Implications of the euro for Latin America's financial and banking systems

Abstract

This paper explores the impact of the euro on Latin America. We disregard both trade and changes in optimal debt strategies as important transmission channels. However, we present evidence suggesting that capital flows into and out of Latin America may be influenced by movements in European interest rates to a far greater extent than previously expected. We conclude with a discussion of the implication of the euro for the Latin American banking system. We argue that the euro will accelerate the internationalization of banking in Latin American creating potential solvency problems during the transition which should be addressed through a tightening of prudential regulation.