This study discusses staple reforms in banking systems in Latin America and the Caribbean to improve their effectiveness. The paper identifies the main problems countries have been experiencing with banking systems, triggered by large credit losses. The direct and indirect costs of banking sector crises have been astonishingly high. The author holds that while the symptoms and costs of banking sector problems are widely recognized, the magnitude of the remedial task is often significantly underestimated. The author then makes a series of observations to keep in mind: First, the acute and costly nature of the problem in most developing countries primarily reflects a host of historical institutional weaknesses that severely complicate the relationships between creditors and debtors; Second, under the best of circumstances, it will take a number of years to remedy these institutional problems, Third, building progressive and profitable banking systems in these countries will entail a mix of short-term and longer-term initiatives on the part of the banks, the authorities and the governments at large, as well as enlightened support and leadership from the international community.
In many emerging markets countries, including Argentina, Brazil and Mexico, banking sector problems have been especially acute despite the presence of very wide net interest margins. On the surface, these wide margins should provide ample cash flow to absorb credit losses, but in fact, not only have such interest margins not been remotely adequate to cushion credit losses, they have also imposed extraordinarily heavy interest cost burdens on many borrowers. While the symptoms and costs of banking sector problems are widely recognized, the magnitude of the remedial task is often significantly underestimated. To put that task in some perspective, the following three observations should be kept in mind. First, the acute and costly nature of the problem in most developing countries primarily reflects a host of historical institutional weaknesses that severely complicate the relationships between creditors and debtors. The resulting absence of a "credit culture" almost ensures a high incidence of credit problems, especially in the face of volatile economic and financial conditions. Second, under the best of circumstances, including solid economic performance, it will take a number of years to remedy these institutional problems, even as largely successful stopgap and damage control programs have been put in place. Third, building progressive and profitable banking systems in these countries will entail a mix of short-term and longer-term initiatives on the part of the banks, the authorities and the governments at large, as well as enlightened support and leadership from the international community, including the IMF, the World Bank and the regional development banks.
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