## Figure 2.7. The Association between the Size of a Credit Expansion and the Riskiness of Credit Allocation Is Greater When Lending Standards and Financial Conditions Are Looser

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**Canonical URL:** [Figure 2.7. The Association between the Size of a Credit Expansion and the Riskiness of Credit Allocation Is Greater When Lending Standards and Financial Conditions Are Looser](https://www.imf.org/-/media/files/publications/gfsr/2018/april/chapter-2/pdf/figure2-7.pdf)

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### Key finding
- A contemporaneous increase in the change in the credit-to-GDP ratio by one standard deviation has a larger association with the riskiness of credit allocation when lending standards and financial conditions are loose compared with when they are tight.
- Riskiness of credit allocation is measured by four indicators: leverage-, interest coverage ratio–, debt overhang–, and expected default frequency–based measures.

### Methodology and definitions
- The analysis quantifies the range of impact of a one standard deviation increase in the change in the credit-to-GDP ratio on the four measures of the riskiness of credit allocation.
- Lending standards or financial conditions are defined as:
  - loose when equal to the 25th percentile of their distribution;
  - tight when equal to the 75th percentile of their distribution.
- Financial conditions include: financial conditions index, corporate spreads, and VIX.
- VIX = Chicago Board Options Exchange Volatility Index.
- Dark-colored bars indicate effects statistically significant at the 10 percent level or higher for four measures out of four.
- Light-colored bars indicate effects statistically significant at the 10 percent level or higher for one measure out of four.
- See Annex 2.2 for details on methodology.

### Interpretation
- When lending standards or financial conditions are loose (25th percentile), the same-sized credit expansion is associated with a larger increase in the standard deviations of the riskiness of credit allocation than when these conditions are tight (75th percentile).
- Statistical significance is indicated differentially by bar shading to show robustness across the four risk measures.

*Sources: Worldscope; and IMF staff estimates.*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2018/april/chapter-2/pdf/figure2-7.pdf_