The volume of banks' credit to the Gross Domestic Product (GDP) is used as an indicator to the participation of banking sector in the economy of a country. What is the minimum acceptable ratio of the volume of banks' credit to the GDP?
Well, honestly that's a diffucult one to answer. Some state that the maximum should be 100%. Anything more is above the market demand to produce and realize goods and services which are accounted in GDP. The minimum then must be linked with marginal efficiency of loans granted. If not enough, then the unsatisfied high quality demand for credit would be too high. The problem of measures could be solved by determining the share of informal credit market or the share of commercial credit as a percent of GDP (substitutes for bank credit). Also the correlation of interest rate with credit supply may help. If interest rate is high then supply of credit is rationed.
Well, simplifying one can say that the minimium acceptable ratio (in numbers) is specific to each country.
Hope that the answer would be useful.
Best wishes,
Burakov Dmitry.
The maturity of the financial sector is a key variable. Empirical estimation is likely to show a negative and significant coefficient. For low income countries (LICs) and emerging economies the degree of financial integration (formal and informal sectors) is low vis a vis mature economies.
The speed of transaction approval related to technology, bureaucracy and corruption will impact in negatively. The depth of the financial markets will play an important role as will the openness of the economy.
Regulatory framework is obviously important but the next big variable is the difference between Islamic and non-Islamic financial systems.
If you are not undertaking empirical research my suggestion is to start with 100%, as Burakov, noted in his cogent response, and then argue theoretically pluses and minuses to make additions and deductions. You may not have percentage adjustments that you can make but you should get a good feel for the direction.
A bank's own credit to deposit ratio is highly efficient at 85-90% to the effect that above this percentage because of reserve requirements any further lending is fueled by inter bank borrowing ( borrowing to lend) and this should be the contingency variable for a bank credit to GDP ratio, in directly or as reserve requirement in a national jurisdiction.
However , one wonders why you would look to a minimum level specifically and what you expect to be the limiting factors for the same. As both answers above show the experiment is unlikely to be fettered by a minima but by an efficiency equilibrium of the GDP product from the credit (marginal)
Thank you Dmitry Burakov, Stuart Locke, and Amit Mittal for sharing your views. Your answers are very useful.
In the case of the Asian crisis 1997/1998, one of the indicators to reflect the vulnerability of the Asian countries to the crisis is ratio of total bank loans outstanding to total GDP. Malaysia, for example, has this ratio increased from about 100% in 1993 to more than 170% during the height of the crisis in 2007.
Thank you Salina for providing this fact about the ratio of total loans to GDP in Malaysia during the Asian Crisis.
In order to maintain a safe level of systemic credit risk in the economy, this level is measured not by the value of loans relative to GDP only the quality of the loan portfolio in commercial banks is measured and the capital adequacy ratio determined by banking supervision institutions.
I invite you to the discussion
The issues of risk management in the context of determinants of the global financial crisis are described in the publications:
https://www.researchgate.net/publication/323244391_Determinants_of_credit_risk_management_in_the_context_of_the_development_of_the_derivatives_market_and_the_cyclical_conjuncture_economic_processes
https://www.researchgate.net/publication/327201116_Importance_and_implementation_of_improvement_process_of_prudential_instruments_in_commercial_banks_on_the_background_of_anti-crisis_socio-economic_policy_in_Poland
https://www.researchgate.net/publication/327201132_The_role_and_application_of_Keynesian_macroeconomic_anti-crisis_theories_in_the_context_of_development_of_the_financial_system_in_Poland
https://www.researchgate.net/publication/320074785_THE_SHADOW_BANKING_AS_AN_EXAMPLE_OF_INEFFICIENCIES_IN_THE_FUNCTIONING_OF_THE_BANKING_SYSTEM_IN_POLAND
I invite you to discussion and cooperation. Greetings
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