The Riskiness of Credit Allocation and Financial Stability
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Summary:
We explore empirically how the time-varying allocation of credit across firms with heterogeneous credit quality matters for financial stability outcomes. Using firm-level data for 55 countries over 1991-2016, we show that the riskiness of credit allocation, captured by Greenwood and Hanson (2013)’s ISS indicator, helps predict downside risks to GDP growth and systemic banking crises, two to three years ahead. Our analysis indicates that the riskiness of credit allocation is both a measure of corporate vulnerability and of investor sentiment. Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process.
Series:
Working Paper No. 2019/207
Subject:
Bank credit Credit Credit booms Financial conditions index Financial crises Financial sector policy and analysis Money
English
Publication Date:
September 27, 2019
ISBN/ISSN:
9781513513775/1018-5941
Stock No:
WPIEA2019207
Pages:
39
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