LatAm financial regulators need to update 'old fashion views' – expert

Central banks and financial regulators in Latin America are operating on the basis of an “old fashioned view” centered on inflation, which needs to be changed as the region is poised to face the challenges of the post-pandemic economic recovery and risks linked to climate change, according to Peruvian economist Daniel Schydlowsky.

“There are people who are purists and who say that central banks and regulators should be narrowly focused on inflation, and that’s tyrannical,” Schydlowsky, who served as a board member at Peru’s central bank between 2003 and 2006 and was head of financial services regulator SBS between 2011 and 2015 and is now a distinguished fellow at Boston University’s Global Development Policy Center, said during a webinar in reference to a report from the university on the post-COVID 19 scenario for the region’s financial regulations.

The report points out that the compulsory application across the whole financial system of Environmental and Social Risk Management (ESRM) mechanisms would ensure “that each individual financier include in its evaluation the effect of its activities not only on the enterprise financed but also on its broader economic context.” 

ESRM, which was originally developed to support project finance and incorporated into the Equator Principles, would also need to be “supported by other traditional measures to reinforce its effects,” the report adds, suggesting that these should include specific policies for sectoral transformation, establishing preferential regulatory conditions for lending to climate friendly activities, storm-resistant construction, electric vehicles, renewable power generation; connectivity and inclusion policies; and building institutional social overhead capital to enable markets to function more effectively on the basis of reliable and widely available information.

This economic context will be very different from the pre-pandemic scenario, as it is expected that pre-existing environmental conflicts will resurge even more strongly, while governments will be tasked with dealing with increased debt incurred during the pandemic to provide subsides and other economic supports.

At the same time, climate emergencies will continue to be felt, while also having a greater impact on those suffering some of the worst economic effects of the pandemic.

However Schydlowsky,  warned that there are political sectors that are opposed to updating regulations.

“There are very strong political positions of that sort in Latin America. Almost every country has a group that says 'with all these other things, that’s diluting the mandate',” he said, adding that although this is “an old-fashioned view”, it has strong backing.

The economist warned that the political debate surrounding regulatory updates could lead to a public backslash as “there are going to be people on the other side who are going to be saying ‘no, you’ve lost your mission’ and ‘don’t dilute what you’re doing’.”

Pictured: Peru's central bank. Credit: BCRP