MEDELLIN, May 8 (Reuters) - Massive expansion into Central America is a good business move for Colombian banks, but financial institutions run the risk that regional instability could affect markets and the financial system, the head of Colombia's central bank said on Thursday.
The purchase of Central American entities by Colombian banks provides diversification to macroeconomic risk, given that the region is an energy importer, and allows for more exposure to the United States economy as it continues its recovery, Jose Dario Uribe said at a conference in Medellin.
But entry into Central America is not without risk for Colombian financial institutions, Uribe cautioned.
"Some Central American economies present high dollarization and liquidity risks, as well as limitations in being the lender of last resort," Uribe told a banking conference.
He added that some countries in the region had a semi-fixed exchange rate and significant public and foreign deficits.
"You have to take into account these characteristics of Central American economies," Uribe said.
In recent years Colombian financial institutions have looked to Central America as the answer to expansionist ambitions, some because they are reaching the limit of local market expansion.
The three largest Colombian banks, Bancolombia, Banco de Bogota and Davivienda, as well as Banco de Occidente and GNB Sudameris, have a presence in Central America.
Regulators and banks should impose high supervision, risk management and information quality standards in their foreign branches that at least match those in Colombia, Uribe said.
"This is key for preserving our policy strength," he said. (Reporting by Nelson Bocanegra, Writing by Julia Symmes Cobb,; Editing by Clarence Fernandez)