Abstract

This paper aims to assess how capital influences the likelihood of survival of Latin American and Caribbean financial institutions during normal economic times, and the 2008 financial crisis. These financial institutions operate in developing economies that are vulnerable to externals shocks, characterized by large foreign institutions, small indigenous institutions, and high dependence on bank financing due to underdeveloped capital markets. The study uses logistic regressions to estimate the likelihood of survival for three non-overlapping periods – pre, post, and during the 2008 recession. Bankscope provided both financial and firm characteristics (ownership and organizational structures) data. Separate analyses were done based on the size of the institutions. The paper provides empirical indicating that different factors influence the survival of large and small institutions. Higher capital ratios increase the likelihood of survival during the post-recession period especially for smaller institutions. In general, smaller indigenous institutions were less likely to survive. Bank regulators in the regions can use the results of this study to increase their understanding of the factors that influence the failure of financial institutions during different economic periods. This knowledge can be used to implement modifications in how existing regulations are applied to different types of financial institutions. This paper identifies the role of capital, ownership and institutional structures, and size in assessing the likelihood of survival during periods of varying economic activities in developing economies. The paper also highlights similarities and differences with studies conducted in developed economies.

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