Credit Reversals

IMF Working Papers, April 23, 2021

Source details

The paper studies episodes in which aggregate bank credit contracts alongside expanding economic activity—credit reversals.
Using data for 179 countries during 1960‒2017, the paper finds that reversals are a relatively common phenomenon—on average, they occur every five years.
By comparison, banking crises take place every eight years on average.
Credit reversals and banking crises appear related:
- Reversals become more likely in the aftermath of banking crises.
- The likelihood of crises drops following reversals.
In terms of foregone economic activity, reversals are shown to be very costly, at about two-thirds of the costs of banking crises after taking into account their relative frequencies.

Average frequency of credit reversals: every five years.
Average frequency of banking crises: every eight years.
Relative cost: reversals cost about two-thirds of the costs of banking crises when accounting for relative frequencies.