Credit in Times of Stress: Lessons from Latin America during the Global Financial Crisis

• DOI: http://doi.org/10.1111/rode.12144
• Published date: 01 May 2015
• Author: Liliana Rojas‐Suarez,Carlos Montoro
• Date: 01 May 2015

Credit in Times of Stress: Lessons from Latin

America during the Global Financial Crisis

Carlos Montoro and Liliana Rojas-Suarez*

Abstract

The 2008–2009 global financial crisis disrupted the provision of credit in Latin America less than in

previous crises. This paper tests whether specific characteristics at both the bank and country levels

at the onset of the global crisis contributed to the behavior of real credit growth in this region during the

crisis. As shown, financial soundness characteristics of Latin American banks, such as capitalization,

liquidity, and bank efficiency in the pre-crisis period, played a role in explaining the dynamics of real

credit during the crisis. We also found that foreign banks and banks that had expanded credit growth

more before the crisis were also those that cut credit the most. Among country-specific characteristics, we

found evidence that balance sheet measures such as the economy’s overall currency mismatches and

external debt ratios (measuring either total debt or short-term debt) were key variables in explaining

credit growth resilience.

1. Introduction

Credit growth in Latin American economies during the 2008–2009 global financial

crisis was more resilient to adverse external financial shocks than in previous epi-

sodes. In sharp contrast to its recent past, when external financial shocks ushered

in banking crises and credit crunches in the region, the reduction in Latin

America’s real credit growth that followed the eruption of the global crisis was

short-lived and no banking system in the region was severely affected. The main

objective of this paper is to identify factors at both the country and the bank levels

that contributed to the behavior of real credit growth in Latin America during the

global crisis.

A finding of the paper is that the strength of some macroeconomic variables during

the pre-crisis period (in particular, a ratio of overall currency mismatches and alterna-

tive measurements of external indebtedness), together with variables that measure

the capacity to implement countercyclical policies, explained banks’ provision of real

credit growth during the crisis.1We also found a positive impact of sound bank indica-

tors on real credit growth. That is, banks with the highest ratios of capitalization and

liquidity before the crisis experienced the lowest decline in real credit growth during

the crisis. An additional result is that foreign banks and those with larger pre-crisis

credit growth rates were, after controlling for other factors, the most affected during

the crisis in terms of credit behavior. On an overall basis, the results show that initial

* Rojas-Suarez: Center for Global Development, 2055 L. Street NW, Washington DC 20036, USA. E-mail:

lrojas-suarez@cgdev.org. Montoro: Latin American Reserve Fund, FLAR. The views expressed in this

article are those of the authors and do not necessarily reflect those of the BIS or the Center for Global

Development (CGD). We would like to thank Leonardo Gambacorta, Ramon Moreno, Philip Turner and

participants in a CGD workshop for fruitful discussions; and Benjamin Miranda Tabak and two anonymous

referees for useful comments. Alan Villegas provided excellent research assistance. An earlier and more

extensive version of this paper was published as a BIS Working Paper No. 370.

Review of Development Economics, 19(2), 309–327, 2015

DOI:10.1111/rode.12144

© 2015 John Wiley & Sons Ltd

conditions mattered substantially in defining Latin American banks’ behavior regard-

ing real credit growth in Latin America during the global crisis.2The pre-crisis period

is defined here as the year 2007. This was a relatively tranquil year in Latin America

and other emerging market economies, in the sense that no major financial crises took

place.

The rest of the paper is organized as follows. Section 2 briefly reviews the

existing literature on determinants of real credit during the global crisis. In Section

3 we present the variables to be used in the empirical analysis as country-level

determinants of Latin American banks’ real credit-growth resilience to external

financial shocks. In Section 4 we undertake an econometric analysis to assess the

relative importance of the different factors explaining the behavior of banks’ real

credit growth in Latin America during the global crisis. Section 5 concludes the

paper.

2. Real Credit Growth in Emerging Markets during the Global Financial

Crisis: A Brief Literature Review

There is a growing literature on the effects of the global financial crisis in

emerging market economies. Some of the existing research analyzes the effects of

pre-crisis conditions on the behavior of credit. To date, however, most of these

studies have focused on country-level data. For example, Hawkins and Klau (2000)

reported on a set of indicators the Bank for International Settlements (BIS) has been

using since the late 1990s to assess vulnerability in the EMEs based on aggregate

information.

With some exceptions, ours is one of the first studies that analyze the drivers of

real credit growth during the 2008–2009 global financial crisis for some emerging

market economies using bank-level information. Among others, Jeon et al. (2013)

studied the international transmission of financial shocks using bank-level data of

foreign subsidiaries of multinational banks in some emerging economies, finding that

the transmission of financial shocks have become more conspicuous since the mid

1990s. In a related work, De Haas and Van Lelyveld (2014) analyzed lending by

foreign subsidiaries during 2008–2009. They found that multinational bank subsidi-

aries slowed down credit growth about twice as fast as domestic banks, particularly in

banking groups that relied more on wholesale-market funding. Also, Beltratti and

Stulz (2012) analyzed the determinants of bank performance in a cross-section of

large banks from July 2007 to December 2008. They found that better-performing

banks had less leverage, lower returns and less short-term capital market funding

immediately before the crisis. Düwel and Frey (2012) investigate how lending activ-

ities of multinational bank’s affiliates located abroad were affected during the global

financial crisis. Using data of affiliates of the 68 largest German banks in 40 coun-

tries, they find that loan supply was stabilized by affiliates’ own resources, such as

local deposits and profitability.

Among the studies using country-level information, Aisen and Franken (2010)

analyzed the performance of bank credit during the 2008 financial crisis for a sample

of over 80 countries. They found that large credit booms prior to the crisis and low

gross domestic product (GDP) growth of trading partners were among the most

important determinants of the crisis credit slowdown. They also found that countercy-

clical monetary and liquidity policy played a critical role in alleviating bank credit

contraction. In addition, Guo and Stepanyan (2011) found that domestic and foreign

310 Carlos Montoro and Liliana Rojas-Suarez

© 2015 John Wiley & Sons Ltd