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. 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. 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. 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. 5 Local markets for debt finance remain small … Source: BIS, IMF International Financial Statistics, S&P Emerging Markets Database, World Bank.

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

7. 7 Mexico … Source: Bank for International Settlements

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

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

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

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

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

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

14. 14 Changing composition of loan portfolio

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

16. 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. 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. 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. 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. 20 END

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

22. 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)