Most countries in Latin America have adopted significant economic reforms over the past 15 years—opening their markets to trade and foreign investment, reducing government budget deficits, embracing more flexible currency regimes, and lowering inflation. Despite these reforms, the region’s financial systems remain small: altogether, its financial assets amount to just $3 trillion, compared, for example, with more than $5 trillion in China. What’s more, their value is only 133 percent of GDP, compared with 228 percent for emerging Asia¹ and 230 percent for China (Exhibit 1). Moreover, Latin America is largely cut off from the growing volume of capital now flowing around the world.

Latin America is diverse, and there are bright spots on the financial landscape. Chile has one of the region’s most developed financial systems, boasting a modern pension scheme and a sound equity market. Brazil has a dynamic equity market, and Mexico is quickly developing a market for long-term bonds and securities denominated in local currency.

Still, Latin America’s overall lack of financial depth...