Credit growth, current account, and financial risk: a theoretical discussion

Financial crises are rare events, but credit booms are not. This article develops a theoretical model for the risk of banking crises that can follow credit booms, which is consistent with empirical findings in the literature. Our model finds that crises are more likely to occur if more credit, allocated to low-income households, is coupled with worse current-account imbalances. This finding has clear policy implications useful for risk control in bank management.