INTRODUCTION
Until recently, banking in Latin-America was largely a local industry defined by local economic circumstances, the nature of the local competition, cultural factors and regulation. However, the 1990s saw drastic changes for Latin-America’s banking industry. Economic reforms, consolidation and trade liberalization unleashed market forces fostering cross-border links among individual economies and markets being restructured for banking and financial services. The once-fragmented national banking industries gradually evolved into a regional industry, dominated by an emerging financial institution elite. These institutions possess the asset size, capitalization, marketing skills and advanced technology required to exploit the region’s vast, untapped demand for financial services.
The purpose of this paper is to review the consolidation process currently transforming the banking industry in Latin-America, address resulting trends and discuss parallels to developments in other parts of the world. The movement toward regional integration stemming from the South American Common Market (Mercosur), and from anticipation of the Free Trade Area of the Americas (FTAA) by year 2005, has sparked the nascent integration of the Latin-American banking industry and spawned new, regional financial conglomerates. These, along with additional conglomerates expected to form in the near future, will compete aggressively in hemispheric markets during the early Twenty-first century.
THE MOVE TOWARDS A HEMISPHERIC MARKET
If the 1994 Miami Summit is remembered as being the starting point of the Free Trade Area of the Americas (FTAA) process and the 1998 Santiago Summit as representing the launching of official negotiations, there were a number of economic and socio-political
Latin-American banking
at the start of the millennium:
Consolidation
and opportunities
issues on the agenda of the 2001 Quebec City Summit addressing topics ranging from trade liberalization to the strengthening of fledgling democracies and eradication of poverty. Although progress toward the FTAA has been slow, the governments of the hemisphere have initiated a rules-based system which is slowly transforming the participating countries. Indeed, there have been indications since the first of these summits that a common society is gradually being forged in the Americas. The hemisphere is being transformed by the confluence of new trade opportunities, new directions in the flow of capital, other migratory movements and the implementation of common rules and financial practices. At the same time new relationships are being forged among government officials, business-people, academics and labour representatives. These developments promise to transform Latin-America’s economic landscape.
Whilst negotiations toward the establishment of the FTAA proceed, Mercosur (Brazil, Argentina, Uruguay and Paraguay) is launching an independent initiative toward a hemispheric market. The dominant economic bloc in the region already accounts for almost half of Latin-America’s GDP and is playing a crucial role in the regional integration process, including the formation of the FTAA. Mercosur countries favor structuring the FTAA in line with integration schemes already existing in the hemisphere. They further argue that it should conform to World Trade Organization provisions and that it should avoid addressing labor and environmental issues. Important Mercosur products currently face tariff and non-tariff barriers to the US market; consequently, Mercosur countries insist that any FTAA agreement must improve their access to the US market.
Although Brazil and Argentina support the creation of an FTAA agreement, they are treating it as a secondary priority. In the interim, they are strengthening Mercosur and expanding its links to create a South-American Free Trade Area (SAFTA). Trade agreements also offering mutually advantageous terms to Mercosur and Chile (an associate member), Bolivia and the Andean Community are planned or are already underway. These countries believe that such a regional power base will give them a stronger hand in negotiating with the United States. They have thus insisted that US fast-track facilitation mechanism be a pre-condition for conducting further substantive FTAA negotiations.
Regional integration has been hampered by such external economic shocks as the devastating el Niño weather phenomenon and the Asian and Russian crises of the late 1990s. These developments have lowered commodity prices and introduced a virtual region-wide recession impeding regional development. Disputes over trade imbalances stemming from Brazilian currency devaluation in early 1999 have created additional obstacles. Economic recovery appeared to be on track since the year 2000; moreover, it was hoped that a strong US economy would accelerate Latin-American exports and, together with Brazil’s economic recovery, would generate growth momentum in the region.
and the emergence of expanded markets created by Mercosur. As new regional automobile, energy, consumer goods and banking industries, in particular, continue to emerge, multinationals will increasingly regard the Mercosur nations as bases for exporting their products throughout all of Latin-America.
Pushed by the new competition from outside and without the trade barriers and protected markets they have enjoyed for decades, local companies will have to focus on core businesses and divest non-strategic subsidiaries. Local family-owned conglomerates will be compelled to consolidate and restructure, whilst simultaneously expanding their core products and markets throughout the region. An increasing number of Brazilian and Argentinean firms are clamouring to join the Mercosur market, while others are forming joint ventures or business alliances with foreign corporations.
Consequently, in spite of international investors’ uncertainty over the state of emerging markets, mergers and acquisitions throughout Latin-America are expected to accelerate in the near future. They more than doubled between 1996 and 1998, increasing from US$35.4 billion in 1996 to US$84.6 billion two years later. The pace of mergers and acquisitions continued unabated during the first six months of 1999, reaching US$35.1 billion for just the first two quarters. Merger activity totaled US$222 billion between 1996 and June 1999, 51.7 percent being initiated by investors from foreign countries (Spanish and US investors were the most active acquirers, committing US$47.9 and US$40.7 billion respectively). Intra-regional activity during the same period accounted for 46 percent and emanated mostly from Mercosur, with Brazilian and Argentinean acquirers being the most active 1.
In the markets for banking and financial services, models which have been successful elsewhere have been transforming the once-segmented and compartmentalized financial industry. Financial conglomerates delivering varied banking and financial services are becoming a common feature in Latin-American markets. Whether patterned after the US holding company or the German “universal banking” concept, they provide a broad range of financial services, including credit card, leasing, factoring, loan, investment and insurance products. Legislation encouraged the formation of such financial groups in some countries (Mexico and Chile), whilst in others conglomerates emerged naturally from market conditions, in the absence of any effective regulatory barriers (i.e. Brazil).
Regional integration within Mercosur’s framework is beginning to liberalize financial markets. Although the complexity of the regulatory frameworks of member countries (and the restructuring taking place within their domestic banking markets) is likely to slow financial market integration, the groundwork has been laid for liberalized financial markets. Firstly, Mercosur members have adopted the uniform capital adequacy requirements for banks, agreed upon by the major industrialized countries in Basle, Switzerland in 1988. Moreover, their central banks have agreed to broad policy goals liberalizing financial transactions and permitting the free flow of capital within Mercosur.
CURRENT TRENDS IN FINANCIAL REGULATION
At the end of the Twentieth century, several Latin-American governments launched a series of comprehensive programs to improve the health of their banking systems. The new policies encourage the creation of a more competitive industry by being typically committed to greater reliance on market forces. Financially vulnerable banks have been forced to close or encouraged to merge, whilst still others have been nationalized. Banks owned by federal or provincial governments have been restructured and privatized, or are now in the process of being sold off. Countries like Mexico, Chile and Argentina have experienced two waves of privatization (in some cases re-privatizing some of the very institutions which were initially privatized but then failed and were then re-nationalized). Having learned from such experience, they have made sure that the second privatization process was better regulated and that ownership has been more widely distributed amongst the public at large, including foreign banks.
International banks were initially prohibited from gaining controlling stakes in national financial institutions. As time has passed, however, the need for averting bank failure and the promotion of government-owned bank privatization has increased foreign ownership in local banking institutions. Both the capital infusion and technology transfer associated with foreign ownership are now considered as being essential for strengthening domestic banking industries and reaching optimal efficiency. Table 1 identifies the cost of restructuring selected Latin-American countries’ financial systems as compared to some South-east Asian countries.
Despite the slowdown which swept through the region in the late 1990s, most Latin-American countries are moving toward improving transparency and perfecting supervision of their financial systems. Indeed, the region’s supervisory and regulatory framework is
Table 1
Estimated cost of restructuring selected countries’ national financial systems
(percent of GDP).
Country Year Cost
Argentina 1981 25%
Chile 1985 20%
Venezuela 1994 15%
Mexico 1995 14%
Brazil 1997 15%
Indonesia 1997 29%
Malaysia 1997 18%
Thailand 1997 32%
Source: F.G.H. Deckers, “Funding Issues for
Latin-America,” paper presented at the Federación
Latinoamericana de Bancos (FELABAN) 23rd Annual
very different from 20 years ago. Chastened by their earlier experiences, Latin-American governments are implementing regulations to avoid bank failures and create a sounder, more transparent credit-granting process. They have thus increased capitalization requirements to ensure that banks are able to sustain losses during economic slumps and to encourage investors to monitor banks more closely. Argentina and Brazil, for example, have raised their capital requirements to 11.5 percent and 11 percent, respectively, well above the 8 percent international minimum standard set by the Basle Agreement.
Many Latin-American nations have also adopted more stringent accounting standards, modeled after those used in the United States. Peru has the most rigorous accounting system in the region. In several countries, banks are required to be regularly rated by private credit-rating agencies and this likewise increases pressure for them to conform to responsible procedures. Table 2 identifies current regulatory trends strengthening the financial systems in Latin-America and contributing to the creation of a sounder banking industry.
BANKING STRATEGIES
Economic recovery in the year 2000 should have boosted lending and increased bank profitability, thereby rendering them an attractive investment target. Even before the recent recession, however, some banks had embarked upon outright acquisitions, while others opened branches or formed strategic alliances; Chile’s Banco Santiago invested in Argentinean and Peruvian banks; the Brazilian Banco Itau (technologically advanced and one of the best managed institutions within the region) created a large branch network in
Table 2
Trends in financial regulation in the late 1990s.
Primary Regulatory Provisions Relevant Countries
Improvement in deposit insurance programmes Argentina, Mexico, Peru
Consolidated supervision of all entities owned by a bank or Chile, Peru controlled by common shareholders
Agreement for the exchange of information between Colombia, Ecuador, Peru, Spain regulatory entities
Maintenance of high minimum liquidity requirements Argentina, Brazil, Peru Capital adequacy guidelines against market risk
Stricter capital adequacy requirements against credit risk Bolivia, Chile, Colombia, Peru, Venezuela
Argentina where it planned to invest over US$70 million and open a new branch every month, and Infisa (a Chilean financial group owning Banco Concepcion in Chile and Banco Consolidado in Venezuela) announced an agreement with an investor group to purchase banks in other countries and launch Latin-America’s first regional retail banking network. Outside investors still promise to make the greatest impact within the region. Spain’s Banco Santander, Banco Bilbao Vizcaya and Banco Central Hispanoamericano are the largest investors, although Canada’s Bank of Nova Scotia and Bank of Montreal have also made significant investments in American banks. The Canadian interest in Latin-American banks has stemmed in part from the 1993 North Latin-American Free Trade Agreement (NAFTA), which has stimulated trade between Canada and Mexico.
On the other hand, the Spanish banks seek to garner considerably greater profit margins than those in their home market by taking advantage of the linguistic and cultural similarities they share with Latin-Americans. Moreover, earlier crises have offered them opportunities for acquiring Latin-American banks at bargain prices. Banco Santander has invested more than US$4 billion and acquired direct and indirect ownership in 10 banks with combined assets of US$46.6 billion in nine countries. Banco Bilbao Vizcaya has also spent over US$4 billion, acquiring stakes in seven banks having assets of US$41.4 billion in seven countries2.
Both banks operate an extensive network of branches and have a strong presence in the Latin-American market. However, unlike its rival bank relying on joint ventures, loose alliances and minority ownership, Santander has purchased full or majority control of its acquisitions and plans to integrate them into a Chilean-based regional network under its own name.
Santander merged with another Spanish bank, Banco Central Hispanoamericano, in 1999 to form Banco Santander Central Hispano SA (BSCH), an organisation with assets in excess of US$281.3 billion. This merger had significant implications for the domestic and international markets formerly served by these institutions. BSCH became a banking and industrial giant in Spain and one of the largest financial groups in Latin-America with equity interests in banks, insurance companies and brokerage firms. Despite Santander’s larger size, both institutions called the deal a merger of equals and consummated it through the exchange of shares 3.
Before the end of the year, Banco Bilbao Vizcaya responded to this merger by one of its own with Argentaria Caja Postal & Banco Hipotecario SA, creating Banco Bilbao Vizcaya Argentaria SA (BBVA), a banking organization having US$230 billion in assets. This merger, too, is expected to have significant implications for Latin-American financial markets, specifically for banking and pension fund markets, where both institutions have a sizable presence 4. Table 3 shows recent major purchases by these Spanish banks in Latin-America.
2 TORRES, C. VITZTHUM, C. and MILLMAN, J. (1998). “Latin exposure bedevils banks in Spain”.
Wall Street Journal, September 29, p. A19.
3 VITZTHUM, C. and RHOADS, C. (1999). “Santander deal to create Spanish Bank Giant”. Wall
Street Journal, January 18, p. A14.
4 PORTANGER, E. and RAGHARAN, A. (1999). “Big spanish bank merger to cap consolidation”.
Table 3
Major acquisitions by Spanish banks in Latin-America, 1995-l999.
Institution Country Percentage Price
Ownership1 (millions of dollars)1
Banco Bilbao Vizcaya SA
Grupo Financiero Probursa (1995) Mexico 90%2 495
Banco Continental (1995) Peru 35 130 Banco Ganadero (1996) Colombia 40 328 Banco Provincial (1996) Venezuela 40 n.a. Banco Frances (1996) 3 Argentina 30 350
Banco Excel Economico (1998) Brazil 55 8554
Banco BHIF (1998) Chile 55 350 Banco Santander SA
Banco Mercantil and Banco Interandino (1995) Peru 100 100 Banco Central Hispano (1996) Puerto Rico 100 290 Banco Osorno (1996) Chile Merger 483 Banco Mexicano (1996) Mexico 75 425 Banco de Venezuela (1996) Venezuela 90 338 Banco Rio de la Plata (1997) Argentina 355 594
Banco Comercial Antioqueno (1997) Colombia 55 144 Banco Geral do Comercio (1997)6 Brazil 51 220
Banco Central Hispanoamericano SA7
Banco Santa Cruz (1998) Bolivia 90 180 Banco Tornquist (1996) Argentina 50 93
BancoSur (1996) Peru 45 90
Banco de Asuncion (1996) Paraguay 39 10
1 Reflects original investment and does not include subsequent increases in ownership through purchase of additional shares. 2 Purchase of shares began in 1991.
3 In August 1997, Banco Frances del Rio de la Plata acquired 72% of Banco de Credito Argentino. BBVbought the remaining
28% of that bank for US$161 million in 1998; the intention was to merge both institutions now operating as a single entity.
4 In the form of capital infusion for this institution.
5 An additional investment in January 1999 raised equity stake to 51.2% of capital and 64.3% of the voting stock. 6 In August 1997, Banco Geral paid about US$500 million for a slightly higher than 50% stake in BancoNoroeste, thereby
providing Santander with a presence in southern Brazil.
7 Other institutions were acquired or had been established earlier. These include Banco Santiago,
Chile (1991), with an equity stake of 22%; BCH International Inc., Puerto Rico (1991) with a 100% equity stake Banco Internacional, Mexico (1993), with an equity stake of 8.3%.
Source: J. Friedland and C. Vitzthum, “Spanish Banks Push into Latin-America”, Wall Street Journal, October 25th
1996, p. A11; T. Vogel and C. Vitzthum, “Venezuela Banks Snag Foreign Investors,” Wall Street Journal, December 20 th 1996, p. A12; Wall Street Journal, May 8 th 1997, p. A18; J. Friedland, “Foreign Acquirers Bolster Argentina’s
Banking System”, Wall Street Journal, May 28 th 1997, p. A15; C. Torres, C. Vitzthumand J. Millman, “Latin
Exposure Bedevils Banks in Spain”, Wall Street Journal, September 29 th 1998, p. A19. See also Sergio Manaut, “La
Banca Española Está Haciendo la América”, Gazeta Mercantil Latino Americana , November 8 th to 14 th 1999,
TARGETED MARKETS
The markets targeted for entry by foreign banks vary depending upon institutional objectives. Some banks target the corporate market in view of the growing opportunities in Latin-America’s business environment. One such institution, for example, has been the Chase Manhattan Bank, which sought to expand its Brazilian operations in January 1999 by acquiring a full stake in Banco Patrimonio Participacoes SA, an investment bank based in Sao Paulo. This acquisition gave Chase a host of functions it lacked in Brazil, such as merger-and-acquisition advisory and capital-market underwriting capability. Other functions which came with this acquisition included asset management, bond origination and trading and equity trading.
Although this acquisition made sense for Chase Manhattan, it also came at an opportune time within Brazil’s vacillating economic environment. A few months earlier (mid-1998), the Swiss-American Credit Suisse First Boston investment bank had expanded its operations in the same product market by acquiring Banco Garantia, a leading Brazilian investment bank which had run into trouble during the Asian crisis. This acquisition vaulted Credit Suisse to a top spot among investment banks in the area of emerging markets. Together, Chase Manhattan and Credit Suisse acquisitions not only strengthened Brazil’s financial system, they also reshaped the domestic financial service industry.
Many foreign banks in Latin-America are targeting medium-sized businesses and the huge, untapped consumer market. Many midsize companies’ drive to become internationally competitive, and the growing credit needs of an emerging middle class, offer the prospect of a lucrative market for foreign banks. Low inflation and projected continued economic growth have further made this new class of customer attractive for foreign banks. This market’s vast potential may be evident in the ratio of total bank loans to gross domestic product, presented as Table 4 for selected Latin-American countries at
Table 4
Ratio of total bank loans to gross domestic product for selected countries in 1998.
Country Percentage
Chile 64
Colombia 35
Brazil 37
Mexico 22
Argentina 32
Peru 28
Venezuela 12
United States 79
year-end 1998. As seen in this table, with the exception of Chile at 64%, the ratio for all other countries was very low. In the case of Venezuela, the ratio was a mere 12%. By contrast, in the United States the ratio was 79 percent. This situation has helped generate interest rate margins twice or three times the size of those earned in industrialized nations. Citicorp, the most important US bank to respond to this potential, has already announced plans to purchase retail banks to strengthen its existing network within Latin-America. It will compete not only with local banks but also with other foreign banks interested in entering or increasing their share of the vibrant retail-banking markets. One such institution is the Dutch ABN-AMRO bank which, after eight decades of primarily investment and corporate banking in Brazil, attained a large presence in the retail market in 1998 when it acquired Banco Real, the fourth-largest publicly-traded bank and Bandepe, a bank owned by the state of Pernambuco.
London-based Hong Kong and Shanghai Banking Corporation (HSBC) Holdings PLC has also entered new retail-banking markets by expanding its investment beyond Chile. In addition to a stake in Mexico’s Grupo Financiero Serfin SA and an equity position in Peru’s Banco del Sur (BancoSur), HSBC has acquired Banco Bamerindus from Brazil and Roberts SA de Inversiones, a diversified financial group from Argentina. These banks combined assets amounted to US$49 billion in 19975.
The temptation for the emerging Latin-American middle class to finance home mortgages and, more importantly, big-ticket items like cars and appliances, has stimulated the demand for consumer credit. The experience of General Motors Acceptance Corporation in Mexico exemplifies the huge potential that this consumer market holds. Unlike Mexican banks which (stung by huge loan losses) have made no loans to consumers for the last five years, GM realized substantial profits by extending such loans. As a result, GM has been the top auto vendor in Mexico for the past three years 6.A competing firm has securitized
these loans by packaging, issuing and selling securities against them to investors. Table 5 depicts the ratio of consumer loans to GDP in selected Latin-American countries as compared to the United States and the United Kingdom. The ratios for Latin-American countries are significantly lower, reflecting the limited availability of consumer credit in these countries. Local banks have traditionally catered to the big businesses and wealthy families and neglected middle class credit needs.
However, as the region’s income-per-capita levels rise, banks are discovering that moderate-income households can be a good risk and offer a good return. The wide gap between the levels of financing in the US and UK suggests that sizable amounts of capital are needed to develop and sustain consumer lending growth for the average Latin consumer to enjoy a comparable standard.
5 SCOTT, Weeks. (1997). “HSBC Leads the Parade”, LatinFinance, No. 88, June, p. 30.
6 FRIEDLAND, Jonathan. (1999). “GM, other firms credit programs help fuel growth in Mexican
US AND EUROPEAN EXPERIENCES: LESSONS FOR LATIN-AMERICA
Although significant differences remain among the regions, experience in the United States and Europe at the end of the last century suggest that Latin-America will also experience further bank consolidation, the emergence of super-regional banks, major changes in how mergers are financed and the promotion of common interests through the “merger of equals”. As the Latin-American economies experienced a recession in the late 1990s, most bank-merger activity occurred in Asia and Europe. Government intervention prompted bank-mergers in the aftermath of the Asian financial crisis. They were generally confined within national markets but allowed for foreign investor participation.
The prospect that the European Monetary Union (EMU) would create the largest financial market in the world fuelled a competitive race in Europe for market share among banks and provided the impetus for mergers within domestic markets (“in-market mergers”). The Union Bank of Switzerland and Swiss Bank Corporation, ABN-AMRO and Banco Bilbao Vizcaya are examples of such mergers. Consolidation was largely confined within national markets, although some institutions sought to prepare for the EMU by positioning themselves in the European market through cross-border alliances with desirable partners in other countries. Strategic alliances took different forms, including the exchange of equity stakes between institutions and the establishment of joint marketing and servicing agreements, with each partner representing the other in designated markets. Although these strategic alliances represented a tentative step toward regionalism, they did not yield substantive changes, because the banks remained very national in their operations. Table 6 identifies Banco Santander’s alliances in Europe.
Table 5
Ratio of consumer financing to gross domestic product for selected countries in 1998
Country Average Percentage
Argentina 4.1
Brazil 3.5
Chile 5.8
México 6.1
Latin-America as a whole 4.9 United Kingdom 12.4 United States 15.6
Source: F.G.H. Deckers, “Funding Issues for Latin-America”,
a paper presented at the Federacion Latinoamericana de
Ban-cos 23rd Annual Assembly (FELABAN), Miami, Florida,
Although some regional mergers have already taken place (e.g., Santander’s entry into the Portuguese market and the Netherlands’ ING Groep into Germany)7, these are
only first steps. However, the creation of a truly regional financial market awaits mergers of greater stature. Such mega-mergers are likely to occur now that a homogeneous capital market has formed as a result of the introduction of the Euro as Europe’s common currency in January 1999.
As in Europe, bank consolidation in the United States has evolved in escalating fashion. First, growing acceptance of the regional banking concept in the mid-1980s enabled banks in one state to penetrate the markets of another. This fuelled significant merger and acquisition activity fostering the development of super-regional banks, while it thwarted the entry of and competition from banks from larger, more distant states. Deregulation of inter-state banking and branch creation in the mid-1990s led to significant US banking industry consolidation by institutions desiring national scope.
Financial markets in Latin-America had experienced a wave of consolidation before the onset of the recent region-wide recession. As economic recovery set in during at the end of the last millennium it created opportunities for bank mergers with consequent effects on financial consolidation. Two merger candidates, widely followed both by domestic and foreign banks, are Brazil’s forthcoming privatization of Banespa (the state bank of Sao Paulo) and Mexico’s sale of the Grupo Financiero Serfin. The sale of these institutions has the obvious potential for reshaping the banking industry in the respective markets. In some countries (e.g. Chile) bank shares appear to be fully priced, which is why cross-border deals may be eventually considered, even without a common currency.
7 Banco Santander Central Hispano successfully negotiated its entry into the banking market of
neighbouring Portugal in 1999 with its US$1.9 billion acquisition of over 94 percent of Banco Totta & Acores SA, Portugal’s fifth largest bank and 71 percent of Credito Predial Portugues SA, a mortgage lending institution. In a similar move, ING Groep NV -the Dutch banking giant- completed its cross-border acquisition of Germany’s BHF Bank AG by paying US$2.3 billion for a 58.2 percent equity stake. “BSCH to Acquire Portuguese Stake”, Wall Street Journal, June 8, 1999, p. A10. Also, E. Portanger, T. Kamm and D. Ball, “European Banks Gird for Border-Crossing Era”, Wall Street Journal, August 17, 1999, p. A12.
Table 6
Banco Santander Central Hispano’s European alliances.
Country Institution Equity Stake (in percent)
France Societe Generale 5.01
Germany Commerzbank 5.0
Italy San Paolo IMI 7.0
United Kingdom Royal Bank of Scotland 9.6
1 To be increased to 7.0%.
Just as in Europe and the United States, once the bank consolidation process runs its course within national markets in Latin-America, local mergers must give way to regional expansion for banks to capitalize on size and survival. This trend will ultimately lead to mergers among institutions based throughout Latin-America and stimulate competition among super-regional banks.
The US and European experience also offers Latin-America a new model for financing mergers. For years, American banks have used stock, rather than cash, in the majority of their acquisitions. Until recently, European bank acquisitions were completed in cash or a combination of cash and stock. However, as the size of transactions has increased, stock deals have become the dominant form of financing. The use of cash to finance large mergers might drain the acquirer’s capital base to levels below those considered safe by regulators. The Euro’s advent has also increased financial markets’ breadth and depth and made possible the financing of once unthinkable large deals. The introduction of the Euro (combined with recent efforts to establish a pan-European stock exchange) promises to further facilitate all-stock mergers between banks in different countries by making them more attractive to investors throughout the continent. Another important experience in bank consolidation has been the “mergers-of-equals” approach. Mergers of this type do not burden the stockholders of the acquiring institution with dilution from high-premium bids overvaluing the price of the acquired company. Instead, such deals are capital conserving and bottom-line disciplined. Moreover, the “merger-of-equals” approach can emphasize common interests between parties and allow potential partners to surmount divisive social and political issues. For instance, in Europe noone expected Banco Santander to merge with Central Hispano. But, once the merger was complete, it became possible to imagine consolidation among many other banks which had hitherto been incompatible. The experience of these Spanish banks offers a workable blueprint for bank mergers in Latin-America, including social and even cultural issues on cross-border deals, while simultaneously introducing vital, state-of-the art practices and technologies necessary for maximizing operational efficiency.
CONCLUSION
transfer. As seen in the US and European experiences, Latin-America must first evolve from national currencies and markets to a homogeneous capital market capable of financing large deals. Integration of financial markets having a common currency will ultimately force Pan-Latin deals and produce transnational Pan-Latin market champions. Until then, the development and growth of regional financial institutions will be sustained primarily by foreign acquisitions. The prospects for future economic growth result from many years of privatization, stricter regulation and tighter accounting procedures, consolidation, greater diversification of ownership, greater foreign investment and a move toward regionalism. As the economies within Latin-America strengthen, inflation subsides and Mercosur grows, an expanding, credit-hungry middle class will make additional demands upon and create new opportunities for financial institutions. Universal banking, or the financial supermarket model, will thrive in this climate. At the same time, the foreign banks providing the necessary infusions of capital will also change the way banking is conducted in Latin-America by introducing higher standards for assessing and granting loans and affecting the development and pricing of banking products. The competition from these foreign-based financial institutions should both push domestic banks to higher levels of performance and result in greater consolidation, as more successful and efficient rivals absorb weaker banks.
Finally, the increased competition and the demands of international commerce will compel those local banks which once made easy profits, regardless of the soundness of their loans, to master the arts of credit assessment and efficiency and conform to commonly shared practices and standards. Though smaller, less efficient banks stand to be hurt by these developments, Latin-American corporations, small businesses and middle-class consumers can expect to benefit.
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