Bank Restructuring and Bank Stability in Latin America

The objective of this chapter is to examine whether or not banking sector restructuring produces significant improvements in bank stability. Restructuring is targeted at distressed banks, and common resolution strategies include injecting liquidity and/or capital, sanitizing bank balance sheets, and consolidating troubled banks with healthier banks through a process of mergers and acquisitions (M&A). Restructuring is often accompanied by legal reforms to strengthen the competitive environment facing banks. Repeal of restrictions on foreign banks is one example. Withdrawing the influence of government in the banking sector through privatization is another. These reforms are expected to increase banking sector stability, because the performance of non-intervened banks should improve — otherwise market share can be lost to resolved incumbents and/or new foreign entrants. An assessment of the effectiveness of bank restructuring must evaluate the impact of legislative changes upon the banking sector per se as well as analysing the post-resolution performance of resolved banks.