## Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability

_IMF Working Papers, August 20, 2021_

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**Canonical URL:** [Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability](https://www.imf.org/en/publications/wp/issues/2021/08/20/loose-financial-conditions-rising-leverage-and-risks-to-macro-financial-stability-464336)

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## Bibliographic details
- Authors: Adolfo Barajas, Woon Gyu Choi, Ken Zhi Gan, Pierre Guérin, Samuel Mann, Manchun Wang, Yizhi Xu
- Published: August 20, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513591483.001

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### Overview
- Authors: Adolfo Barajas, Woon Gyu Choi, Ken Zhi Gan, Pierre Guérin, Samuel Mann, Manchun Wang, Yizhi Xu
- Date: August 20, 2021
- Short description: After a steady increase following the global financial crisis, private nonfinancial sector leverage rose further during the COVID-19 on the back of easy financial conditions induced by unprecedented policy support. The paper investigates empirical relationships between increased leverage, financial conditions, and macro-financial stability in a sample of major advanced and emerging market economies.

### Key findings
- Loose financial conditions contribute to leverage buildups.
- There is an intertemporal tradeoff:
  - Financial stability risk is lessened in the near term.
  - Financial stability risk is exacerbated in the medium term.
- The intertemporal tradeoff is amplified under certain conditions:
  - During credit booms.
  - When debt service burdens are particularly high.
  - When the share of foreign currency debt is high in emerging markets.
- Selected macroprudential tools can arrest leverage buildups and mitigate the intertemporal tradeoff.

### Amplifiers and vulnerabilities
- Credit booms amplify the tradeoff between near-term easing of stability risk and medium-term exacerbation.
- High debt service burdens increase medium-term macro-financial stability risk.
- A high share of foreign currency debt in emerging markets raises vulnerability and amplifies the tradeoff.

### Policy implications and recommendations
- Recognize the intertemporal nature of loose financial conditions: near-term stability gains may mask medium-term risks.
- Use selected macroprudential tools proactively to:
  - Arrest leverage buildups.
  - Mitigate the intertemporal tradeoff between near-term and medium-term financial stability.
- Pay special attention to episodes of credit booms, elevated debt service burdens, and high shares of foreign currency debt in emerging markets when designing macroprudential responses.

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2021/08/20/loose-financial-conditions-rising-leverage-and-risks-to-macro-financial-stability-464336_