Latin American Capital Markets

DEVELOPING BOND MARKETS: A COMPREHENSIVE VIEW 303cause disclosure leads to transparence and best practices. Well-established and transparentaccounting and auditing methods help the monetary authority and the marketin supervising the financial system. Moreover; it is important that the monetary authoritycollects and processes all information in order to ensure the proper disclosureof the information that the market needs.Supervision and RegulationBanking regulation must be designed according to international standards. Prudentialregulations—including lending standards, capital adequacy, and asset diversification—must be addressed to gradually reach the standards of the Bank for International Settlements(BIS). In addition, the supervisory authority must gain enforcement power;otherwise, control will be downgraded to a monitoring function without intervention.A sound financial system reinforces investor confidence and facilitates the developmentof new products, such as mutual funds. In order to prevent systemic risks, asafety net should support banks that are experiencing temporary liquidity (but notsolvency) problems.Interest Rote LiberalizationRemoving interest rate and portfolio limits from the banking system and the financialsector as a whole is necessary to build a sound financial system.This form of liberalizationleads to better pricing and allocation of assets and liabilities. In order to developthe government securities market, liberalization must be complemented by regulationsand reforms not only to improve loan foreclosure and corporate bankruptcybut also to reach international standards of prudential regulation.CompetitionA more competitive environment spreads benefits over the entire market and helpsthe development of the process.The entry of international financial service providersis an interesting move toward banking and financial sector reform, but should becarefully analyzed, especially during the first stages, in order to avoid damage to localplayers.In some countries, the banking system is the center of the financial system,and, in an environment of limited competition and weak supervision, banks may beless interested in supporting the disintermediation implied by developing bond mar-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub