IMF Working Papers

The Riskiness of Credit Allocation and Financial Stability

By Luis Brandão-Marques, Qianying Chen, Claudio Raddatz, Jerome Vandenbussche, Peichu Xie

September 27, 2019

Download PDF

Preview Citation

Format: Chicago

Luis Brandão-Marques, Qianying Chen, Claudio Raddatz, Jerome Vandenbussche, and Peichu Xie. The Riskiness of Credit Allocation and Financial Stability, (USA: International Monetary Fund, 2019) accessed December 2, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Bank credit, Credit, Credit booms, Financial conditions index, Financial crises, Financial sector policy and analysis, Money

Keywords: Bank credit, Corporate debt, Countercyclical credit policy, Credit, Credit allocation, Credit boom dummy, Credit booms, Credit expansion, Credit quality, Credit risk, Credit series, Credit spread, Credit-to-GDP ratio, Financial conditions index, Financial crises, Financial leverage, Financial vulnerability, Global, IFS credit data, Macro-financial stability, Real GDP, Supply shift, WP

Publication Details

  • Pages:

    39

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/207

  • Stock No:

    WPIEA2019207

  • ISBN:

    9781513513775

  • ISSN:

    1018-5941