Rapid Credit Growth: Boon or Boom-Bust?

Abstract

Episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises. This paper presents the findings of a comprehensive event study focusing on 99 credit booms. Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies. In particular, domestic policy rates were below trend during the pre-peak phase of credit booms and likely fuelled macroeconomic and financial imbalances. For emerging economies, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity) are virtually flat during these periods. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies.

Where the Wild Things Are: Measuring Systemic Risk through Investor Sentiment

“…Under this hypothesis, there should be a causal relationship between the and the incidence of global crises. To test this hypothesis, I use the list of global financial crises reported in Elekdağ and Wu (2011) and create a crisis index, , by counting the number of banking or currency crises in each year.…”

“…Excessive credit growth has historically been a strong predictor of financial crises (Elekdağ and Wu, 2011;Schularick and Taylor, 2012). In response to growing evidence, Basel III seeks to discourage destabilizing credit booms through the establishment of a countercyclical capital buffer (CCB) requirement (Basel Committee on Banking Supervision,…”

The Identification of the Build-up of Financial Imbalances from Macro-Prudential Policy Perspective

“…Despite the fact that the financial imbalances identification method that was proposed by [11] and will be used in this research is most often used by scientists, there are some limitations of this method. [12] note that this method has at least two limitations. First, there can be situations when both nominal credit and GDP are falling and yet the credit-to-GDP ratio increases because GDP falls more rapidly.…”

“…There are many scientific publications ( [3]- [12]) analyzing the build-up of financial imbalances in the developed and developing countries, however, a number of empirical studies investigating the financial imbalances in three Baltic countries is quite limited. Some scientists [7] analyzed a large sample of countries, however, they did not excluded the Q4 there has been observed the build-up of the financial imbalances in real estate market when housing prices were over the long-term equilibrium level.…”

“…Most of scientists [3]- [12] focus on the identification of the financial imbalances in the developed countries, however, a number of the scientific publications analyzing these issues in the Baltic States is quite limited. The analysis of the scientific literature revealed that only scientists [13]- [22] have analyzed the financial imbalances in the Baltic and other Central and Eastern European (CEE) countries.…”