# **Financial Development in Latin America and the Caribbean: Stylized Facts and the Road Ahead**

Tatiana Didier Sergio L. Schmukler<sup>*</sup>

**Abstract**

The paper documents the major trends in financial development in Latin America and the Caribbean since the early 1990s. The paper compares trends in Latin America and the Caribbean with those in Asia, Eastern Europe, and advanced countries and compares countries within Latin America and the Caribbean. The findings show that financial systems in the Latin America and the Caribbean region have become more diversified and more complex. In particular, domestic financial systems have become less bank-based, with bond and stock markets playing a larger role; institutional investors have gained some space in channeling domestic savings, thus increasing the availability of funds for investment in capital markets; and several economies in the region have started to reduce currency and maturity mismatches. Nonetheless, a few large companies continue to capture most of the domestic savings. And because these trends have unfolded more slowly than pro-market reformers had envisioned, broad, market-based financial systems with dispersed ownership have yet to materialize fully in the region. As a result, convergence is still largely failing to happen and the region’s financial systems remain less developed than those of the advanced economies and several other emerging economies, most notably those in Asia.

**JEL classification codes:** G00, G20, G21, G23

**Keywords:** Financial Development, Latin America, Banking, Capital Markets

* The authors work for the World Bank in, respectively, the Office of the Chief Economist for the Latin America and the Caribbean Region (tdidier@worldbank.org) and the Macroeconomics and Growth Team of the Development Research Group (sschmukler@worldbank.org). This paper is part of the background work prepared for the 2011 Flagship Study <u>Financial Development in Latin America and the Caribbean: The Road Ahead,</u> conducted at the Office of the Chief Economist for Latin America and the Caribbean of the World Bank. This paper is forthcoming in the book Emerging Issues in Financial Development: Lessons from Latin America, to be published by the Latin American Development Forum Series. The paper benefited from very helpful comments by Augusto de la Torre, Cesar Calderon, Asli Demirgüç-Kunt , Alain Ize, Eduardo Levy Yeyati, Guillermo Perry, Claudio Raddatz, Rodrigo Valdes, and participants at presentations held at the Bank of Korea International Conference 2011 (Seoul), the 12th Global Development Network Annual Meeting (Bogota), the NIPFP-DEA Workshop (Delhi), ADBI (Tokyo), the World Bank (Washington, DC), IMF (Washington, DC), American University (Washington, DC), Central Bank of Brazil (Rio de Janeiro), Casa das Garças (Rio de Janeiro), Foro Internacional de Economía (Lima), ITAM (Mexico, DF), Central Bank of Uruguay (Montevideo), Central Bank of Paraguay (Asuncion), Paraguay Ministry of Finance (Asuncion), and University of Chile (Santiago de Chile). The authors are grateful to Francisco Ceballos, Luciano Cohan, Juan Cuattromo, Gustavo Meza, Paula Pedro, Virginia Poggio, Andres Schneider, Patricio Valenzuela, Luis Fernando Vieira, and Gabriel Zelpo for outstanding research assistance at various stages of this project. For help in gathering unique data, the authors wish to thank Mario Bergara (Central Bank of Uruguay), Samuel Fox (Fitch Ratings), Fabio Malacrida (Central Bank of Uruguay), Carlos Serrano (National Banking Commission, Mexico), and ADR Team of the Bank of New York, among many others. The views expressed here are those of the authors and do not necessarily represent those of the World Bank.