Did the Basel Accord Cause a Credit Slowdown in Latin America?
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Economía 5.1 (2004) 135-182

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Did the Basel Accord Cause a Credit Slowdown in Latin America?


Many countries throughout the world have experienced significant credit slowdowns in recent years, and researchers have set out to determine the possible causes. One strand of this literature examines postcrisis cases of a marked decline in credit in Scandinavia and East Asia. Some of the more dramatic cases covered include Finland, which lost over 44 percentage points of gross domestic product (GDP) in the banking system's credit to the private sector over the 1992-97 period, and Thailand, which experienced a drop of about 36 percentage points in 1998-2000.1 Such experiences triggered concern over whether these declines were merely a reflection of depressed economic activity, or whether they resulted from a diminished capacity or increased unwillingness of banks to lend. The latter phenomenon (that is, a supply-driven credit decline) is termed a credit crunch. A number of studies set out to test whether credit crunches had occurred, by estimating a system of supply and demand functions for bank credit and allowing the observed quantity to be determined by the short end of the market.2 In most of these studies, the findings were more in line with a credit demand contraction than a credit crunch. [End Page 135]

A second strand of the credit crunch literature focuses on the experience of the United States in the early 1990s, when credit growth not only declined but was suspected of contributing to the economy's slow recovery. The same aggregate measure used above indicates that the U.S. banking system reduced credit by 13 percentage points of GDP between 1990 and 1993. To the extent that bank credit was not easily substitutable with other sources of finance, such a credit contraction could have contributed to a decline in economic activity. Several studies address these issues and explore whether the credit tightness could be linked to the adoption of the Basel Accord's risk-based minimum capital requirements toward the end of the 1980s. Bernanke and Lown, who analyze the reasons for credit tightness in the early 1990s, find evidence that a so-called capital crunch had occurred and that it played a procyclical role in the subsequent recession.3 They conclude, however, that the deteriorating financial condition of firms (that is, the balance sheet channel), rather than the depressed supply of credit from capital-constrained banks (that is, the bank lending channel), may have been the major contributor to the ensuing recession. Berger and Udell look at the impact of lagged fundamentals on loan growth; they find evidence that the adoption of the Basel Accord had a negative impact on loan growth overall, but they argue that the evidence does not clearly point toward an increased sensitivity of loan expansion to different measures of risk.4 Peek and Rosengren find evidence supporting a credit crunch; a bank's initial capital ratio at the time the country adopted risk-based capital requirements played a key role in determining its subsequent lending activity.5

Several countries in Latin America and the Caribbean have also experienced large credit slowdowns in the past twenty years. As table 1 illustrates, declines in bank credit took place throughout the region, with many occurring in the 1990s. Many cases featured double-digit reductions in the ratio of bank credit to GDP, with a drop of nearly 16 percentage points in Bolivia and 20 percentage points in Mexico. On an average annual basis, most declines ranged around 1-3 percentage points. A notable exception is the recent experience in Panama, which saw a 16 percentage point decline over the last two years. Furthermore, recent credit [End Page 136] growth has tended to be sluggish even in cases in which the declines ended before 2003.6

 Credit Slowdowns in Latin America
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Table 1
Credit Slowdowns in Latin America

Barajas and Steiner looked at eight of these Latin American cases (namely, Argentina, Bolivia, Brazil, Chile, Colombia, Mexico...