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

IMF Working Papers, February 1, 2005

Source details

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

Drawing from a unique data set comprising 2,893 banks and 152 countries over the period 1987 to 2000, the paper tests whether the adoption of the Basel Accord by Latin American and Caribbean countries was responsible for the serious slowdowns in credit growth experienced by these countries.
On average, both bank capitalization and lending activities in Latin America increased after Basel.
Consequently, Basel did not seem to lead to an overall credit decline.
The authors find evidence that loan growth became more sensitive to some risk factors after Basel.
The study suggests that the upcoming adoption of Basel II might cause greater procyclicality of credit.

Data set: 2,893 banks and 152 countries.
Time period covered: 1987 to 2000.
Regional focus: Latin American and Caribbean countries (in comparison to other countries in the panel).

Subject: Bank credit, Banking, Basel Core Principles, Capital adequacy requirements, Loans
Keywords: bank behavior, bank risk variable, credit crunch, loan growth, loan-asset ratio, means test, WP

Basel adoption did not produce an overall decline in credit in Latin America according to this study’s average effects.
Increased sensitivity of loan growth to certain risk factors implies that regulatory changes can alter the transmission of risk to bank lending behavior.
The authors flag that adoption of Basel II could increase the procyclicality of credit, suggesting policymakers should consider mechanisms to mitigate potential procyclical effects when implementing new regulatory frameworks.

IMF Working Paper by Thomas F. Cosimano, Ralph Chami, and Adolfo Barajas (February 1, 2005).