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The Global Credit Crunch and Foreign Banks' Lending to Emerging Markets: Why Did Latin America Fare Better?

Author/Editor: Kamil, Herman | Rai, Kulwant
Authorized for Distribution: April 1, 2010
Electronic Access: Free Full Text (PDF file size is 3,145KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: The recent global financial turmoil raised questions about the stability of foreign banks' financing to emerging market countries. While foreign banks' lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks' lending to LAC countries-whether extended directly by their headquarters abroad or by their local affiliates in host countries-we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks' lending was channeled in domestic currency. We also show that foreign banks' involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks' lending.
 
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Series: Working Paper No. 10/102
Subject(s): Bank credit | Caribbean | Credit restraint | Cross country analysis | Economic models | Emerging markets | International banking | International banks | International capital markets | Latin America | Liquidity
Author's keyword(s): Banks; global: credit crunch; cross-border lending
 
English  
    Published:   April 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010102   Pages:   33
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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