VI Regional Integration and Financial System Issues

99 C America has made good progress over the past decade in stabilizing the macroeconomic environment and establishing a sound and efficient financial system. Macroeconomic stability and measures to address financial sector weaknesses have contributed to increased intermediation and improvements in key financial sector indicators. At the same time, credit to the private sector from locally licensed banks remains relatively low and the ability of banks to withstand shocks would benefit from improved financial sector risk management.1 Dollarized balance sheets and lending to a largely unhedged private sector make some systems vulnerable, particularly to adverse exchange rate movements, underscoring the need for further crisisproofing. This is particularly important in countries with high debt levels and in a region that is susceptible to shocks such as commodity price movements and natural disasters. Financial sector integration brings important benefits, but it also poses new risks and challenges. Ongoing financial sector integration and consolidation will help the region take advantage of economies of scale and promote competition and efficiency. At the same time, however, financial sector integration without appropriate regulations and supervision could undermine adequate prudential monitoring of bank activities and allow undue risk-taking. Harmonizing prudential norms and financial supervision between countries and strengthening the capacity to conduct consolidated supervision to keep pace with the growth of cross-border banking activities will help the region capitalize on the opportunities that integration offers.2 Financial Sector Development and Structure