Credit policies, once fashionable among central banks and finance ministries but withdrawn in the latter part of the 20th century, should be reintroduced to help with challenges such as the low-carbon transition according to a new paper.
Such tools are used to influence the allocation of lending by banks, either by restricting or encouraging the flow of finance to certain sectors.
A key argument used against credit policies – that they have a distortive effect and make the allocation of credit less efficient – focuses on the wrong metric, the authors argue. Instead of looking at the performance of the banking sector, they should be judged against the broader socio-economic objectives that credit policies are intended to deliver.
The paper, published in Socio Economic Review, finds that the decline of credit policies worldwide is associated with a lower share of lending to non-financial firms, and a banking system increasingly geared towards financing the purchase of existing assets such as property.
Proactive credit policies may be needed to ensure sufficient finance for major economic challenges, such as the transition to a zero-carbon economy, and could also help to reduce financial instability, the authors suggest. But they note that green credit policies have largely been confined to emerging market economies.
The China Banking and Insurance Regulatory Commission and People’s Bank of China (PBoC) used a credit policy known as window guidance to support sustainable objectives for over a decade until 2019. Although that policy is no longer in operation, the PBoC recently unveiled a new green lending facility, following a similar announcement by the Bank of Japan.
The paper notes that while there is some concern that the use of credit policies creates room for the politicisation of lending decisions, this should be balanced against the reality of a liberalised market, where private lenders essentially focus on pursuing different forms of rent extraction.
This page was last updated November 10, 2021
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