Overview

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Overview

Although several special types of credit institutions emerged in Latin America in the late colonial period, it was not until the third quarter of the nineteenth century that modern banks and banking practices became permanently established in the hemisphere's republics. At that time the expansion of trade and the financial requirements of national governments impelled the creation of new types of credit institutions and the reform of monetary systems throughout the area. By the end of the century there existed a broad variety of banks, both domestic- and foreign-owned, mostly concentrated in commercial and mortgage banking as opposed to industrial finance.

In the 1920s the trend toward greater specialization in banking accelerated, a process reflected in the creation of central banks in most nations. The establishment of state development (industrial, agricultural, and foreign trade) banks was perhaps the characteristic feature of Latin American banking during the 1930s and 1940s. In subsequent decades private banking was diversified on a local and regional basis, foreign banks multiplied in various financial centers, and new types of banking instruments and institutions linked to burgeoning capital markets were developed.

THE EARLIEST BANKS

Historians have not yet satisfactorily explained the impact of banking on the overall processes of economic development in Latin America, concentrating instead mainly on institutional histories. It is should be emphasized, however, that, during the nineteenth century, the birth of banking was the result of a slow process of expanding and maturing credit markets that served the needs of agriculture, ranching, mining, manufacturing, and, of course, trade. In addition, the larger banks served the financial needs of governments, always a critical function.

The first banks, which were not destined to survive, were closely tied to government finance. Neither the first Banco Do Brasil, established in 1808, nor the Banco de Buenos Aires, founded in 1822, nor the Banco De Avío of Mexico, created in 1830, was able to weather the financial crises generated by deficit-ridden governments. Only in Brazil did commercial banking begin to flourish with the establishment of banks in Rio de Janeiro (1838), Maranhão (1844), and Bahia (1844). After the 1850s, however, banking institutions began to multiply in other nations, some of which were to prove more durable. Among the more important national banks were the Banco de la Provincia de Buenos Aires (1854), the Banco Nacional de Chile (1865), the Banco del Perú (1863), the Banco Español de la Isla de Cuba (1856), and the Crédito Inmobiliario y Fomento Cubano (1857).

BANKING CRISES

The first regionwide banking crisis occurred as a result of the world recession that began in 1873. Numerous banks in Chile, Peru, Argentina, and Brazil failed, thinning the ranks of the financial institutions in many cities. However, in the 1880s a new banking boom took place, a reflection of the general process of economic modernization in most Latin American nations. This development included the building of railway systems, the introduction of tramways, establishment of telephone and electrical enterprises in the larger cities, and the expansion of the leading export sectors: agriculture, ranching, and mining. To finance these activities it became necessary to create many new banks, not only in the capitals but also regionwide. The leaders in this process were the larger state banks—the Banco Nacional (Argentina), the Banco Nacional de México, and the Banco do Brasil—which began to engage heavily in branch banking and to dominate the commercial credit markets through their branches in both the capital and many secondary cities. In the late 1880s provincial governments began to stimulate the establishment of regional banks, modeled to a large degree on the U.S. free banking system. This new practice, carried out with great speed, combined with the rapid expansion of burgeoning stock markets in Rio de Janeiro, Buenos Aires, and Santiago de Chile to spur a wave of feverish financial speculation.

A second great financial crisis shook many Latin American capitals in the early 1890s. In Argentina virtually all the state-owned banks were forced to close in the midst of a general financial panic that brought the government to its knees. In Brazil the financial craze (Encilhamento) that marked the transition from empire to republic in 1889 soon led to financial crisis and banking retrenchment. In Chile the banking boom of the late 1880s was cut short by the civil war that toppled the administration of President José Balmaceda in 1891.

THE GROWTH OF SPECIALIZED BANKING

From 1900 to 1914 there was a new stage in the history of banking in Latin America as specialization became more important. The largest domestic banks concentrated on lending to the government but also participated in commercial banking, providing loans to merchants and landowners. At the same time, there emerged a large number of specialized mortgage banks that helped finance the rapid development of cities such as Buenos Aires, Rio de Janeiro, São Paulo, Mexico City, and Havana. The mortgage banks also provided funds to rural property owners, who prospered with the expansion of exports. There simultaneously developed additional and different specialized banking institutions: cooperative banks; a few mining and industrial banks; many private financial companies (mostly involved in real estate speculation); and a large number of foreign banks.

Foreign banks had actually begun playing an important role in the 1860s with the establishment of British-owned commercial banks in Buenos Aires, Rio de Janeiro, Lima, Santiago, and Mexico City. Some of these expanded rapidly—for example, the Bank of London and the Río de la Plata, which quickly established branch offices not only in various cities in Argentina but also in Uruguay and Paraguay. British banks dominated foreign banking in Latin America until the 1890s, when a number of German-owned banks were established in the principal cities of the region. In contrast to the British banks, which tended to be independent companies, the German banking firms were direct subsidiaries of the biggest German commercial banks, the Deutsche, Disconto, and Dresdner banks. In any case, the foreign-owned banks in Latin America tended to specialize principally in the financing of foreign trade, in foreign exchange transactions, and in providing loans to such foreign-owned enterprises as railways, mines, and public utilities.

In 1914 the outbreak of World War I provoked a brief financial crisis in many Latin American countries, but subsequently most banks prospered with the export boom generated by war demand. A new development at the time was the penetration of U.S. banking houses in the region, particularly in the Caribbean but also in several South American capitals. Here the National City Bank took the lead, controlling most of the new branches.

CENTRAL BANKING

During the 1920s central banks began to be established in various Latin American nations. The first such banks were created largely as a result of financial advisory missions led by Edwin W. Kemmerer, a Princeton University professor, to Chile, Peru, Bolivia, Ecuador, and Colombia, all of which established central banks in the 1920s through his direct inspiration. In Mexico the central bank, the Banco de México, was set up in 1925 under the guidance of local financial and legal experts, such as the lawyer Manuel Gómez Morín, who later played an important role in conservative political circles. In Argentina central banking came more slowly: it was not until 1935, after the onset of the Great Depression and the mission to Buenos Aires of Bank of England director Sir Otto Niemeyer in 1932, that the government decided to establish the Banco Central de la Repúblic Argentina, the first president of which was the illustrious economist Raúl Prebisch. In Brazil the Getúlio Vargas administration (1930–1945) adopted a different banking strategy, deciding to continue using the services of the Banco Central da Republica do Brasil to manage most government finance. Not until 1965 was the Brazilian central bank established.

The state took an even more direct role in the banking sector in the 1930s and 1940s in most Latin American nations, creating a great array of specialized agricultural, industrial, and mining credit institutions. In Mexico this was the period of the founding of the Nacional Financiera (1934), the Banco de Crédito Ejidal (1935), the Banco Nacional de Comercio Exterior (1938), and several other financial agencies. In Peru the Banco Agrícola was set up in 1931, the Banco Industrial in 1937, and the Banco Minero in 1941. In Argentina the Banco de Crédito Industrial, set up in 1941, was transformed into the Banco Nacional de Desarrollo in 1971. In Chile the Corporación de Fomento de la Producción (CORFO) was set up in 1939, and in Brazil the Banco Nacional do Desenvolvimento Econômico e Social was established in 1952; there also were several state-promoted regional development banks, such as the Banco de Crédito da Amazônia, set up in 1942, and the Banco do Nordeste, in 1952. In Venezuela the role of the Corporación Venezolana de Fomento (CVF) must be underscored because it has been the main agency for promoting public investment in basic infrastructure, as well as in the industrial and agricultural sectors, since the 1950s.

REGIONAL BANKING

A major innovation in the 1960s was the establishment of regional, multilateral development banks, the most important being the Inter-American Development Bank (IDB), headquartered in Washington, D.C. This bank pooled the resources of many Latin American countries and also tapped the international capital markets for additional funds. Under its first president, Felipe Herrera, the IDB established a new financial strategy consisting of providing long-term loans to governments and state agencies to help modernize infrastructure, agriculture, education, and selected industries. As a multilateral institution it has proved as durable and successful as its elder colleague, the World Bank, and has provided the region with a high volume of development financing on reasonable terms. Other regional development banks have been established by governments in Central America and the Caribbean, although they remain relatively small.

Whereas the commercial banks dominated Latin American credit markets until World War II, in the second half of the twentieth century many different specialized companies developed to provide financing for private enterprise and investment. The growth of private financial institutions other than commercial banks began in the 1950s and 1960s. In the mid-1960s the assets of the private financial companies (financieras) equaled those of the commercial banks and later surpassed them. Nonetheless, it should also be kept in mind that many financieras and insurance firms are owned or controlled by a banking group, a fact that confirms both the trend toward financial specialization and the traditional high level of concentration of banking capital in most of Latin America.

A PERIOD OF CHANGE

The 1980s were a period of dramatic change in the Latin American banking world. Following an enormous wave of financial speculation fueled by a foreign debt boom in the late 1970s came a series of economic crises that deeply affected the solvency of many Latin American banks, including a major drop in petroleum prices in the early 1980s, a foreign debt crisis that began in 1982, and domestic economic recessions that plagued most Latin American economies during the decade. As a result, several governments took measures to restructure their banking systems.

In August 1982 President José López Portillo of Mexico announced the nationalization of virtually the entire commercial banking system and the expropriation of dollar deposits from tens of thousands of depositors. The losses suffered by private citizens were on the order of several billion dollars, but the government absorbed the external debts of the banks, which surpassed $10 billion. The former stockholders of the commercial banks were subsequently compensated with approximately one-third of the stock of the state-owned banks and with facilities for the establishment of many new private financial companies, mostly involved in stock market operations.

In Peru in 1987 President Alan García announced the nationalization of commercial banks, but the uproar and opposition were so great that his action helped spur the political campaign of the writer Mario Vargas Llosa against the García administration. Eventually the Peruvian authorities were forced to water down their measures and begin a gradual process of reprivatization. In 1989 Brazilian President Fernando Collor de Mello announced the nationalization of all commercial bank deposits, which were then valued at more than $100 billion. Despite great opposition, the government maintained this control for eighteen months, after which there began a renewed process of liberalization of the banking system. Meanwhile, in Mexico the government of Carlos Salinas de Gortari began a process of reprivatization of the Mexican commercial banks in 1990, which for some time proved a financial success and a source of considerable income for the government.