Latin America Banks: The drivers of growth

Ten years ago, Latin America Banks were well off the danger zone , while their world leaders counterparts were right on the middle of the financial Hurricane(2008).Most of the analisys were focused on the way to get through it all, but very few attention was even posibble to consider to look for explanation about Latin America Banking which seemed to be outperformance by any standard within the banking industry.Somehow these banks were consider to be underdeveloped just the way the markets they were focused on.Perhaps that assesment was representative of most banks in Latin America at that time, except for one key fact: these banks had a better sense of covering the systemic risks arising from the drivers of economic growth, specially risk seeking behaviour. As economic growth move up profit expetations, so it also push up risk tolerance. So , those banks with higher risk exposure because of its demographic scope such as to have 90% of population with bank accounts, go along with the sistemic risk. As soon as it comes along a sudden stop in economics growth, so it brings down riskier banks with it. Brussels righlty thought that in such a case, it was necessary to have stronger insurance policies,(higher capital provisions), which was equivalent to make Banks less prone to systemic risk. This meant Banks became like the counter cycliccal filters of the systemic risk , instead of being the cyclical follower of it.That approach imply that while the economy is booming, Banks move cautiously with credit policies.On the other side, while the economy is weak , banks support the economy with more flexible credit policies.It is like the other side of a coin regarding the interest rate movements during economic cycles: High while it is expansive, low while it is recessive . Mc Kinsey & Company (www.mckinsey.com), just released (July 29, 2019), a report about Latin American retail banking markets with interesting remarks, which comes as a reminder that it is not just to arrive first , but also to arrive well prepared. The major findings shows that while ROE (Return on equity), between 2011-2018 was in the range of 8-10% for global bank industry ( in some cases with negative interes rate), Latin American retail banks ROE was 12,8% between 2012-2017 with consumer finance as the leading driver for such outcome. Latin American banks as a whole had a ROE of 14% in 2017. Which are the explaining factors?.The same report explores some hypothesis which are revisited below: a.- Latin american banks have a low risk demographic exposure. Only 30-40% of population over 15 years old, has a bank account. What they lose in terms of scope, they gain in terms of risk control. Banks in Developed countries, have up to 90 % exposure to a wider demographic segment. b.- Growing population in the lower range age segment (25-35 years old), which means new younger workers on their way to get a job with potential rise in earnings. Quite on the contrary to the developed countries Banks which have older workers closer to retirement and looking for saving instead of spending.Young workers represent fresh look for new opportunities most latin american Banks look for. In fact when it comes to microloans , Latin American countries like Peru are among the leaders in that sub markets.- It is also interesting to realize that there are association betwen Banks size with ROE and its variance. Thus, small Banks(43,7% of the sample) , have lower ROE (3,9%) and higher dispersion. Medium (24,5% of the sample),and large size banks(19,6% of the sample), have 13,1% and 13,6% ROE respectively and average dispersion and depending upon revenues, while Leaders Banks (12,0% of the sample), have higher ROE (15,2%), coupled with lower dispersion and depending upon efficiency. However, no matter the positive outcome, there are also some weakness: Mc kinsey report states the following weakness for retaiol banking in Latin America a.- Lower cost efficiency b.- Lowwer asset quality c.- Lower provisions over asset(1,1%) It follows that there is also a consistency between Bank risk behaviour, and the quality of the insurance policy to support it However, the main result is that Latin American Banks will be the growth leaders among global markets banking system through 2022.This means that services sector in Latin America, may become the new driver for economic growth.-

European Central Bank: Its key role

The ECB started in 1998 following the Treaty of Amsterdam . The European Central Bank came out after the European Monetary Institute (EMI) which had been set at the second stage of the Economic and Monetary Union (EMU), to handle transitional issues concerning the implementation of the Euro as a currency. The European Central Bank (ECB) is one of the seven institutions of the EU and the Central Bank for the Eurozone as a whole. It is one of the most critical Central Banks in the world, and it supervises over 120 central banks and commercial banks within the EU states. The ECB, works with the Central banks in each of the EU states, to formulate monetary policy .- The primary function of the European Central Bank is to maintain price stability and safeguard the value of the Euro. The Governing Council defined price stability with rate of inflation either under or close to 2%. Price stability is essential for spurring economic growth and job creation, which are core objectives of the EU.To ensure the robustness of the banking system, the ECB is responsible for banking supervision in all the EU member states holding the power to grant and withdraw banking licenses, conduct supervisory reviews and set higher capital requirements to counter any financial risks. Beyond ther formalities for any Central Bank,the ECB has a key role in keeping the euro value as the currency set for the world stage, as an alternative to other currencies. This is quite a challenge because for doing so, the ECB needs to have among all members states a fiscal policy discipline , otherwise its main goal goes into the risk zone of weakening the euro. The basic format of the Euro, give to the fiscal policy its fair share for supporting economic activity up to a deficit of no more than 3% of GDP. However, as the crisis of 2010 proved, it is hard to keep that level when social needs arise such that fiscal spending goes far beyond that limit.This creates stress among some members of the eurozone. This when the real importance of ECB take place. How to cope with the adjustment process to get fiscal spending down, while keeping at the same time the Euro as a reliable currency?.- This is the reason because Mr Draghi, now in his last four months in charge of the ECB, is considered to be the one who saved the euro in the worst of the moment for the Eurozone following its 2010 own crisis.- He realized that the euro was suitable to get along with more active monetary policy("whatever it is necessary" in his own words), which was not necessarily on the menu at the beggining of thenew currency. In fact, it was something the ECB was not set for. Open market operations(To buy Bonds), or reducing actively interest rates, was an unkonwn territory Mr Draghi went through sucessfully. This is so, because the euro currency play the role of a fixed exchange rate where monetary policy is supposedly constrained by free capital flows. So , there are good expectations that after the learning process is already done, the new authority will follow the same path and this is good for the Euro zone. Another matter is the issue of a more flexible approach, the so called "two speed euro zone", which some key economies of the Euro zone, are asking to be applied.-