Growth on a firm basis
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Growth on a firm basis

Latin American bank earnings will expand faster than the region's expected 5% annual GDP growth. This time, though, with crisis-induced shake-outs, consolidation, foreign investment and competition, growth should have a solid footing. Jennifer Tierney reports.

Latin America's banking system was no stranger to breakdown even before the Mexican peso devaluation spawned the tequila crisis. Even Chile, which has one of the region's most solid banking systems, experienced a serious banking crisis in the early 1980s. Its banks then underwent massive state-sponsored shock therapy and are now completing a thoroughgoing consolidation.

That pattern has been repeated throughout the region to varying degrees. Although devastating devaluations or severe economic instability are often pointed to as the triggers for banking crises, the shaky foundations of national banking systems are more to blame. Poor asset quality, unfocused regulations, bad credit analysis and good old-fashioned corruption erode a banking system long before the walls finally crumble.

Still, if Chile exemplifies the pattern of banking reform in Latin America, golden days lie ahead. Once the shock treatement is over, Latin banking systems will rebound strong and healthy, ready to take on the new foreign competition. If they follow the Chilean example closely enough, Latin America will boast universal banking for the first time in the region's history.

In a recent regional banking report, Santander Investment called the Latin banking crisis "an invaluable learning experience for bank managers, industry regulators and deposit holders."

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