We examine the association between country-level sectoral credit dynamics and bank-level systemic risk. Contrary to most studies that only delve into broad-based credit development, we focus on sectoral credit allocation, specifically to households versus firms, and to the tradable versus non-tradable sector. Based on a global sample of 417 banks across 46 countries over the period 2000–2014, we find that lending to households and corporates in the non-tradable sector is positively associated with system-wide distress. Conversely, credit granted to corporations and to the tradable sector negatively correlates with banks’ systemic behavior. Sub-sample analysis shows that risks from household lending are transmitted through small banks, whereas non-tradable lending is transmitted through large banks. Moreover, banks located in emerging market and developing economies exhibit enhanced systemic behavior against the backdrop of higher household and tradable credit growth, whereas credit to non-tradable sector firms tends to increase systemic fragility of banks in advanced economies. By the same token, the results differ for the pre-crisis and crisis/post-crisis periods, with the full sample findings driven by the crisis/post-crisis timespan. The findings emphasize critical policy implications considering sectoral heterogeneity, bank size, country of incorporation of banks, and periods of financial tranquillity/instability. Authorities can intervene in the most systemic economic sectors and limit the accumulation of “bad credit” and preserve systemic resilience, while still benefiting from the positive impact of “good credit” on growth and financial stability.
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