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Credit at Times of Stress: Latin American Lessons from the Global Financial Crisis - Working Paper 289

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  • Liliana Rojas-Suarez and Carlos Montoro

Abstract

The financial systems in emerging market economies 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 behavior 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 capitalization, 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.

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File URL: http://www.cgdev.org/files/1425986_file_Montoro_Rojas_Suarez_LATAM_lessons_FINAL.pdf
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Bibliographic Info

Paper provided by Center for Global Development in its series Working Papers with number 289.

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Length: 46 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:cgd:wpaper:289

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Web page: http://www.cgdev.org

Related research

Keywords: Latin America; credit growth; global financial crisis; emerging markets; financial resilience; vulnerability indicators;

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  1. Marc Klau & John Hawkins, 2000. "Measuring potential vulnerabilities in emerging market economies," BIS Working Papers 91, Bank for International Settlements.
  2. Francisco F. Vázquez & Carmen Reinhart & Marco Arena, 2007. "The Lending Channel in Emerging Economies," IMF Working Papers 07/48, International Monetary Fund.
  3. 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.
  4. 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.
  5. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
  6. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  7. 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.
  8. Ralph Chami & Raphael A. Espinoza & Adolfo Barajas & Heiko Hesse, 2010. "Recent Credit Stagnation in the Mena Region," IMF Working Papers 10/219, International Monetary Fund.
  9. Liliana Rojas-Suarez, 2010. "The International Financial Crisis: Eight Lessons for and from Latin America," Working Papers 202, Center for Global Development.
  10. 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.
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Cited by:
  1. 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.

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