Global Banks, Local Crises: Bad News from Argentina

Federal Reserve Bank of Atlanta E C O N O M I C R E V I E W Third Quarter 2002 I magine a world where your favorite bank is like Starbucks: you can find a branch at every corner, in every city on the globe. Imagine a world where in emerging markets all banks are international because local banks have either disappeared or been bought out. The world just described is not as distant from reality as one might think, especially in the Americas. Nearly everywhere you go in Latin America, from San Luis Potosí in Mexico to Santiago in Chile, Citibank has an office (see Chart 1). In the last few years, large U.S. and European banks have expanded their presence in several Latin American countries at a staggering pace to the extent that today in some countries they own or control the majority of the domestic banking system. In the past few decades, banking crises have been a recurrent phenomenon in Latin America.1 Some have argued that the internationalization of the banking sector has ushered in a new era. A November 2001 report by Salomon Smith Barney states that “One of the main benefits that the presence of foreign banks in Latin America should produce is the overall decline in systemic risk. . . . We believe systemic risk in the [Argentine] banking system (one that caused the collapse of the system of payments) is low, as 43% of its equity is controlled by foreigners”(23). The rationale for this optimism is as follows. When an intermediation sector is purely domestic, any financial crisis, major Global Banks, Local Crises: Bad News from Argentina