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According to standard measures, the current expansion fails to represent a credit boom, but would be if this trend continues. This is particularly the case for the economies of Brazil and Peru.

High commodity prices and strong capital credits continue to drive the price of some assets in many countries in Latin America. While not yet standard indicators they are suggestive of a credit boom, if they continue at this rate of expansion they could create vulnerabilities.

It is recommended that monetary policy will help scale the expansion rate, but also continuing to adapt micro and macro-prudential policies, and strengthening information systems and monitoring to detect systemic risks. Bank credit is growing rapidly in many countries of the region, raising concerns that an excessive expansion in the long run may not be sustainable.

The growth of credit to the real private sector averaged 10% -15% in late 2010, although it remains high even below 20% -25% seen before the global financial crisis. According to standard measures, the current expansion fails to represent a credit boom, but would be if this trend continues. This is particularly the case for the economies of Brazil and Peru.

The expansion of credit has been widespread by sector, although mortgage is experiencing a boom in particular. In Brazil, for example, the annual growth of real mortgage is over 40%, reaching a level more than three times higher than that observed in early 2007.

While the mortgage market is still small in many countries of the region, and credit growth is a genuine deepening of financial intermediation, the rapid expansion of credit is normally associated with some easing of credit standards and increased future delinquency. This growth of mortgage credit has bolstered the price of housing in the region, which has grown at an average real rate of 10% per year since 2005, slightly above the rate in emerging Asia.

Credit remains largely funded by bank deposit, although the recent expansion has been accompanied by an increase of external indebtedness of banks, particularly the segment of medium and small banks. While external liabilities remain low, the average is no more than 10% of total liabilities; authorities must remain vigilant, since the obligations with non-residents tend to be a source of funding especially volatile.

In addition, the abundant access to foreign credit and the low cost has allowed a growing number of Latin American companies to finance directly with foreign capital. Companies in the region placed or issued debt abroad for about $150 billion in 2010, well above pre-crisis levels, which were already high.

A good understanding of the maturity profile and composition of corporate debt is vital, particularly because many companies also use the local financial system to finance operations. It is crucial to avoid that borrowing outside the financial system creates a systemic risk. How to avoid another credit boom? The main policy challenge is to avoid excessive credit expansion and the formation of bubbles in asset prices that eventually could lead to financial collapse.

To do this, and avoid macroeconomic policies to encourage domestic demand in times of excessive dynamism, we should continue to consider macro-prudential instruments such as increasing reserve requirements, stricter limitation on foreign borrowing, and the application of more stringent capital requirements for certain types of loans. At the same time, it will be important to strengthen surveillance of the financial system, an area in which significant improvements were observed during the last decade.

Finally, better information on the entire mortgage market (where credit has been growing rapidly) and corporate debt is vital. Indicators should be developed in house prices, closely monitoring the relationship between construction companies and the banking sector, and in some cases, a reduction of the loan-value (a measure which has generally been successful in the emerging markets of Asia).