Paraguay: Selected Issues

The Paraguayan banking system compares relatively well with other Latin Americanbanking systems. Banks are well capitalized, have ample access to deposit funding sources, and are profitable. Most importantly, the authorities have taken a number of decisive steps to strengthen supervision and ensure stability in the financial system within the last decade.Nevertheless, the credit delivery system still appears somewhat weak with little improvement in key metrics in recent years. The consolidation process has resulted in a slightly more concentrated banking system with substantially lower levels of foreign participation.Nevertheless, effective interest rate margins have declined by a small amount as concentration ratios increased. This suggests that greater concentration has not had a negative impact on competition in the sector. Indeed, the panel regressions indicated that increases in system wide concentration levels actually reduced effective margins. In addition, the regressions demonstrate that banks which gained market share also ended up lowering effective spreads. The impact ofcredit risks, in the form of NPLs, on margins has been relatively minor.