Giving Credit Where Credit is Due: How to Design Policies that Work
IMF Blog, October 2, 2013
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Bibliographic details
- Authors: ErikOppers
- Published: October 2, 2013
Overview of the problem
- Five years into the economic crisis credit is still barely growing, and even declining in many advanced economies.
- Weak credit growth is a major factor holding back the economic recovery.
- Policymakers have tried many policies to jumpstart credit growth, yet banks appear reluctant to lend and it is often unclear whether constraints reflect supply-side reluctance or demand-side inability to borrow.
Key analytical approach
- The Global Financial Stability Report analysis proposes a step-by-step framework:
- First, use data from lending surveys to disentangle general demand and supply factors — a first cut to target policies that differ depending on whether credit supply or credit demand is constrained.
- Second, attempt to pinpoint the specific factors constraining credit growth (more challenging because these factors are not directly observable, interact, and change over time).
- Application of the framework to countries with sufficient data shows:
- No two countries’ issues are alike.
- Constraints are not frozen in time and can shift between demand and supply.
Empirical findings (selected examples)
- In a number of euro area countries:
- Early in the crisis, lackluster demand for loans limited credit growth.
- As the crisis intensified in 2012, banks became reluctant to supply more loans.
- United States:
- Corporate credit was constrained early in the crisis by a substantial tightening of lending standards in banks.
- These constraints have since dissipated (as of the analysis).
- France and Italy:
- Supply constraints have more recently resurfaced in some euro-area countries, including France and Italy.
Costs, risks, and prudential considerations
- The current practice of piling policy upon policy has monetary and non-monetary costs:
- Clear upfront fiscal costs (for example, bank recapitalization).
- Contingent costs (for example, a credit guarantee scheme).
- Obscure costs, including increased risk to financial stability.
- Example of prudential trade-offs:
- Policies encouraging banks to lend to certain sectors (e.g., lowering prudential risk weights for loans to small and medium-sized enterprises) could increase credit risk and potentially inflate nonperforming loans in the future.
- Supervisors may waive some normal risk-mitigation practices to compel banks to take more risk, raising the risk to financial stability as an explicit policy cost to weigh.
Policy guidance and recommendations
- Policies are most effective when they correctly target the underlying factors constraining credit:
- Example sequencing: support demand early in a crisis (for example, by alleviating over-indebtedness in firms and households), then shift to support credit supply later (for example, by cleaning up bank balance sheets).
- Recommendations to improve outcomes:
- Collect better data, including matched borrower-lender data on new loans.
- Use the proposed framework to pinpoint constraints on both the demand and supply sides and track how they change over time.
- Apply the analysis to improve targeting of credit-supporting policies so that better-targeted policies would benefit credit creation at a lower cost to the public purse and to future financial stability.
- Caution against policy overreach:
- The authors provide an inventory of the many policies that 42 countries have implemented and note it is not clear that the net benefits of all policies are favorable.
- Restraint and careful weighing of costs versus benefits are emphasized.
Erik Oppers, October 2, 2013 — Giving Credit Where Credit is Due: How to Design Policies that Work
Content in this bundle
- GFSR: Chapter 2: Appendix Table 2.1. Policies Implemented to Support Credit Markets
- Assessing Policies to Revive Credit Markets