Changes in Funding Patterns by Latin American Banking Systems: How Large? How Risky?

This paper investigates the shifts in Latin American banks’ funding patterns in the postglobal financial crisis period. To this end we introduce a new measure of exposure of local banking systems to international debt markets that we term: International Debt Issuances by Locally Supervised Institutions. In contrast to well-known BIS measures, our new metric includes all entities that fall under the supervisory purview of the local authority. This is especially important in Latin America, where the participation of foreign banks that are established as independent, fully-capitalized entities is most substantial. Using this metric we found that all types of Latin American banking groups increased significantly and sharply their issuance of external debt securities. Owing to the low ratios of banks’ external debt to total liabilities in the pre-crisis period, solid solvency ratios and improved supervisory capacity, the recent increase in banks’ external indebtedness has not resulted in financial difficulties and banking systems remain strong. However, a preliminary analysis of risks based on this new trend reveals the emergence of several signs of increased vulnerability. First, in some banking groups (particularly in Brazilian banks, domestic and foreign alike) the increased issuance of external debt has been accompanied by a greater reliance on wholesale funding. In contrast, reliance on wholesale funding by Colombian banks has remained low and stable. Second, rollover risks have significantly increased for Latin American banking groups. Maturing debt, which increased significantly in 2013-14, will continue at high levels in 2015-16 in the context of major uncertainties in international capital markets. This risk is especially noticeable in Brazil and Chile, whose ratios of maturing debt to total debt are high. Third, in spite of a sizeable accumulation of international reserves, the large increase in banks’ external debt might have contributed to reducing the resilience of central banks to deal with a severe adverse shock.