The Riskiness of Credit Origins and Downside Risks to Economic Activity

Download or read book The Riskiness of Credit Origins and Downside Risks to Economic Activity written by Claudio Raddatz and published by International Monetary Fund. This book was released on 2024-03-29 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.