The Riskiness of Credit Origins and Downside Risks to Economic Activity

53 Pages Posted: 4 Apr 2024

See all articles by Claudio E. Raddatz

Claudio E. Raddatz

University of Chile, School of Economics and Business

Dulani Seneviratne

International Monetary Fund (IMF)

Jerome Vandenbussche

International Monetary Fund (IMF)

Peichu Xie

Peking University

Yizhi Xu

International Monetary Fund (IMF)

Abstract

We construct a country-level indicator capturing the extent to which aggregate bank credit growth originates from banks with a relatively riskier profile, which we label the Riskiness of Credit Origins (RCO). Using bank-level data from 42 countries over more than two decades, we document that RCO variations over time are a feature of the credit cycle. RCO also robustly predicts downside risks to GDP growth even after controlling for aggregate bank credit growth and financial conditions, among other determinants. RCO’s explanatory power comes from its relationship with asset quality, investor and banking sector sentiment, as well as future banking sector resilience. Our findings underscore the importance of bank heterogeneity for theories of the credit cycle and financial stability policy.

Keywords: Private sector debt, credit growth, credit origin, credit cycle, bank soundness, credit risk, financial vulnerability, investor sentiment, financial stability

JEL Classification: E44, E47, G01, G21, G28

Suggested Citation

Raddatz, Claudio E. and Seneviratne, Dulani and Vandenbussche, Jerome and Xie, Peichu and Xu, Yizhi, The Riskiness of Credit Origins and Downside Risks to Economic Activity. IMF Working Paper No. 2024/072, Available at SSRN: https://ssrn.com/abstract=4782820 or http://dx.doi.org/10.5089/9798400272158.001

Claudio E. Raddatz (Contact Author)

University of Chile, School of Economics and Business ( email )

Diagonal Paraguay 257, Of. 1206
Santiago, R. Metropolitana 7520421
Chile

HOME PAGE: http://alum.mit.edu/www/craddatz

Dulani Seneviratne

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

Peking University ( email )

Yizhi Xu

International Monetary Fund (IMF) ( email )

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
21
Abstract Views
131
PlumX Metrics