The Sao Paulo office of Banco do Brasil, Latin America's largest bank. (Photo: Jeff Belmonte)        Font Size ..... Small Normal Big Very Big

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

With the benefit of hindsight, the United States' financial sector meltdown and bailout last fall hinged upon a number of decisions over banks and financial services companies that were deemed "too big to fail." Later those decisions were extended to include other large companies that were considered key to the economy, such as auto manufacturers. Does the concern of financial services companies or other businesses being too big to fail apply in Latin American countries? If so, which? What steps might regulators in the region take to prepare for too-big-to-fail scenarios? Is there a taxpayer perspective to be concerned about—do companies that get too big entail a potential public burden that citizens will not support? Are governments putting forward proposals to regulate banks more like utilities, with regard to regulation of retail prices, activities and size?

Franklin Santarelli, senior director in Fitch Ratings' Latin America Financial Institutions Group: 'Too big to fail' is not a romantic concept, it's a reality. When the markets or public/private institutions fail to work properly, government support can provide a way to create a temporary solution for those issues. The array of situations that may require such actions is quite ample, being that the rationale for such help should be based under the assumption of the well-being of the overall economic activity and not in order to provide privileges to specific sectors or players. Banks and other financial institutions that play an essential role in the payment system of a country are special cases where governments should be ready to act in order to avert crises. Also, other players like utilities, or even large manufacturing companies, may be candidates to receive such support based on the same assumption. The recent government actions seen in several developed markets are not new for Latin America, and certainly can happen again in the future. Large banks, utilities companies and even large manufacturing companies have been supported by Latin American countries many times. The highly regulated environment where banks and other financial institutions operate should be a framework to avoid such emergency situations, but when the emergency happens, there should be a quick answer from the authorities to provide such support. Sometimes the existence of clear policies towards such 'support actions' can avoid the need to use it. Taxpayers should be aware that the costs can be high, but on the other hand, that cost should be compensated by the long-term benefits of avoiding a collapse on economic activity.

Mauro Alem, economist in the Capital Markets & Financial Institutions division of the Inter-American Development Bank: Whereas 'too big to fail' is a critical issue in Latin American countries, it is worth noting than even though size plays a relevant role, the interlinkage between relatively small, but highly leveraged institutions could be even more important. In this sense, the concern of financial services companies or other businesses being too big to fail is much less relevant in Latin American countries for various reasons. First, the structure of the economies in Latin America is fundamentally different from advanced industrial countries, particularly with regard to the financial sector. For instance, measures of financial depth are about half those observed in developed countries. Moreover, except for the largest economies in the region, the size and development of capital markets are too incipient to be affected by financial derivatives disruptions. Second, banks and enterprises are not as leveraged as their counterparts in the developed world, which has explained why Latin American financial institutions have weathered the current financial crisis reasonably well. In this sense, the more relevant risk in Latin America is that of related credit, and the need for effective consolidated supervision, given the high concentration of private wealth in a few economic groups. Finally, Latin American countries' financial institutions face higher risk-weighted capital requirements than the developed world, and these are often exceeded. Financial regulators in the region have learned the lessons from past financial crises, and the sound position of the Latin American financial sector is a clear sign of the progress made so far.

Alexis Rovzar, partner in the Latin America Practice of White & Case: This time around, most Latin American countries are better equipped financially than in previous crises and the banks and financial intermediaries are not at all at the center of their problems, given they are generally well capitalized and have been prudent enough to avoid toxic assets coming from the North. Though some may have problems in their own markets, given for instance a push to bank more first-time customers with lower incomes—many of which were attracted through credit cards, about the most expensive credit available—the amounts involved pose no systemic risk. In Brazil, where some of the new smaller banks encountered liquidity problems, timely government intervention fixed it. Most of the largest domestic banks elsewhere are foreign owned and were growing their local business with the benefit an extra 'set of eyes' of their own regulators. While banks may be facing pressures on their commissions, interest rates (mainly on credit cards) and other charges, it is not anticipated that they will be regulated further than by the application of international standards, the likes of Basel II and others generally deriving from this crisis. Who then is 'too big to fail' and how does a government justify helping a few large corporations and not all, especially small or mid-size companies, which are also hurting? My guess is no country has clear criteria; they are reacting case by case and governments and development banks have once again become very active, ranging from opening lines of credit to programs like discounting suppliers' receivables. In addition, making a case that a local or regional company is too big to fail in most of Latin America invites heated arguments by the left-wing political parties, labor unions and others at a time when populism is looking for familiar faces to place guilt on the loss of jobs, increase of poverty and other common effects of this crisis. In my view, at this time governments in the region are engaged in trying to contain the loss of jobs with 'preservation' programs and using their balance sheets to fund infrastructure programs that result in new job creation.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.