The political economy of foreign banks in Latin America: Mexico and Argentina, 1990--2001

The widespread presence of foreign retail banks in Latin America since the 1990s is a phenomenon whose background and significance have only begun to be analysed and understood. Domestic political economy relationships must be considered in understanding how and why foreign banks have come to dominate the domestic banking systems of Latin American countries, the general economic policy environment and international trends alone are not sufficient explanatory variables. This study argues that financial internationalization, as represented by the participation of foreign retail banks in domestic banking systems, is mediated through domestic political institutions and relationships.; Through qualitative interviews with persons directly involved in the making and implementing of legislation and policies regarding foreign banks in Mexico and Argentina, analysis of the Congressional debates and resulting legislation regarding foreign banks in Mexico and Argentina, and careful reading of previously published work related to the banking sector in the two countries, this study finds that states choose to protect the retail banking sector is based on the state's perception of the extent to which the costs and benefits of that protection continue to fall in its favour. This perception and its corresponding set of policy and legislative instruments governing foreign bank entry, are affected by domestic political conditions, as well as by global economic trends. These trends are both banking sector specific, and indirectly related to the banking sector, such as trends in capital mobility.; Specifically, where foreign banks are allowed to enter and operate in the retail banking sector, the political relationship between government and banking elites is weaker than in countries where foreign bank entry is restricted. Conversely, where both private and public domestic retail banks are allowed privileges which protect them from foreign competition, there is a strong relationship between the government and banking elites.