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Predicting the likelihood and severity of financial crises over the medium term with a cyclical systemic risk indicator

Author

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  • Detken, Carsten
  • Fahr, Stephan
  • Lang, Jan Hannes

Abstract

This special feature presents a tractable, transparent and broad-based cyclical systemic risk indicator (CSRI) that captures risks stemming from domestic credit, real estate markets, asset prices, external imbalances and cross-country spillovers. The CSRI increases on average several years before the onset of systemic financial crises and its level is highly correlated with measures of crisis severity. Model estimates suggest that high values of the CSRI contain information about large declines in real GDP growth three to four years down the road, as it precedes shifts in the entire distribution of future real GDP growth and especially of its left tail. Given its timely signals, the CSRI is a useful analytical tool for macroprudential policymakers to complement other existing analytical tools. JEL Classification: G00

Suggested Citation

  • Detken, Carsten & Fahr, Stephan & Lang, Jan Hannes, 2018. "Predicting the likelihood and severity of financial crises over the medium term with a cyclical systemic risk indicator," Financial Stability Review, European Central Bank, vol. 1.
    • Handle: RePEc:ecb:fsrart:2018:0001:2
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    File URL: https://www.ecb.europa.eu//pub/financial-stability/fsr/special/html/ecb.fsrart201805_2.en.html
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    Citations

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    Cited by:

    1. Schüler, Yves S. & Hiebert, Paul P. & Peltonen, Tuomas A., 2020. "Financial cycles: Characterisation and real-time measurement," Journal of International Money and Finance, Elsevier, vol. 100(C).
    2. Erhart, Szilard, 2019. "Exposition, climax, denouement: Life-cycle evaluation of the recent financial crisis in the EU by linking the ESRB financial crisis database to the European Commission's Macroeconomic Imbalance Proced," ESRB Working Paper Series 102, European Systemic Risk Board.
    3. Lang, Jan Hannes & Izzo, Cosimo & Fahr, Stephan & Ruzicka, Josef, 2019. "Anticipating the bust: a new cyclical systemic risk indicator to assess the likelihood and severity of financial crises," Occasional Paper Series 219, European Central Bank.
    4. Cabral, Inês & Detken, Carsten & Fell, John & Henry, Jérôme & Hiebert, Paul & Kapadia, Sujit & Pires, Fatima & Salleo, Carmelo & Constâncio, Vítor & Nicoletti Altimari, Sergio, 2019. "Macroprudential policy at the ECB: Institutional framework, strategy, analytical tools and policies," Occasional Paper Series 227, European Central Bank.

    More about this item

    Keywords

    cyclical systemic risk indicator; financial crises;

    JEL classification:

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

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