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Evaluating early warning indicators of banking crises: Satisfying policy requirements

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  • Mathias Drehmann

Abstract

Early warning indicators (EWIs) of banking crises should ideally be evaluated on the basis of their performance relative to the macroprudential policy maker's decision problem. We translate several practical aspects of this problem - such as difficulties in assessing the costs and benefits of various policy measures as well as requirements for the timing and stability of EWIs - into statistical evaluation criteria. Applying the criteria to a set of potential EWIs, we find that the credit-to-GDP gap and a new indicator, the debt service ratio (DSR), consistently outperform other measures. The credit-to-GDP gap is the best indicator at longer horizons, whereas the DSR dominates at shorter horizons.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 421.

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Length: 37 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:bis:biswps:421

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Keywords: EWIs; ROC; area under the curve; macroprudential policy;

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Cited by:
  1. Andrew Berg & Enrico Berkes & Catherine A. Pattillo & Andrea Presbitero & Yorbol Yakhshilikov, 2014. "Assessing Bias and Accuracy in the World Bank-IMF's Debt Sustainability Framework for Low-Income Countries," IMF Working Papers 14/48, International Monetary Fund.
  2. Diana Bonfim & Nuno Monteiro, 2013. "The implementation of the countercyclical capital buffer: rules versus discretion," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  3. Behn, Markus & Detken, Carsten & Peltonen, Tuomas A. & Schudel, Willem, 2013. "Setting countercyclical capital buffers based on early warning models: would it work?," Working Paper Series, European Central Bank 1604, European Central Bank.

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