Latin America: Vulnerabilities Under Construction?

Credit Growth in Latin America: Financial Development or Credit Boom?

“…A number of papers have recently studied whether the period of rapid credit growth in Latin America could build up financial vulnerabilities in the region (e.g. Cubeddu et al, 2012;IMF, 2011b;IMF, 2012a). This paper adds to this literature by providing a detailed breakdown of the credit development on market segments, sectors, currencies, maturities, and bank origin.…”

“…Indeed, as mentioned above the property prices have historically played an important role in banking crises. However, data on housing prices is only available in a minor sub-sample of Latin American countries (Cubeddu, Tovar and Tsounta, 2012), why we are precluded from including them in our analysis here. Nevertheless, Cubeddu, Tovar and Tsounta (2012) analyze the housing markets in Peru, Mexico, Chile and Colombia using a VECM model and find no imminent misalignment in prices, although the authors note that misalignments could emerge if current trends persists.…”

“…Indeed, a period of sound financial deepening might entail a period of temporary high credit growth. Second, a related point is that the technique does correct for structural breaks that might arise due to policy reforms or other structural changes that could affect the degree of financial sophistication (Cubeddu et al, 2012). Third, on the technical level revisions to the credit-to-GDP gap can be substantial (Edge and Meisenzahl, 2011) and the HP-filter is known to have end point problems (Mise et al, 2005).…”