Bankingin Latin America
Bankingin Latin America
Financialsystems today are different. However, financial activities haveexpanded and diversified, driven by globalization, deregulations, newfinancial instruments have created the world beyond past imagining.When weighed based on the global standards, the Latin American fiscalintermediation is regarded as diminished. The Latin America financialsystems are mainly bank-based. However, following a small duration ofa sturdy credit growth marred by fiscal liberalization in thestarting times of the 1990s, the lending by the bank has not yetimproved from collapse as a result of the mid-1990s banking crisis.This has made the bank loan as a ratio of GDP smaller weighed againstthe emerging markets as well as the industrialized countries. TheLatin America low lending levels appears connected to the highintermediation costs preference in the area (IMF, n.d).
LatinAmerica prides in having the highest intermediation spreads asopposed to those in the other banking markets (Maude, 2006). Comparedto the other regions,LatinAmerica is known to have, less efficient banks, elevated interestrates as well as huge reserve requirements. However, the countrieswithin this region are not very different from their counterparts inseveral other facets regarded as vital in the determination of thefiscal intermediation costs, for instance, inflation, taxation, bankprofit, in addition to total bank assets among others (Agnoli &Vilan, n.d).
Iam taking the role of a wealthy banker in Latin America. I haveconsidered this role because of the following reasons. The wealthybankers take funds from the few selected privileged people and creditthem back, thereby earning a pleasant spread. A large quantity ofthese funds arrives in Latin America from the home countries of theprivileged individuals stacked in suitcases with bankers carryingmany of the suitcases. Therefore, bankers are not just porters. Theyare proficient at scheming multifaceted deals to assist their richcustomers transport money out of their states, such as shaminvestment companies, offshore trusts, and analogous foreign exchangeswaps that evade national banks. The deals also include ‘back toback` credit in which the customer is loaned his money by the bank.Their ingenuity is usually admirable. Therefore, among the topbillionaires in Latin America are wealthy bankers. This accounts forthe reasons why I would take up the role of a banker in LatinAmerica.
Chileis the country of my choice in Latin America. This is because itoffers the best investment opportunities. Chile has the bestevaluated emerging economy globally. Various internationalorganizations have played a part in sustaining Chile`s growtheconomically and socially. It is also regarded as among the initialcountries to enrol in the organization for economic development andcooperation in the world. Chile`s GDP has always been rising despitethe economic crisis experienced in the preceding year (CIA, 2015).
Accordingto Maude (2006), the central bank also foresees that Chile would growby about 6.8 percent in the coming years in terms of performance.Moreover, its per capita income is likely to increase as the yearsgo. Besides, Chile is considered one of the most attractive countriesto pursue business opportunities since it has an open economy. It hasgone ahead to sign about 24 percent trade agreements worldwide.Additionally, Chile has a twofold taxation agreement with the UK andother 26 countries. Overall, there are many advantages of pursuingbusiness activities. These advantages are clearly outlined in the2012 report.
Chileis the best of all since it takes chances by ensuring that allinvestors are well protected, and their rights are observed. Itsperformance is the best in terms of business in the world. Chile isone of the most reliable partners in the world to do business with asa country. It has the best sovereign ratings. It is a competitivecountry economically it is open to trading activities thus enablingit to be a free, vibrant market. Finally, it is considered to be atransparent country. This is because of its ratings worldwide it hasthe lowest level of corruption in the government. Thus, it offers ahealthful political environment to conduct business (Morris, 1990).
Thereare various forms of investments that one can undertake they includefreely exchangeable currency, concrete physical assets, and variousforms of technology, foreign loans as well as debts capitalizationand profits capitalization as described below.
Freelyexchangeable currency is comes into the country via the auction at anentity certified to function within the FEM (Formal Exchange Market)at the most complimentary exchange rate acquired by the overseasinvestor. This is regarded as the most basic instrument used byinvestors to bring capital into the country like Chile for instance.Therefore, the capital brought in the country can be used for variouspurposes in the country. It can be used to initiate projects that canhelp alleviate poverty and hunger, enhance growth and stability inthe economy among others (Housemann & Weisbro, 1965).
Anotherform of investment is intangible assets in any given state or formcarried into the state following the common regulations that apply toimportation and guided by exchange coverage. The assets are prizedaccording to the standard procedures that are normally applied toimports. The assets brought in the country can also serve as animportant thing in a country. Assets are good since the country caneasily liquidate them thus obtaining quick money when the needarises.
Thethird form of investment that can be beneficial to a country likeChile is an investment in technology in diverse states. Theinvestment may be benefited from and evaluated by the commission in120 days time frame considering its valuable cost in the globalmarkets. However, if the allocated time frame lapses and no valuationare done, the investor allocates the cost in a sworn statement. Thecontrol of technology that forms portion of a foreign investmentagreement is never supposed to be separately moved from the body towhich it was initially donated under any circumstance. Equally, it isalso not supposed to be subject to depreciation regardless of thesituation.
Accordingto Tamagma (1965), the other form of investments is the foreigncredits and debts capitalization, in liberally redeemable money, solong as such agreements have been fully certified. The authorizationmust be obtained from both the committee and central bank. Theauthorization applies when a borrower pays a foreign loan andrequests its capitalization in a recipient company or when a foreigncreditor accepts the capitalization of its credit and becomes apartner or a shareholder of such a company.
Anotherkind of investment is in credits that are linked to foreigninvestment. The common decrees, terms, as well as other facetsconcerned in the foreign loans arbitration, surcharges imposed on theentire cost that the borrower bears for the foreign creditsutilization, counting taxes along with all the expenses arecategorized as those presently certified in the prospect by thecountry’s central bank.
Finally,there is the investment in capitalization of profits qualifying forremittance abroad. Profits qualify for remittance only after thecorresponding taxes have been paid. The capitalization of a companyrequires the authorization of the committee’s the vice president.The taxes already paid would be discounted from the amount to becapitalized.
Mydecision based on the readings and class notes is that Chile is oneof the best countries in Latin America that was stable during thefinancial crisis. Some countries suffered financial turmoil duringthat time and not a single country escaped this crisis. Admittedly,other methods of banking crisis could have been put to use as theamount of deposit withdrawals or the fiscal cost of the crisis.Specific microeconomic features or given economic conditions seem tohave made countries more prone to the banking crisis.
Anotherdecision is that the era of exchange rate, the dollarization degree,and the banking system structure significantly affect fiscal, lendingas well as macroeconomic variables. A deposit insurance system thatis well-funded and an elastic lender of final resort facility alsoassist diminish the depressing macroeconomic banking crisis impact.Latin American countries are likely to experience a slow growth intheir loans. This is because the countries rate of expansion is highsince the year 2010 (Chorafas, 2006). Another thing is that consumercredit is also likely to go down. On the other hand, some countriesin Latin America are experiencing a high rate of economic growth withthe issuing of bonds internationally. Corporate lending is alsolikely to increase because of the decline of credit that used to beoffered abroad. The value of risk model was not an accurate method touse in evaluating the bank`s performance too.
Foreignbanks have a number of benefits in Chile. First, small overseas banksin Chile as well as Peru compared to the domestic banks lend asmaller amount to SMEs. On the other hand, medium and large overseasbanks raise their loan to SMEs more rapidly than the home banks.Clerk et al. (2006) relay on a firm study undertaken in 35 developingcountries and changeover financial systems. They concluded that theoverseas banks benefit the SMEs in the form of reduced financingobstructions. Nonetheless, they cannot ascertain whether thisenhancement was due to the elevated lending by the overseasinstitutions or local banks elevated their lending owing to increasedrivalry for large obvious borrowers in the market. Further, firms inChile indirectly profit from the existence of overseas investorssince it augments the prospect that firms institute bank associationsthereby recuperating credit access for all companies.
Anotherbenefit is that overseas banks in Chile impose lesser lending chargeas well as spreads than the local banks and take over banks. Takeoverbanks in Chile have a higher spread than Greenfield banks. Foreignbanks also decrease Chile’s disclosure to the state. When localconditions get worse, foreign banks augment credit instability ifshocks are the principal alterations in business chances in the localcountry, nevertheless, it would decrease it if the foremost creditvolatility sources are the local deposits supply. Foreign banks areefficient and more stable since they absorb after deposit shock(Chorafas, 2014).
Otherbenefits include multicurrency banking, where all currencies in morethan twenty countries are readily available. Also, foreign exchangeand wealth can be skilfully managed since the experts come from allover the world. Relationship management services are also enhanced inforeign banking due to diversity. Finally, there is access to expertinformation and services, global transfers as money can easily betransferred globally as fast as possible.
Agnoli,M.,& Vilan, D. (n.d). Financingtrends in Latin America. Retrieved from http://www.bis.org/publ/bppdf/bispap36b.pdf
Chorafas,D. N. (2014). Banks,bankers, and bankruptcies under crisis: Understanding failures andmergers during the great recession.
CIAWorld Factbook.(2015). Chile.Retrieved fromhttps://www.cia.gov/library/publications/the-world-factbook/geos/ci.html
Hausmann,R., & Weisbrod, S. R. (1996). Bankingcrises in Latin America.Washington, D.C: Inter-American Development Bank.
IMF.(n.d). LatinAmerican financial systems Crises and reforms.Retrieved fromhttps://www.imf.org/external/pubs/ft/op/238/pdf/op238_5.pdf
Maude,D. (2006). Globalprivate banking and wealth management: The new realities.Chichester, England: John Wiley & Sons.
Morris,F. (1990). LatinAmerica`s banking systems in the 1980s: A cross-country comparison.Washington, D.C: World Bank.
Tamagna,F. M. (1965). Centralbanking in Latin America.México: Centro de Estudios Monetarios Latinoamericanos. Washington,D.C: World Bank.