Published on Wednesday, October 18, 2023 | Updated on Wednesday, October 18, 2023

Latam | Macrofinancial risks in banking systems

The current macrofinancial environment in the Latam region has both positive and negative factors affecting banking activity.

Key points

  • Key points:
  • Among the former we have the favorable evolution of inflation and exchange rates, high margins due to higher rates,and generally solvent banking systems. Furthermore, the region has very low banking penetration levels and a very young population, which favors future growth expectations.
  • Among the latter, economic growth in Latam is expected to be weak with tight funding conditions, and the region faces geopolitical risks, financial fragmentation and other idiosyncratic risks.
  • A challenge that Latin American banking systems must face is the management of interest rate risk (IRR), since NII is larger than in other regions in total revenue, as BIS data shows. In comparison with banks in many advanced economies, Latam banks make less use of interest rate derivatives.
  • The financial position of banks in Latam is sound, but with room for improvement in asset quality and operational efficiency; Latin American banks have heavier cost structures than other regions.
  • At present, the following macrofinancial risks stand out: (1) the growth of fixed income portfolios, which exposes banks to potential valuation losses; (2) partial dollarization in some countries; (3) liquidity tensions in some countries in an environment of higher funding costs; and (4) the high growth of some credit portfolios, which could cause delinquency problems in the future.

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