Contagion risk

Is Latin America exposed to the recent banking turmoil in the US and Europe?

The collapse of Silicon Valley Bank (“SVB”) and Signature Bank and the forced takeover of Credit Suisse have put the global banking industry on high alert. Latin America is no exception as governments and regulators across the region watch closely for signs of contagion.  

Ilan Goldfajn, president of the Inter-American Development Bank (“IADB”), said that Latin America has a “very resilient and well managed” financial system, although analysts warned that if the crisis spreads across the world, the region could see lower economic growth this year. An industry executive reported, “There has been marginal impact on some of the region’s banks but it was slight and more driven by panic than any real belief that Latin American banks could be going bankrupt as has happened in the United States or Europe.”  

“There has been marginal impact on some of the region’s banks but it was slight and more driven by panic than any real belief that Latin American banks could be going bankrupt as has happened in the United States or Europe.”  

An industry executive, Mexico

According to the ratings agency Moody’s, Latin American banks maintain high volumes of liquid assets, mostly made up of investments in domestic government securities and stable retail deposits. Furthermore, on 18 March, the top financial officials of the region met in Panama at the annual IADB meeting and concluded that the recent banking uncertainties in the US and Europe would have a limited impact on the region. 

This view was corroborated by Verónica Rodríguez Ceja, governor of the Bank of Mexico, and Fernando Haddad, Brazil’s Minister of Finance, who have both said that the US banking crisis had generated less turbulence than originally expected. Below we take a closer look at the situation on the ground in Mexico and Argentina. 

Mexico’s banking industry is one of the largest in Latin America and its proximity to the US market may suggest a certain vulnerability to the recent turmoil but an executive at a Mexican bank affirmed, “Mexican banks are large and diversified, unlike the US banks that collapsed which were smaller and had businesses overly exposed to specific market niches and suffered from very specific problems. Mexican banks are highly regulated and very ‘risk-managed’, it wouldn’t be possible to have a business model focused exclusively on start-ups. In fact, we have the opposite problem in Mexico: it is very hard for start-ups to access financing. Therefore, my view is that large Mexican banks are sufficiently capitalised, with an ICAP of 19% according to the Comisión Nacional Bancaria y de Valores (“CNVB”), so contagion is not expected.” 

Mexican banks are highly regulated and very ‘risk-managed’, it wouldn’t be possible to have a business model focused exclusively on start-ups … large Mexican banks are sufficiently capitalised, with an ICAP of 19% according to CNVB, so contagion is not expected.” 

Executive at a Mexican bank

Argentina is currently in a fiscally vulnerable situation and one may think the country could be exposed to any financial stress but a veteran macroeconomist in Buenos Aires explained that Argentina has very different problems, “Argentina has been suffering a different kind of crisis. With very little foreign currency reserve it has been gradually isolating itself from the global financial system. The only positive from this is that there has been absolutely no impact on Argentina from the US banking crisis. However, as always with Argentina, investors must consider the strength of the dollar and its impact on Argentina’s commodities market together with Argentina’s bond markets.” 

Overall, our sources believed that Latin America should remain well-insulated from the current turmoil. Nevertheless, S&P Global Ratings predicted that Latin American banks should expect to face secondary effects, which could lead to an increase in risk aversion from institutional investors, and higher funding costs with tighter access to capital markets. 

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