## The Riskiness of Credit Allocation and Financial Stability

_IMF Working Papers, September 27, 2019_

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**Canonical URL:** [The Riskiness of Credit Allocation and Financial Stability](https://www.imf.org/en/publications/wp/issues/2019/09/27/the-riskiness-of-credit-allocation-and-financial-stability-48670)

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## Bibliographic details
- Authors: Luis Brandao Marques, Qianying Chen, Claudio Raddatz, Jerome Vandenbussche, Peichu Xie
- Published: September 27, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513513775.001

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### Main empirical findings
- Study uses firm-level data for 55 countries over 1991-2016.
- 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.
- The riskiness of credit allocation functions as:
  - a measure of corporate vulnerability, and
  - a measure of investor sentiment.
- Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process.

### Data, scope, and methodology indicators
- Data: firm-level coverage across 55 countries.
- Sample period: 1991-2016.
- Risk measure: Greenwood and Hanson (2013)’s ISS indicator.
- Forecast horizon with predictive power: two to three years ahead.

### Policy-relevant implications
- Monitoring the ISS indicator can provide early warning signals for downside GDP risks and systemic banking crises within a two- to three-year window.
- The dual interpretation of the riskiness measure (corporate vulnerability and investor sentiment) implies policy responses should address both balance-sheet exposures and market-risk-taking incentives.
- The documented misprediction by economic forecasters indicates a need to reassess forecasting models and belief formation mechanisms used for macro-financial risk assessment.

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_Source: https://www.imf.org/en/publications/wp/issues/2019/09/27/the-riskiness-of-credit-allocation-and-financial-stability-48670_