CHICAGO--(BUSINESS WIRE)-- As negotiations over the scope of bank re-capitalization enter a decisive phase in Europe, Fitch sees little risk that a potential Eurozone funding crisis would spill over into Latin America's banking system.

In most Latin American countries, subsidiaries of large European banks make up between 10% and 20% of assets in the local banking system. Subsidiaries of European banks, such as Santander, BBVA, and HSBC, are typically important players across the region, but funding relationships with parent institutions show none of the interdependence that may be exposing other emerging market banking systems to significant contagion risk.

The outliers in the region are Mexico, with a 45% European subsidiary bank market share, and Chile, where Santander and other subsidiaries of European banks account for about 30% of total bank assets. However, banks in both countries benefit from self-funding and minimal dependence on parent banks in Europe.

Subsidiary banks in Latin America are largely funded through local deposits, with little or no direct exposure to short-term parent funding. On the asset side, exposure to parent banks and Eurozone sovereigns is negligible. Moreover, with respect to parent banks most directly exposed to European sovereign debt risks, French and Italian banks are generally small players in Latin American banking.

Financial regulators and central banks across the region, well aware of the disastrous economic consequences of the Latin American banking crisis in the 1980s, have been proactively monitoring the exposure of banks to instability in the international financial system. In addition, strong accumulation of foreign exchange reserves in recent years has given central banks more flexibility to inject liquidity into the financial system should a funding crisis develop.

While these insulating effects are likely to provide broad support for national financial systems in a funding crisis, Fitch notes that smaller and weaker banks are more directly exposed to risks than their larger market-leading competitors.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which includes hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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