=100Colombia
1998=100
Venezuela
1994=100
Brasil1994=100
Argentina
2001=100
Perú
1999=100
Financial Sector Effects
June 7th, 2007 7
…which has resulted in a banking sector in Latin American that is both smaller than OECD or East Asian averages, as well as unable to follow
their upward trend.
Source: BBVA from World Bank data
Credit-to-GDP ratio (avg. % )
0
50
100
150
200
1980-1989 1990-1999 2000-2005
Latam OCDE East Asia
Financial Sector Effects
June 7th, 2007 8
Macroeconomic Stability
In contrast to previous decades, Latin America faces today a much more stable macroeconomic scenario: Inflation has plunged, GDP
growth rates are higher while less volatile…
-3.0%
-1.5%
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
9.0%
10.5%
12.0%
13.5%
15.0%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Latin America: GDP growth (%)
Source: BBVASource: World Bank
Latam: GDP growth volatility (period std dev)
0.5
1
1.5
2
2.5
3
3.5
1980-1989 1990-1999 2000-2005
June 7th, 2007 9
…in the context of current
account and fiscal surpluses, and along with a
significant partial
liquidation of its external debt.
Macroeconomic Stability
Source: World Bank
Latin America: External Debt / GDP (% )
20%25%30%35%40%45%50%55%60%65%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
June 7th, 2007 10
Improved Financial Indicators
…events that have elicited a reduction of bank spreads and default rates.
Default rates in Latin America fall since 2002, and currently are lower than in emerging Asia.
Banking Default Rates 2006
0
2
4
6
8
10
12
14
16
18
20
Arg
enti
na
Braz
il
Colo
mbi
a
Peru
Uru
guay
Mex
ico
Vene
zuel
a
Chile
Phili
ppin
es
Indo
nesi
a
Thai
land
Mal
aysi
a
Sri L
anka
Indi
a
Hon
g Ko
ng
Kore
a
LATAM = 2,5
ASI A = 9,3
Source: GFSR - I MF
%
*excluding BrazilSource: BBVA from IMF data
Latam: Avg. Bank Spreads (pp.)*
0
2
4
6
8
10
12
14
1994-97 1998-2001 2002-06
June 7th, 2007 11
Credit Surges
…with financial depth ratios generally growing, except in the cases of Argentina and Venezuela.
Source: BBVA from IMF data
Credit/GDP ratio
0
10
20
30
40
50
60
Argentina Brasil Chile Colombia México Perú Venezuela
1976-1990
1991-2006III
* Venezuela average 1991-2004
In sum, a macro and financial scenario that fostered a credit expansion in the last few years...
June 7th, 2007 12
Financial institutions perceive a much better scenario for credit development.
1- A more stable and favorable macroeconomy 2- Interest rates are lower than previous years.
3- Risk premiums have declined.
Greater and more solvent credit demand
Credit Supply expansion enhances the balance sheets of
financial institutions.
June 7th, 2007 13
Outline
1. From turmoil to stability: linkages between the macroeconomy and the financial sector .
2. Financial Regulation and performance: assessing the links.
a. Institutional challenges to regulatory success.
3. Priorities for regulatory reform
June 7th, 2007 14
What is the role of policy reform in the current expansion of the financial sector?
Prior to the current benign macroeconomic environment, reform of the financial sector has been extensive in the region
In many instances,
however, reforms have not precluded
financial crises. Particularly in Latin America,
the link between financial reform and performance
is not clear. Source: ICRG*higher values imply a sounder environment for investments
Investment Risk Index* (period avg.)
0
2
4
6
8
10
Arge
ntin
a
Braz
il
Chile
Colo
mbi
a
Mex
ico
Peru
Vene
zuel
a
84-87 88-91 92-95 96-99
June 7th, 2007 15
Regulation “per se” does not achieve financial stability.
Financial sector performance
Institutional Endowment Financial regulationMacroeconomic
Stability
A key conclusion that emerges from the wave of reforms in Latin America is that regulation is an imperfect substitute of other
determinants of financial sector performance. A minimum threshold of institutional quality and macroeconomic stability are also requirements
for achieving a sound financial sector.
June 7th, 2007 16
Consequently, there is not a linear relation between regulation and financial stability
In Latin America, the stricter regulation does not necessarily deliver better financial performance.
Chile, while having a less repressive financial sector than most Latin American examples, is among the most stable financial sectors in
the region.
Source: Stallings and Studart (2003)* a higher value implies a stricter regulatory framework
Overall Supervision Index* (2003)
66.5
77.5
88.5
99.5
Braz
il
Mex
ico
Peru
Arge
ntin
a
Chile
Boliv
ia
Latam avg: 0.18
Source: BBVA from World Bank data
June 7th, 2007 17
Outline
1. From turmoil to stability: linkages between the macroeconomy and the financial sector .
2. Financial Regulation and performance: assessing the links.
a. Institutional challenges to regulatory success.
3. Priorities for regulatory reform
June 7th, 2007 18
The Institutional Challenge
In all, and especially after the progress on the macroeconomic front, consolidating the current expansion of the financial sector in
Latin America requires enhancing the institutional endowment.
0
20
40
60
80
100
120
140
160
180
200
-2,5 -2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5
Governance index {-2.5,2.5}
Dep
osi
t ban
ks
clai
ms
on p
riva
te s
ecto
r(%
of G
DP)
Source: BBVA based on IMF and World Bank
Financial system and governance (2005)
Positive relationship between size of domestic
financial sector and
institutional quality.
June 7th, 2007 19
The Institutional Challenge
Latin America is in a discouraging situation regarding governance, especially regarding rule of law and control of corruption
Business Environment Index
2
3
3
4
4
5
5
6
MEN
A
Euro
pe&
Centr
al Asia
Lata
m
Asia-Pacifi
c
Áfr
ica
Sub-S
ahara
n
World
Business Environment Index
2
3
3
4
4
5
5
6
MEN
A
Euro
pe&
Centr
al Asia
Lata
m
Asia-Pacifi
c
Áfr
ica
Sub-S
ahara
n
World
Index based on 11 business-related variablesSource: BBVA
June 7th, 2007 20
The Institutional Challenge
0
20
40
60
80
100
120
140
160
180
200
0 1 2 3 4 5 6 7 8 9 10
Legal rights index (0-10)
Deposit
banks c
laim
s o
n p
rivate
secto
r
(%
of G
DP)
Source: BBVA based on IMF and World Bank
Financial system and legal framework (2006)
Financial systems in particular lack larger protection on borrowers and lenders rights…
June 7th, 2007 21
Outline
1. From turmoil to stability: linkages between the macroeconomy and the financial sector .
2. Financial Regulation and performance: assessing the links.
a. Institutional challenges to regulatory success.
3. Priorities for regulatory reform
June 7th, 2007 22
Given the vulnerabilities embedded in the institutional framework, and the resulting tendency of the region to suffer financial crises, some Latin American nations have opted for a strong regulation of
the banking sector.
Regulation as a response to domestic vulnerabilities
Yet, some harsh regulatory aspects may stand against the establishment of an efficient financial system, reinforcing the
ambiguous relation between regulation and performance.
Weak Institutions
Exposure to crises
Strict Regulation
June 7th, 2007 23
Source: IMF
Foreign Bank Assets as % of Total Bank Assets
0
10
20
30
40
50
60
Arg
entina
Bra
zil
Chile
Colo
mbia
Mexic
o
Peru
Venezu
ela
1994 1999 2000
A case in point is vetoing foreign entry in the banking sector, a measure that has been increasingly eradicated.
In Latin America, foreign banks have been a crucial way to increase competition and efficiency.
Foreign Bank Presence
June 7th, 2007 24
Credit Promotion
Credit promotion to sectors deemed strategic has translated into an inefficient allocation of resources, crowding more profitable (generally
private) investment out.
BrasilLibre
57%
Direcciona
do
36%
Leasing
3%
Sector
público
4%
Venezuela
Hipotecari
a **
10%
Microcrédi
to*
3%
Agropecuar
ia
16%
Resto
71%
*Max
** In effect during 2007
Source: BBVA
Other regulatory measures that reduce the efficiency of the financial sector are on the other hand, still present.
June 7th, 2007 25
Public Banks Share
Most Latin American countries have a structure of public banks that competes directly with private banks. A reduction in the market share of public institutions is desirable, as well as a stronger orientation towards
underbanked segments of the population.
Source: National Central Banks
Public Banks, Share of Credit
0
10
20
30
40
50
Argentina Brasil Chile Colombia Venezuela** 2004
2000
2005
A similar problem occurs with the share of public banks, which in some countries still comprise a sizeable share of the domestic credit market.
June 7th, 2007 26
Increasing market-regulated arrangements.
Further reform should reduce measures resulting in greater interventionism, while fostering those based on market-regulated
arrangements.
Latam: Banks adopting Basel II as percentage
of total banking assets
0
20
40
60
80
100
ene-06 2007-09 2010-15
Local banks Foreign banksMinority foreign presence
Latam: Banks adopting Basel II as percentage
of total banking assets
0
20
40
60
80
100
ene-06 2007-09 2010-15
Local banks Foreign banksMinority foreign presence
Percentage of banks assets expected to fall under Basel II , at different time
horizons.
End of 2006
2007-09
2010-15
Group 1 (6 countries)
23 100 100
Group 2 (5 countries)
0 20 94
The attachment of Latin American banking systems to Basel II is an example of the right path to follow.
June 7th, 2007 27
Conclusions.
Volatility and exposure to crises have traditionally limited the growth of the financial sector in Latin America, which has remained
underdeveloped compared to East Asian emerging economies.
Easing foreign presence or following Basel II prescriptions are examples of the effort that Latin America is doing towards a good
regulatory framework of the financial sector. Nevertheless, examples of inadequate measures still exist (e.g., compulsory credit, large
public bank presence, etc.)
The consolidation of the current financial development requires minimum thresholds of macroeconomic stability, institutional quality, and an adequate regulatory framework. The absence of any of these
is likely to deter further financial development.
The current macroeconomic scenario has helped to revert the above tendency, facilitating an intense growth of local credit markets.
June 7th, 2007 28
Ample Stable Credit & Adequate Financial Regulation: Finding the Balance for Emerging Countries.
José Luis Escrivá
Chief Economist BBVA Research Department
June 7th 2007