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

ECONOMIA: The Journal of the Latin American and Caribbean Economic Association, Fall 2004

40 Pages Posted: 25 Oct 2004 Last revised: 26 Dec 2008

See all articles by Thomas F. Cosimano

Thomas F. Cosimano

University of Notre Dame; International Monetary Fund

Ralph Chami

International Monetary Fund (IMF)

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Multiple version iconThere are 2 versions of this paper

Abstract

Latin American countries have experienced serious slowdowns in credit growth since the early 1990s, and have also adopted the Basel Accord risk-weighted minimum capital requirements during this period. Drawing from a unique data set comprising 2,893 banks and 152 countries over the period 1987 to 2000, we test whether these two phenomena were related, both for a sample of over 90 countries, as well as for a subsample of countries from Latin America and the Caribbean. We find that, on average, both bank capitalization and lending activities increased after Basel in Latin America. Consequently, Basel did not seem to lead to an overall credit decline. However, we do find evidence that loan growth became more sensitive to some risk factors, consistent with a "risk retrenchment" hypothesis. Our study also suggests that the upcoming adoption of Basel II might cause banks to become more sensitive to a wider range of risk factors, and also lead to a greater procyclicality of credit. Furthermore, from the full sample of countries, we find that the increase in credit growth after Basel becomes progressively smaller the more financially developed the country. However, this effect is weakened considerably when we focus on Latin America.

Keywords: Capital requirements, Basel Accord, Capital channel, Latin America

JEL Classification: E5, G2

Suggested Citation

Cosimano, Thomas F. and Chami, Ralph and Barajas, Adolfo, Did the Basel Accord Cause a Credit Slowdown in Latin America?. ECONOMIA: The Journal of the Latin American and Caribbean Economic Association, Fall 2004. Available at SSRN: https://ssrn.com/abstract=607983

Thomas F. Cosimano

University of Notre Dame ( email )

513 W. Broad #704
Falls Church, VA 22046
United States
574-807-4876 (Phone)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ralph Chami

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6039 (Phone)
202-623-6068 (Fax)

Adolfo Barajas (Contact Author)

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

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