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Why have credit variables taken centre stage in predicting systemic banking crises?

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  • Audit, Dooneshsingh
  • Alam, Nafis

Abstract

In this paper, we investigate the growing prominence of credit in the systemic banking crisis prediction literature. Through the application of the signal extraction model and multivariate probit panel regression, we evaluate the performance of the absolute change in credit-to-GDP ratio as an early warning system indicator of systemic banking crises. The findings reveal that the accelerated financialisation of economies turns the excess supply of credit into generating conditions that increase the likelihood of a systemic banking crisis. The findings also indicate that even with persistently low and stable inflation, systemic risk could gradually accumulate through an excessive supply of credit.

Suggested Citation

  • Audit, Dooneshsingh & Alam, Nafis, 2022. "Why have credit variables taken centre stage in predicting systemic banking crises?," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(1).
    • Handle: RePEc:eee:lajcba:v:3:y:2022:i:1:s2666143822000023
    DOI: 10.1016/j.latcb.2022.100047
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    More about this item

    Keywords

    Credit-to-GDP ratio; Systemic banking crisis; Early warning system; Financialisation;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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