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The Riskiness of Credit Allocation and Financial Stability

Author

Listed:
  • Qianying Chen
  • Mr. Luis Brandao Marques
  • Mr. Jerome Vandenbussche
  • Claudio Raddatz
  • Peichu Xie

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.

Suggested Citation

  • Qianying Chen & Mr. Luis Brandao Marques & Mr. Jerome Vandenbussche & Claudio Raddatz & Peichu Xie, 2019. "The Riskiness of Credit Allocation and Financial Stability," IMF Working Papers 2019/207, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2019/207
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    References listed on IDEAS

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