The Washington consensus and multinational banking in Latin America

The dramatic increase in multinational banks in the late 1990s is a direct result of Washington Consensus-type policies that emphasize the removal of barriers to the free flow of financial capital. In Latin America, foreign banks now control almost half of the total banking activity. Inevitably, the direct implication of such circumstances is a fall in the profits of domestic banks. In response to this, domestic banks react by curtailing their overall lending in the short run, thereby preventing small borrowers from accession to credit, and eventually increasing their lending to riskier projects and borrowers in the medium run. Either way, the multinationalization of the banking system in emerging markets will tend to increase the fragility of the overall system rather than decrease it. Evidence of both scenarios has been reported. Adopting an endogenous money approach, the authors advocate policies that, although recognizing that deregulation and liberalization may be difficult to stop, would, nonetheless, address some of the more contentious consequences of multinational banking.