Fitch Ratings Special: Central American Banks

From abundance to scarcity: Challenges faced by Central American banks in an environment of tight liquidity.

Friday, February 6, 2009

After having been hit hard by the US mortgage crisis in 2008, large US and international banks have considerably weakened, in some cases escaping from bankruptcy only thanks to strong government intervention. Such an event has eroded the public’s confidence in the financial system worldwide. As a result, the challenges that governments, companies and individuals face are unprecedented in terms of magnitude and scope, judging from how fast it has spread to most economic sector.

Central American banks have not exhibited as much of a deterioration in asset quality as have their counterparts in the developed world; however, the region currently faces an increased cost of funding, with a more limited amount of funds available to companies and individuals. Unfortunately, the situation is expected to continue to worsen in the short term, due to the adverse economic environment worldwide.

Growth in bank assets has slowed down as a result of the aforementioned lack of funding, slower expected economic growth and tougher credit policies. The latter have not only been attributed to a decline in loan portfolio quality but also to the increasing preference for more liquid assets.

Besides the aforementioned impact on the banks’ loan portfolios, the crisis has also taken its toll on investment portfolios in terms of both reduced profitability and increased volatility, which has been detrimental to the entities’ liquidity and equity metrics throughout the region. Furthermore, the risks that these financial systems face are exacerbated by the fragile nature of the region’s economies in the event of external shocks, the lack of a lender of last resort (in El Salvador and Panama), the proximity of ...



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Fitch Ratings Special: Central American Banks

January 2009

From abundance to scarcity: Challenges banks face in an environment of little liquidity.

After losses caused by the real estate crisis in the United States in 2008, big American banks and those from other developed countries have been greatly weakened and, in some cases, have only escaped bankruptcy thanks to help from their governments.

Central American Banks: Biannual Results and Perspectives

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In Fitch's opinion (in the Special Report), the complex economic environment in the region is starting to have an effect on the performance of the banks in Central America.

"Results for the first half of 2008 indicate that the slump in the economy and the increase in inflation have weakened the quality of bank assets," indicated the report.

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