Concentration versus Efficiency and Financial Liberalization in Latin American Banking

Abstract

The processes of financial liberalization and international integration have contributed to significant changes in the banking sectors of many developing countries. In Latin America, banking sectors have experienced an accelerated process of consolidation. Enhanced consolidation has been accompanied by a significant increase in the degree of market concentration in the banking industry. A direct effect of such measures has been the inflow of foreign capital which, although necessary for recapitalizing the financial system, increases the market concentration of the sector. A number of current concerns about the implications of market concentration on competitiveness in the banking industry and its possible impact in the economy exist. The banking sector seems to be highly concentrated in many countries in Latin America and therefore studying the sector and identifying the impact of the enhanced degree of concentration and its potential collusion effects seems an appropriate task. For example, some of the collusion effects that may have been driven by a highly concentrated banking sector may include high commercial lending rates, credit rationing and low deposit rates.