## Giving Credit Where Credit is Due: How to Design Policies that Work

_IMF Blog, October 2, 2013_

## Source details

**Canonical URL:** [Giving Credit Where Credit is Due: How to Design Policies that Work](https://www.imf.org/en/blogs/articles/2013/10/02/giving-credit-where-credit-is-due-how-to-design-policies-that-work)

## Other formats

- [Markdown version](/en/blogs/articles/2013/10/02/giving-credit-where-credit-is-due-how-to-design-policies-that-work/index.md)
- [Structured JSON version](/en/blogs/articles/2013/10/02/giving-credit-where-credit-is-due-how-to-design-policies-that-work/index.json)
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## Bibliographic details
- Authors: ErikOppers
- Published: October 2, 2013

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### 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*

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## Content in this bundle

- **GFSR: Chapter 2: Appendix Table 2.1. Policies Implemented to Support Credit Markets**
  - [GFSR: Chapter 2: Appendix Table 2.1. Policies Implemented to Support Credit Markets (Markdown version)](/External/Pubs/FT/GFSR/2013/02/pdf/appendix2_1.pdf.md){rel="alternate" type="text/markdown"}
  - [GFSR: Chapter 2: Appendix Table 2.1. Policies Implemented to Support Credit Markets (PDF)](/External/Pubs/FT/GFSR/2013/02/pdf/appendix2_1.pdf){rel="external" type="application/pdf"}
- **Assessing Policies to Revive Credit Markets**
  - [Assessing Policies to Revive Credit Markets (Markdown version)](/External/Pubs/FT/GFSR/2013/02/pdf/c2.pdf.md){rel="alternate" type="text/markdown"}
  - [Assessing Policies to Revive Credit Markets (PDF)](/External/Pubs/FT/GFSR/2013/02/pdf/c2.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/blogs/articles/2013/10/02/giving-credit-where-credit-is-due-how-to-design-policies-that-work_