## THE RISKINESS OF CREDIT ALLOCATION: A SOURCE OF FINANCIAL VULNERABILITY?

## Source details

**Canonical URL:** [THE RISKINESS OF CREDIT ALLOCATION: A SOURCE OF FINANCIAL VULNERABILITY?](https://www.imf.org/-/media/files/publications/gfsr/2018/april/chapter-2/doc/sum2.pdf)

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### Overview
- The chapter examines the evolution of the riskiness of corporate credit allocation—the extent to which riskier firms receive credit relative to less risky ones—its relationship to the strength of credit expansions, and its relevance to financial stability analysis for a large number of advanced and emerging market economies since 1991.
- Focus is on the allocation of credit across firms rather than the aggregate volume of credit or credit growth.
- The analysis uses new measures constructed mostly from firm-level financial statement data that are available in many countries and can be replicated for macro-financial surveillance.

### Key findings
- The riskiness of credit allocation rises during periods of fast credit expansion, especially when loose lending standards or easy financial conditions occur concurrently.
- Globally, the riskiness of credit allocation:
  - increased in the years preceding the global financial crisis and peaked shortly before its onset;
  - declined sharply after the crisis; and
  - rebounded to its historical average in 2016, the latest available year for globally comparable data.
- As financial conditions loosened in 2017, the riskiness of credit allocation might have risen further.
- An increase in the riskiness of credit allocation signals:
  - heightened downside risks to GDP growth; and
  - a higher probability of banking crises and banking sector stress,
  over and above the previously documented signals provided by credit growth.
- Conclusion: a riskier allocation of corporate credit is an independent source of financial vulnerability.

### Implications for financial stability monitoring
- The results highlight the importance of monitoring the riskiness of credit allocation as an integral part of macro-financial surveillance.
- The new measures are simple to compute, rely mostly on firm-level financial statement data, and can be readily replicated.
- Policymakers would benefit from collecting these data in a timely manner.

### Policy and institutional mitigants
- Various policy and institutional settings are associated with a smaller increase in the riskiness of corporate credit allocation during relatively fast credit expansions:
  - a tightening of the macro-prudential policy stance;
  - greater independence of the supervisory authority from banks;
  - a smaller government footprint in the corporate sector; and
  - greater minority shareholder protection.

*Source: Summary (sum2) — IMF chapter PDF*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2018/april/chapter-2/doc/sum2.pdf_