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Credit Fluctuations in Latin America: Stylized Facts and Policy Issues

Credit Fluctuations in Latin America: Stylized Facts and Policy Issues. XXV Meeting of the Latin American Network of Central Banks and Finance Ministries Washington, DC 17-18 May 2007 Augusto de la Torre. Structure of presentation. Stylized facts Depth, volatility, co-movement, funding

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Credit Fluctuations in Latin America: Stylized Facts and Policy Issues

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  1. Credit Fluctuations in Latin America:Stylized Facts and Policy Issues XXV Meeting of the Latin American Network of Central Banks and Finance Ministries Washington, DC 17-18 May 2007 Augusto de la Torre

  2. Structure of presentation • Stylized facts • Depth, volatility, co-movement, funding • Issues • Are banking systems sounder overall? • Are banks moving to fill the access gaps? • Are risks masked by current upswing phase? • New dimensions of prudential policy?

  3. Average credit growth picked up vigorously… Countries: Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, El Salvador, México, Perú. Real Growth: Nominal credit deflated by CPI. Source: IMF International Financial Statistics.

  4. ...but is still low as ratio to GDP Private credit from banks and other credit institutions. Source: Financial Structure Database, World Bank. LAC: Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, El Salvador, México, Perú; OECD: Canada, Germany, Japan, UK, and US; SEA: Indonesia, Korea, Malaysia, Philippines, and Thailand

  5. Local markets for debt finance remain small…

  6. But local corporate bond markets taking off in some countries … like Chile Source: Bank for International Settlements

  7. Mexico… Source: Bank for International Settlements

  8. … and to a much lesser extent, Colombia Source: Bank for International Settlements

  9. Bank credit growth has been quite volatile… Real Growth in Credit to the Private Sector Source: IMF International Financial Statistics.

  10. Bank credit growth has been quite volatile… Real Growth in Bank Credit to the Private Sector Source: IMF International Financial Statistics.

  11. Co-movement of bank credit across countries Real Growth in Credit to the Private Sector, % Source: IMF International Financial Statistics.

  12. Lending capacity and credit Source: IMF International Financial Statistics.

  13. Lending capacity and credit (cont.) Source: IMF International Financial Statistics.

  14. Changing composition of loan portfolio

  15. Are Latin banking systems sounder overall? Selected Latin American Countries: Improvements in Compliance with BCPs between FSAPs Source: IMF-World Bank Financial Sector Assessment Program

  16. Are Latin banking systems sounder? (cont.) • General direction is towards more robust macro and prudential (including exit) frameworks • Trend towards enhanced risk management practices, especially in more internationalized banking systems • Stronger bank financial statements – but not clear how much is due to the cyclical mirage • Contractual and informational environments clearly improving in a number of countries

  17. Are banks filling access gaps? • Mass, homogeneous credit products lead the pack –combination of technology, credit bureaus & competition • Consumer credit – including competition from department stores • Consolidation of microfinance industry • Housing finance on the move, but to a lesser extent • Corporate debt markets – competition from local and international capital markets • Middle segment – varying stories, but positive direction

  18. Are risks masked by current upswing phase? • No room for complacency, even if the menace of sudden stops in capital flows has subsided… • Loanable funds “glut” feeding asset price bubbles • “Good times are bad times for learning” (Gavin & Hausmann) • Scoring methods based on limited data series • Currency mismatches appear contained but unknown extent of duration mismatches

  19. Selected prudential policy challenges • A sensible transition to Basel II • E.g., differential impacts, implementation issues • Compatibility with modern business models and risk management practices • E.g., definition of SME, links between screening tools and capital and provisions policies • Forward-looking, cycle-sensitive provisioning & capital rules • E.g., countercyclical provisions

  20. END

  21. Capital requirements depend on credit rating, with different effects under IRB vs. SA Source: Stephanou and Mendoza (2005)

  22. … and hence can vary greatly in case of SMEs PD: 0.2% (BBB) LGD: 40% PD: 4.5% (B) LGD: 50% Source: BBVA (2004)

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