Shaping the savings curve: the diminishing returns of financial depth in Latin America

Purpose: The purpose of this study is to examine the relationship between financial depth and domestic savings in Latin America, identifying how variations in financial development influence savings rates and determining if there is an optimal level of financial depth that maximizes savings. Design/methodology/approach: The study utilizes the system Generalized Method of Moments (GMM) panel estimation methodology to analyze the impact of financial depth on domestic savings in Latin American countries. Annual data from 2000 to 2021 is employed, incorporating a comprehensive set of financial, economic and demographic variables. Financial depth is measured using indicators such as mutual fund assets to GDP ratio, pension fund assets to GDP ratio, insurance premium volume to GDP ratio and domestic credit to the private sector as a percentage of GDP. Findings: The results reveal a statistically significant nonlinear relationship between financial depth and domestic savings, indicating that an increase in financial depth can enhance savings up to a certain threshold. Beyond this point, further improvements yield diminishing returns. These findings are consistent across the entire sample and specifically within Latin American countries. Research limitations/implications: The study is limited by the availability and quality of data across the examined period, and the findings may not be generalizable to other regions outside Latin America. Additionally, the nonlinear relationship suggests a need for further research to explore the mechanisms behind diminishing returns. Practical implications: Policymakers in Latin America should focus on enhancing financial depth to boost domestic savings, aiming to reach the identified threshold. A balanced approach is necessary to avoid overexpansion of financial systems, which may not lead to further significant increases in savings rates. Social implications: Improved financial depth could lead to greater financial inclusion and economic stability in Latin America, allowing households to save more effectively. This can contribute to broader economic growth and financial resilience in the region, positively impacting overall social welfare. Originality/value: This study contributes to the existing literature by providing a detailed understanding of the nonlinear relationship between financial depth and domestic savings in Latin American countries. Unlike previous research, it employs a comprehensive set of financial, economic and demographic variables, using advanced panel data techniques (system GMM) to address endogeneity issues. The identification of a threshold level for financial depth offers valuable insights for policymakers, highlighting the importance of a balanced approach. This research adds to the ongoing discussion on financial development, providing empirical evidence that can guide strategies to enhance savings and financial stability in the region.