Credit at times of stress: Latin American lessons from the global financial crisis
AbstractThe financial systems in emerging market economies (EMEs) during the 2008-09 global financial crisis performed much better than in previous crisis episodes, albeit with significant differences across regions. For example, real credit growth in Asia and Latin America was less affected than in Central and Eastern Europe. This paper identifies the factors at both the country and the bank levels that contributed to the behaviour of real credit growth in Latin America during the global financial crisis. The resilience of real credit during the crisis was highly related to policies, measures and reforms implemented in the pre-crisis period. In particular, we find that the best explanatory variables were those that gauged the economy's capacity to withstand an external financial shock. Key were balance sheet measures such as the economy's overall currency mismatches and external debt ratios (measuring either total debt or short-term debt). The quality of pre-crisis credit growth mattered as much as its rate of expansion. Credit expansions that preserved healthy balance sheet measures (the "quality" dimension) proved to be more sustainable. Variables signalling the capacity to set countercyclical monetary and fiscal policies during the crisis were also important determinants. Moreover, financial soundness characteristics of Latin American banks, such as capitalisation, liquidity and bank efficiency, also played a role in explaining the dynamics of real credit during the crisis. We also found that foreign banks and banks which had expanded credit growth more before the crisis were also those that cut credit most. The methodology used in this paper includes the construction of indicators of resilience of real credit growth to adverse external shocks in a large number of emerging markets, not just in Latin America. As additional data become available, these indicators could be part of a set of analytical tools to assess how emerging market economies are preparing themselves to cope with the adverse effects of global financial turbulence on real credit growth.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 370.
Length: 44 pages
Date of creation: Feb 2012
Date of revision:
stress tests; financial instability; macroprudential;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ari Aisen & Michael Franken, 2009. "Bank Credit and the 2008 Financial Crisis: A cross-country Comparison," Working Papers Central Bank of Chile 532, Central Bank of Chile.
- Stephen Cecchetti & Michael R King & James Yetman, 2011. "Weathering the financial crisis: good policy or good luck?," BIS Working Papers 351, Bank for International Settlements.
- Andrew K. Rose & Mark M. Spiegel, 2010.
"Cross-Country Causes and Consequences of the Crisis: An Update,"
NBER Working Papers
16243, National Bureau of Economic Research, Inc.
- Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, vol. 55(3), pages 309-324, April.
- Andrew K. Rose & Mark M. Spiegel, 2011. "Cross-country causes and consequences of the crisis: an update," Working Paper Series 2011-02, Federal Reserve Bank of San Francisco.
- Rose, Andrew K & Spiegel, Mark, 2010. "Cross-Country Causes and Consequences of the Crisis: An Update," CEPR Discussion Papers 7901, C.E.P.R. Discussion Papers.
- Ralph Chami & Raphael A. Espinoza & Adolfo Barajas & Heiko Hesse, 2010. "Recent Credit Stagnation in the MENA Region: What to Expect? What Can Be Done?," IMF Working Papers 10/219, International Monetary Fund.
- Marco Arena & Carmen Reinhart & Francisco Vázquez, 2006.
"The Lending Channel in Emerging Economics: Are Foreign Banks Different?,"
NBER Working Papers
12340, National Bureau of Economic Research, Inc.
- Francisco F. VÃ¡zquez & Carmen Reinhart & Marco Arena, 2007. "The Lending Channel in Emerging Economies: Are Foreign Banks Different?," IMF Working Papers 07/48, International Monetary Fund.
- Liliana Rojas-Suarez, 2010. "The International Financial Crisis: Eight Lessons for and from Latin America," Working Papers 202, Center for Global Development.
- Marc Klau & John Hawkins, 2000. "Measuring potential vulnerabilities in emerging market economies," BIS Working Papers 91, Bank for International Settlements.
- luis Fernando Melo & Hernán Rincón, 2012.
"Choques externos y precios de los activos en Latinoamérica antes y después de la quiebra de Lehman Brothers,"
BORRADORES DE ECONOMIA
009450, BANCO DE LA REPÚBLICA.
- Luis Fernando Melo & Hernán Rincón, 2012. "Choques externos y precios de los activos en Latinoamérica antes y después de la quiebra de Lehman Brothers," Borradores de Economia 704, Banco de la Republica de Colombia.
- Carlos Montoro & Liliana Rojas-Suarez, 2012. "Credit in times of stress: lessons from Latin America," BIS Quarterly Review, Bank for International Settlements, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).
If references are entirely missing, you can add them using this form.