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

Carlos Montoro
February 24, 2012

The financial systems in emerging market economies performed much better during the 2008–09 global financial crisis during previous crises, albeit with significant differences across regions. Real credit growth, for example, was less affected in Asia and Latin America than in Central and Eastern Europe.

This paper identifies the factors that contributed to real credit growth in Latin America during the global financial crisis. The authors find that this resilience was highly related to policies and reforms implemented before the crisis. The best explanatory variables in their analysis are those that gauge the economy’s capacity to withstand external financial shocks such as the economy’s overall currency mismatches and external debt ratios (measuring either total debt or short-term debt). Variables signaling 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.

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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