The Riskiness of Credit Allocation and Financial Stability

40 Pages Posted: 8 Nov 2019

See all articles by Luis Brandao-Marques

Luis Brandao-Marques

International Monetary Fund - Monetary and Capital Markets Department

Qianying Chen

International Monetary Fund (IMF) - Monetary and Capital Markets Department

Claudio Raddatz

International Monetary Fund (IMF)

Jerome Vandenbussche

International Monetary Fund (IMF)

Peichu Xie

International Monetary Fund (IMF)

Date Written: September 2019

Abstract

We explore empirically how the time-varying allocation of credit across firms with heterogeneous credit quality matters for financial stability outcomes. Using firm-level data for 55 countries over 1991-2016, we show that 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. Our analysis indicates that the riskiness of credit allocation is both a measure of corporate vulnerability and of investor sentiment. Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process.

Keywords: Real effective exchange rates, Financial crises, Economic conditions, Credit booms, Credit expansion, Corporate debt, credit allocation, credit risk, financial leverage, financial vulnerability, financial crises, macro-financial stability, WP, riskiness, decile, ISS, country level, debt issuance

JEL Classification: E44, E47, G01, G21, G23, G28, G32, E52, E01, F16,

Suggested Citation

Brandao-Marques, Luis and Chen, Qianying and Raddatz, Claudio and Vandenbussche, Jerome and Xie, Peichu, The Riskiness of Credit Allocation and Financial Stability (September 2019). IMF Working Paper No. 19/207. Available at SSRN: https://ssrn.com/abstract=3482290

Luis Brandao-Marques (Contact Author)

International Monetary Fund - Monetary and Capital Markets Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States
2026238308 (Phone)
2025898308 (Fax)

Qianying Chen

International Monetary Fund (IMF) - Monetary and Capital Markets Department ( email )

United States
1-202-623-6633 (Phone)

Claudio Raddatz

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jerome Vandenbussche

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Peichu Xie

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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