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

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 quot;risk retrenchmentquot; 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