What Is Credit Easing?
Credit easing is a group of unconventional monetary policy tools used by central banks to make credit and liquidity more readily available in times of financial stress. Credit easing happens when central banks purchase private assets such as corporate bonds.
Credit easing aims to increase the resources available to financial institutions during stressful times.
- Credit easing is an unconventional monetary policy tool allowing central banks to purchase non-Treasury assets.
- The goal of credit easing is to stabilize lending markets by having the central bank act as buyer of last resort for certain non-government debt securities.
- Similar to quantitative easing, credit easing differs somewhat in that credit easing focuses on the quality of central bank assets held while QE looks to quantity.
Credit Easing Explained
Credit easing entails an expansion of the asset side of the Federal Reserve's balance sheet. This focus on assets differentiates credit easing from other unconventional monetary policy tools, although several of these methods involve the expansion of the central bank's balance sheet, quantitative easing focused on the liability side of the Bank of Japan's balance sheet.
In response to the Great Recession, the Federal Reserve engaged in credit easing by purchasing large sums of Treasuries and mortgage backed securities (MBS). As liquidity to the banking sector increased, interest rates fell, making money cheaper for institutions. The large scale credit easing by the Fed eventually put a halt to the banking disaster.
Credit easing also attempts to stabilize asset prices and reduce volatility. Once the Federal Reserve began its credit easing during the financial crisis, the equity market collapse steadied and price volatility fell.
Credit Easing vs. Quantitative Easing
Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank's balance sheet.
Credit easing is often used synonymously with quantitative easing. However, Ben Bernanke, the renowned monetary policy expert and former chairman of the Federal Reserve, draws a sharp distinction between quantitative easing and credit easing: "Credit easing," he remarks, "resembles quantitative easing in one respect: It involves an expansion of the central bank's balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental." Bernanke also points out that credit easing focuses on "the mix of loans and securities" held by a central bank.
Despite these semantics, even Bernanke admits that the difference in the two approaches "does not reflect any doctrinal disagreement." Economists and the media have largely disregarded the distinction between the two terms by dubbing any effort by a central bank to purchase assets and inflate its balance sheet as quantitative easing.