DEFINITION of 'Credit Easing'

Credit easing is a group of 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 the stressful times. 

BREAKING DOWN 'Credit Easing'

Credit easing entails an expansion and focus on the asset side of the Federal Reserve's balance sheet. This, according to Ben Bernanke, differentiates credit easing from the policy of quantitative easing used by Japan's central bank from 2001 to 2006. Although both 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. 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 will also stable asset prices and volatility. Once the Federal Reserve began its credit easing during the financial crisis, the equity market collapse steadied and price volatility fell. 

 

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