Credit Easing

What is Credit Easing?

Credit easing or qualitative easing is defined as a movement or shift in the composition of the central bank's assets toward less liquid and riskier assets while making no changes in the size of the balance sheet. As a result, resources are redistributed from one set of agents to another.

The central bank conducts qualitative as a monetary policy tool to stabilize economic activity and improve economic welfare. This methodology involves purchasing specific assets to reduce interest rates. In addition, it modifies resource allocation that agents are unable to carry out on their own.

• Credit easing shifts the central bank's asset composition toward less liquid and riskier assets while maintaining the balance sheet size.
• Federal credit easing is a monetary policy used by central banks to increase credit availability in the economy. The banks buy assets such as bonds to provide liquidity during financial crises. 
• This protects the economy from negative interest rates and promotes economic growth.
• According to the International Monetary Fund, qualitative easing causes sharp currency depreciation, high inflation rates, and a considerable decline in economic growth.

Credit Easing Explained

Credit easing is a method that entails purchasing specific assets to lower interest rates and increase liquidity in the target market by a central bank. Acquisition of default private securities is important to strengthen private credit markets. The approach focuses on the balance sheet's asset side as opposed to quantitative easing, which focuses on the liability side. The goal aims to change the size and composition of central bank assets to influence lending conditions for individuals and enterprises.

Financial institutions have enough resources to lend with the implementation of credit easing policies. People borrow from these institutions and spend it. This increases the money supply in the economy. Investments also grow, paving the way for the creation of jobs. When people get jobs and earn money, it also increases the money supply in the economy.

Many central banks had employed credit easing during the global financial crisis . They made these measures initially intending to stabilize the financial system, but they eventually employed them to provide more accommodation near the zero lower bound. It is the situation in which the short-term nominal interest rate is at or close to zero. Liquidity traps form here, restricting the central bank's ability to boost economic growth. Due to this, credit easing has been a wide success, particularly during severe financial instability when it prevented the collapse of financial markets and consequently bigger output losses. It also became useful to alleviate financial risks in emerging and developing countries.

Examples

Given below are two credit easing examples from the past

#1 - Bank of Japan:

In 2001, Japan experienced a mild deflation. As a result, they adopted a series of measures, including federal credit easing. In the second round, the lower long rates were primarily achieved by direct asset purchasing, for the policy duration effect was not employed until the comprehensive easing policy was announced. Then the Bank of Japan (BOJ) began a "comprehensive easing program" in October 2010. The Japanese government gave credit easing a higher priority than the preceding quantitative easing policy.

Japan had soon expanded the asset menu to include low-rated private bonds, ETFs, and J-REITs. The J-REIT dividend yield, in particular, responded strongly, and the J-REIT index bottomed out shortly after BOJ announced the BOJ J-REIT purchase. Later, Long-term interest rates eventually fell due to the policy duration effect. In the first wave of unorthodox policy measures, this was augmented with quantitative easing policy. Lower long rates were mostly accomplished through direct asset purchases in the second round, as BOJ did not use the policy duration impact until the comprehensive easing program was announced.

#2 - The Bank of England:

The Bank of England (BOE) established the "Asset Purchase Facility" in January 2009 after the financial crisis of 2008. It initially bought commercial debt with revenues from the Debt Management Office's short-term Treasury bill sales. This policy measure can be classified as credit easing akin to fiscal operations. The BOE announced its quantitative easing program in March 2009, announcing that it would buy $200 billion in long-term government bonds, or 14% of the nominal GDP, well exceeding the size of the freshly issued 2009 bond. In October 2011, in response to sluggish domestic demand, the BOE increased asset purchases by $75 billion.

The BOE's quantitative easing program differed from the BOJ's in that it targeted non-bank private sector asset acquisitions, such as pension funds, rather than directly expanding bank lending. However, both the credit easing examples demonstrate qualitative measures Used to avert financial crises.

Use of credit easing

According to the IMF(International Monetary Fund), qualitative easing causes sharp currency depreciation, high inflation rates, and a significant drop in economic growth. The use of credit easing hence must be with caution in emerging and developing economies. Instead, countries should enhance financial supervision and regulation and build a robust macro-prudential policy to reduce financial market vulnerabilities. Monetary authorities will be able to take corrective action sooner rather than later due to tighter oversight and regulation.

Credit Easing vs. Quantitative Easing

Credit Easing and Quantitative Easing (QE) are different from each other in the ways given below:

Credit easing	Quantitative easing
The acquisition is for certain assets only and does not aim to reduce reserve levels	Federal monetary policy in which a central bank acquires longer-term securities on the open market
Focuses on increasing the balance sheet's asset side by extending several types of credit	The focus is on the liabilities side by increasing the reserve base to a specific level.
More about the quality of the assets	More about the quantity of the assets

Credit easing has only one goal- to jumpstart the credit markets. The reserve base consists primarily of money and other liquid assets. Both involve the idea of expansion of the central bank's balance sheet. However, a purely QE approach focuses on the level of bank reserves. In the case of joint QE and CE implementation, CE is more effective than QE at raising corporate prices because the price sensitivity of a corporate bond to its purchases is far higher than the price sensitivity of gilt substitute purchases.

Second, CE is more successful in reducing credit spreads, with this benefit becoming larger with time and only being significant for higher-rated bonds. Third, unlike QE, CE can encourage corporate issuance very quickly. In a low-interest-rate environment, CE could be a useful monetary policy instrument. The relative efficacy of CE and QE may be influenced by the quality/risk of private bonds. It is linked to the amount of risk a central bank is willing to take on in adding to its balance sheet.

Frequently Asked Questions (FAQs) 

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