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Identifying Excessive Credit Growth and Leverage

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  • Alessi, Lucia

Abstract

Excessive credit growth has often been associated with the build-up of systemic risks to financial stability. With the entry into force of a new macro-prudential policy framework in the EU on 1 January 2014, a set of policy instruments has been made available to regulators to address such risks by curbing excessive leverage and/or imposing capital buffers which increase the resilience of the system against potential future losses. This special feature presents an early warning system designed to support macro-prudential policy decisions. Drawing on the historical experience of EU countries, the model aims to assess whether observed leverage dynamics might justify the activation of macro-prudential tools such as the counter-cyclical capital buffer proposed by the Basel Committee on Banking Supervision. The early warning indicators are based on aggregate credit-related, macroeconomic, market and real-estate variables, while the early warning thresholds are derived by considering conditional relationships between individual indicators in a unitary framework. JEL Classification: G00

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  • Alessi, Lucia, 2014. "Identifying Excessive Credit Growth and Leverage," Financial Stability Review, European Central Bank, vol. 1.
    • Handle: RePEc:ecb:fsrart:2014:0001:2
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    More about this item

    Keywords

    capital buffers; excessive credit growth; excessive leverage; financial stability; systemic risk;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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