Default, Credit Growth, and Asset Prices

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper uses a Merton-type estimate of the probability of default (PoD) for the main banks in a sample of Organization for Economic Cooperation and Development and middle-income countries as a proxy for the fragility of their banking systems. Based on theory and stylized facts, the paper explores a range of financial and real variables that explain such PoDs across time. We find property price fluctuations and bank credit to be important explanatory factors. There is two-way interaction between these variables and a clearer relationship when the variables are entered as a deviation from trend. The lag structure between such developments and PoDs is long and varies widely across countries. The paper assesses the implications of these findings for economic policy.

Bank credit and the housing market in OECD countries

“…Miller et al (2011) found that the impact of the 'collateral' channel is stronger than 'wealth' effects in the US. 12 Although the causality between credit and housing prices goes in both directions, the strongest effect is the one that emerges from housing prices to credit (Hofman, 2003;Goodhart et al, 2006). 13 The effect of disposable income on credit is uncertain (Nobili and Zollino, 2012).…”

House prices, money, credit, and the macroeconomy

“…He finds that property prices are an important determinant of the long-term trend development in credit over this period and that increases in property prices have a highly significant positive effect on credit dynamics. 8 Hofmann (2003), Goodhart and Hofmann (2004a) and Goodhart et al (2006) analyse the relationship between bank lending and property prices based on a multivariate empirical framework and find that causality does in fact seem to go in both directions, but that the effect of property prices on credit appears to be stronger than the effect of credit on property prices. Gerlach and Peng (2005) analyse the link between property prices and credit in Hong Kong and find that causality runs from property prices to lending, rather than conversely.…”

The role of macroeconomic determinants in credit risk measurement in transition country: Estonian example

“…It simply means that banks start 'selling the loans'. Borio et al (2001), Davis and Zhu (2004), and Goodhart et al (2005) state that the rapid growth of indebtedness follows the rapid growth of the price level of the real estate market. It makes possible the acquisition of new financing more widely available.…”