Financial Markets and the Behavior of Private Savings in Latin America

This paper complements previous studies by arguing that the low private savings ratio in Latin America can be associated with the limited confidence of households and businesses in domestic financial institutions. Previous studies have established a relationship between private savings and financial markets either by using a measure of financial depth or a measure of borrowing constraints. This paper offers an alternative view by claiming that the private savings rate relates positively to the confidence of the private sector in the strength of the financial system and that the latter concept can be approximated by the ratio of corporate demand for bank liquid assets. An important limitation of the analysis is the scarcity of data available for Latin American countries. Therefore, the conclusions derived from this paper should be taken as preliminary. Notwithstanding, the evidence supports the hypothesis advanced in this paper. Latin American countries, where private savings rates are lower than in other developing countries and most industrial countries, display the highest corporate to household bank deposit ratios among the three groups of countries considered here. The evidence also indicates that the ratio of corporate to household deposit holdings is strongly correlated with other indicators of the fragility of the banking system, such as the cost of bank liquidity. The ratio of corporate to household deposit holdings is also inversely correlated with a more traditional measure of financial market depth, such as the ratio of liquid financial assets to GDP