The Theoretical Correlation Between Bank Credit Expansion and Financial Vulnerability
DOI:
https://doi.org/10.54097/a20yq232Keywords:
Bank credit expansion; Financial vulnerability; Systemic risk; Financial cycles; Macroprudential policy.Abstract
The theoretical link between bank credit expansion and financial vulnerability is explored in this paper. The study shows that during economic booms, banks often over-expand credit scale, which, while promoting economic growth in the short term, also accumulates systemic financial risks. The article first reviews key theoretical frameworks such as Minsky's financial instability hypothesis and the financial accelerator theory and analyzes the micro drivers and macro environmental factors of bank credit expansion, and then constructs theoretical models to reveal the intrinsic linkage mechanism between bank credit expansion and asset price fluctuations, rising leverage ratios, maturity mismatch, and liquidity risk. The study also shows that bank credit expansion alters the balance sheet structure of economic entities, increases the interconnectivity and complexity of the financial system, and thereby raises financial vulnerability. Finally, the article discusses counter-cyclical adjustment mechanisms within the macroprudential policy framework and the role of regulatory tools such as capital adequacy ratios and liquidity coverage ratios in curbing excessive credit expansion, and puts forward policy recommendations such as improving the financial regulatory system, optimizing the credit structure, and strengthening the risk early warning mechanism in the hope of finding a balance between promoting economic growth and maintaining financial stability.
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