How did Latin America survive the global credit crunch?

Back in 2008, after the Lehman collapse, bank lending to emerging markets contracted sharply. But while bank lending was retreating in Eastern Europe and emerging markets in Asia, it shrank comparatively little in Latin America. Why?

A partial answer can be found below, courtesy of a new working paper from the IMF.

[Share of foreign banks' lending through their local affiliates, 2008 (in percent of total)]

When talking about foreign bank lending it's important to distinguish between cross-border flows (when a foreign bank lends to another country from its headquarters abroad) and lending by foreign banks' local affiliates. The graph above shows that unlike other emerging market regions, foreign bank lending in Latin America is mostly conducted through their local branches.

This type of lending is much more stable than cross-border flows, in large part because loans by foreign banks' local affiliates are mostly financed by local deposits. These types of loans are also more likely to be denominated in domestic currency, which as can be seen below, turns out to be the case in Latin America.

[Share of foreign banks' lending denominated in domestic currency, 2008 (in percent of total)]

But there's another piece of the puzzle. The largest foreign banks in Latin America, Santander, Scotiabank and BBVA, to name a few, did not have large exposures to Eastern European markets, which made it less likely for tough conditions over there to affect lending in Latin America.

So in sum, it does indeed seem like Latin America is atoning for its original sin, and if foreign bank flows are to be taken advantage of, countries should promote the type that takes place through their local affiliates.