and transition risks. Section 4 discusses the key results of our analysis. Section 5 concludes with some emerging policy implications.

# **2. Banking sector, natural disasters, and climate risk regulations in LAC**

## **Banking sector**

The banking sector is the critical infrastructure for financial intermediation in LAC. Banks in LAC provide on average more than 90 percent of the credit granted by regulated financial intermediaries, with non-bank financial institutions (NBFIs) and credit cooperatives of secondary relevance (Trujillo and Navajas 2016). There is, however, significant country heterogeneity. NBFIs are significant players in Costa Rica, Peru, and the Dominican Republic, where they account for between 8 and 14 percent of the total credit portfolio. In Ecuador, Mexico and Costa Rica, credit cooperatives hold a market share of the credit market of about 10 percent. The deposit market shows a similar picture, with commercial banks taking the lion’s share of savings.

The banking sector size varies across LAC economies and is highly concentrated. Of the countries included in our sample, Chile and Brazil exhibit the deeper banking systems, with banking assets above 90 percent of GDP at the end of 2019.<sup>2</sup> In contrast, the banking sectors in Argentina and the Dominican Republic are shallower, with banking assets at around 40 and 30 percent of their GDP, respectively. Banking market concentration in LAC is generally high and above that observed in other regions. As of 2018, the seven largest economies in the region exhibited an average concentration ratio, measured as the share of the three largest banks' market, of 65 percent (World Bank 2020).

Banks' assets are dominated by loans, with a non-negligible fraction of securities. As of 2019, total loans, including credit to the public sector, represented 55 percent of the median bank assets in LAC, ranging from 45 percent in Argentina to 66 percent in Chile (Figure 1). Securities, especially government securities, also account for a significant share of banks’ assets, with 19 percent for the median bank in the region. Mexican and Chilean banks hold the largest proportion of their assets in securities, at a median of 34 and 21 percent, respectively.

## **Natural catastrophes and climate change**

Natural disasters have become increasingly more frequent and destructive in LAC, leading to a sharp rise in economic damages. Moreover, empirical evidence points to increased economic damage of natural disasters, substantially driven by large-scale events (Coronese et al. 2019). The most economically damaging natural disaster events in LAC – the second most disaster-prone region in the world – have been earthquakes, floods, and storms.<sup>3</sup> The region suffers from geophysical, hydrological, meteorological, and climatological disasters, which have historically led to significant economic damages.<sup>4</sup> Overall, the economic losses directly or indirectly related

> 2 IMF, Financial Soundness Indicators.

> 3 See OCHA 2020.

> 4 Based on EM-DAT database. The disaster events recorded fulfill at least one of the following criteria: 10 or more deaths of people, 100 or more people affected/injured/homeless, and declaration by the country of a state of emergency and/or an appeal for international assistance. For more details: https://public.emdat.be/about.

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