The explosion in household borrowing is one example of what can be gleaned from the BIS’ new global database that fills a glaring void in economists’ understanding of the vital role of credit.
While data on credit in the banking sector has been available, accurate data on credit to the non-financial sector, such as households and corporates, has been largely missing, one of the reasons that policy makers utterly failed to spot the warning signs from the build-up of private sector credit that preceded not only the 2088 financial crises, but most other crises that originate in the financial sector
Up to now, data on lending from foreign lenders and non-banks, such as the unregulated yet massive shadow-banking sector, have also been lacking.
To remedy this, statisticians from Swiss-based BIS – known as the central bankers’ bank – collaborated with 40 central banks from advanced and emerging economies to create a public database that includes total credit from all sources.
The building blocks of the new data series are financial accounts, domestic bank credit and cross-border bank credit.
“The new data cover much longer periods and many more countries than nearly all existing total credit series. On average, 45 years of quarterly data are available. For several countries, including Argentina, Germany, Italy and the United States, data start as early as the late 1940s/early 1950s,” BIS said in its latest quarterly review.
In addition to the growth of household borrowing, the data shows how credit has substantially outgrown economic growth in nearly all countries.
In the 1950s, total credit was around 50 percent of Gross Domestic Product in many advanced economies and then grew over the next 20-30 years and started to top 100 percent in the 1960s and 1970s. By the late 1980s, credit boomed in some countries, such as the United States and the United Kingdom.
Other countries, like Germany and Canada, saw modest credit growth while Ireland is the extreme case: In 1995 it had a credit-to-GDP ratio of around 100 percent. Fifteen years later, the ratio peaked at 317 percent and hasn’t dropped much since.
The explosion of credit with accompanying boom-bust episodes is hardly limited to advanced economies. In Thailand, for example, private sector borrowing rose from 12 percent of GDP in 1958 to 75 percent 30 years later, BIS said.
“A rapid expansion in credit then followed that ended in the 1997 Asian crisis. Thailand’s credit-to-GDP ratio nearly halved over the subsequent 13 years, but started to increase again from 2010 onwards,” BIS said.
In general, emerging economies have tracked advanced economies in increasing the level of household credit. In the 1990s, when data are first collected for emerging economies, household borrowing made up 10-20 percent of total credit. Now, it has risen to 30-60 percent, corresponding to the current levels of many advanced economies.