Concentration and foreign penetration in Latin American banking sectors: Impact on competition and risk

Abstract

In the 1990s, Latin American banking sectors experienced an accelerated process of concentration and foreign penetration that prompted diverse views regarding its implications for the competitive behavior of banks and the financial stability of the system. In this paper, we examine these issues exploiting a rich bank-level database for eight Latin American countries. We find that, while increased concentration did not weaken banking competition within the region, foreign penetration appears to have led to a less competitive industry. Moreover, we find that bank risk has been negatively associated with competition which, coupled with the previous finding, explains the positive link between banking sector stability and foreign penetration revealed by the data.