Although Latin American countries have made significant strides in reforming their financial markets, these markets remain shallow, implying a need for further reform. Stronger protection of creditor rights can improve the size and stability of credit markets and provide greater access to capital for small and medium-sized enterprises that operate under greater financial strictures. In discussing creditor protection's impact on the size of financial markets, the authors first document the state of Latin American creditor protection. They then discuss the effect of enhanced creditor rights on small and medium-sized firms and how the dynamics of financial markets are affected by the regulation of creditor rights. To examine the effects of adverse economic shocks on creditors, the authors study the credit cycle in various countries. In addition to increasing the size of financial markets and stimulating economic growth, reforms that strengthen creditor protection can affect credit allocation, the authors find. Their research suggests that the rules and regulations concerning the seizure of collateral need reforming and, more importantly, that the judicial system must become more agile to assure prompt, effective, and less expensive enforcement of creditor rights. The authors note that the successful introduction of these reforms may require convincing the citizenry that creditor protections benefit not only the financial sector but the economy overall.
