Credit Creation What are the risks/challenges associated with these powerful trends
Bigger the financial system, it is better
More trading and liquidity is always good
• Increase in the financial system assets- Upsizing
partly explained by loans granted to
households and corporate Credit is granted for purchase
of items
• Increase in the financial trading activity
Increased Price
• Growth in securitized credit
Demand for more credit
• Development of credit derivatives- because of expectation inc of
enabled create credit exposure far larger prices
than loans to real economic borrowers
Suppliers of credit experience
less loss
Inc supply of loans- Attracts
more loans
Economy grows
and Downsizing risk
Banks are in loss- Credit is not
granted for purchasing of
items
Decreased Prices
Low demand for more credit
because of expectations of
prices to falls down
Financial institutions are less
willing to give credit
Decrease supply of loans
Economy slows down
 Fundamental questions which is posed in the article about
credit creation

How confident we can be about :

Quantity of band credit supplied and credit demanded will be socially optimal ?
Allocation of that credit to different sectors or activities are socially optimal ?

Functions of bank

Create credit and extend to different sectors