By Sam van de Schootbrugge 28-04-2021
In: deep-dives | Credit

How Costly Are Contractions In Bank Credit?

(6 min read)
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A raft of prudential regulations sprung up to protect financial stability in the aftermath of the 2008 Global Financial Crisis. Yet at the onset of the 2020 COVID pandemic, these policies were relaxed to avert a contraction in bank credit. This is because supply-driven credit contractions are costly in terms of economic activity – a new IMF working paper examines just how costly.

The paper considers the relative dynamics of bank credit and economic activity throughout credit cycles, using event study techniques. In particular, they quantify the impact of episodes in which credit growth contracted and GDP growth expanded (referred to as credit reversals) on economic activity at different points of the credit cycle.

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