Credit Stagnation in Latin America

This study examines a troubling phenomenon occurring recently in several Latin American economies: a marked slowdown in bank credit to the private sector. Based on the study of five countries (Argentina, Bolivia, Colombia, Peru, and Mexico), we first document the magnitude of the problem, asking how severe and prolonged has the slowdown been and how this behavior compare with the past? Second, we explore how commercial bank balance sheets have changed in order to understand whether the credit slowdown is merely a reflection of a slowdown in bank deposits or whether the asset side has changed. Third, drawing on the disequilibrium approach used in recent studies of credit slowdowns in the aftermath of financial crises in East Asia (Ghosh & Ghosh, 1999) and in Finland (Pazarbasioglu, 1997), we investigate in a systematic manner the possible causes for the slowdown in Colombia, Mexico, and Peru. Among supply factors, we explore whether banks have experienced a squeeze in loanable funds, or have become more cautious in their lending in response to deteriorating macroeconomic conditions, past accumulated credit risk and/or tightened regulation. Likewise, demand for credit may have contracted as a result of slowing economic activity or the emergence of substitutes for bank credit, such as financing from abroad. Finally, we decompose the estimated shifts in supply to identify major differences in the expansion and slowdown phases for each country and across countries. JEL Classification Number: G21