1. 1 Credit Growth: Enhanced Access or Higher Risk by Giovanni Majnoni IADB “ XXIII Meeting of the Latin American Network of Central Banks and Finance Ministries ” Washington, April 20-21, 2006

2. 2 Source: IMF WEO, 2006 Credit grows faster than in other regions while interest rates have broadly converged 1

3. 3 Source: IMF WEO, 2006 Consumption remains strong while current account surplus and capital inflows increase liquidity 2

4. 4 No surprise that retail credit grows faster: consumer credit growth is generalized … 3

5. 5 … while housing finance growth is not uniform 4

6. 6 The private sector has resorted to self-financing and foreign lending but not to commercial credit 5

7. 7 Consumer lending is still small when compared to East Asia … 6

8. 8 … leaving room for further substantial growth (income inequality may represent a constraint) … 7

9. 9 … but rapid growth in the supply of new products may generate new risks 8

10. 10 Severity: write-offs close to 30% in 2003 and 2004 Causes: Lack of adequate credit information (only positive info) on individuals Imported models of credit scoring that did not screen high risk borrowers Use for cash advances and not for transactions High lending rates The impact on retail credit was mitigated by the conservative LTV ratios in housing finance (between 60% and 70%) that have avoided a spillover. A credit card crisis in Korea in 2003 highlighted weaknesses in risk management and governance 9

11. 11 Loans of different size require different risk management strategies 10 Credit losses distribution in Chile for loans above and below US 21,000

12. 12 + + + CR Volume = f(i, risk governance, risk assessment) + - - CR Risk = f(i, risk governance, risk assessment) Policy implication : Increased access to credit and bank solvency share a common reform and policy agenda. Main lesson: credit growth translates into credit risk if risk management and governance is poor 11

13. 13 Limited attention to risk governance is a major shortcoming of Basel II: 1. Quantitative aspects of risk management (measurement of RWA) 2. Inadequate attention to capital requirements at a consolidated level (consolidation stops at the bank holding group not at the ultimate owners); 3.Cursory mention to internal risk control. The new Basel Core Principles and BCBS documents on bank governance address previous issues Bring risk management and governance into the policy agenda 12

14. 14 From compliance with Basel to country’s specific strategies of risk management and governance. From FSAP based “assessments” to a “Roadmap to credit risk management and governance” defined along four key dimensions: 1. Banks credit risk management 2. Banks credit risk governance 3. Risk based supervision 4. Credit information infrastructures (legal and technical) Toward an integrated approach to risk management and governance 13

15. 15 Thank You gmajnoni@worldbank.org 14