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

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.