IDEAS home Printed from https://ideas.repec.org/p/zbw/bofecr/42019.html
   My bibliography  Save this paper

Banking crisis prediction with differenced relative credit

Author

Listed:
  • Kauko, Karlo
  • Tölö, Eero

Abstract

Indicators based on the ratio of credit to GDP have been found to be highly useful predictors of banking crises. We study the difference in this ratio as an early warning indicator. We test a large number of different versions of the differenced credit-to-GDP ratio with data on Euro area members. The optimal time interval of the difference is about two years. Using the moving average of GDP instead of the latest annual data has little impact on forecasting performance. The indicator is a particularly promising choice at relatively short forecasting horizons, such as two or three years.

Suggested Citation

  • Kauko, Karlo & Tölö, Eero, 2019. "Banking crisis prediction with differenced relative credit," BoF Economics Review 4/2019, Bank of Finland.
    • Handle: RePEc:zbw:bofecr:42019
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/212997/1/bofer-2019-04.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Nektarios Aslanidis & Stilianos Fountas, 2014. "Is real GDP stationary? Evidence from a panel unit root test with cross-sectional dependence and historical data," Empirical Economics, Springer, vol. 46(1), pages 101-108, February.
    2. Alessi, Lucia & Detken, Carsten, 2018. "Identifying excessive credit growth and leverage," Journal of Financial Stability, Elsevier, vol. 35(C), pages 215-225.
    3. Hélène Rey, 2016. "International Channels of Transmission of Monetary Policy and the Mundellian Trilemma," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(1), pages 6-35, May.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-1061, April.
    6. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    7. Detken, Carsten & Weeken, Olaf & Alessi, Lucia & Bonfim, Diana & Boucinha, Miguel & Castro, Christian & Frontczak, Sebastian & Giordana, Gaston & Giese, Julia & Wildmann, Nadya & Kakes, Jan & Klaus, B, 2014. "Operationalising the countercyclical capital buffer: indicator selection, threshold identification and calibration options," ESRB Occasional Paper Series 5, European Systemic Risk Board.
    8. Lo Duca, Marco & Koban, Anne & Basten, Marisa & Bengtsson, Elias & Klaus, Benjamin & Kusmierczyk, Piotr & Lang, Jan Hannes & Detken, Carsten & Peltonen, Tuomas, 2017. "A new database for financial crises in European countries," ESRB Occasional Paper Series 13, European Systemic Risk Board.
    9. Verona, Fabio, 2016. "Time–frequency characterization of the U.S. financial cycle," Economics Letters, Elsevier, vol. 144(C), pages 75-79.
    10. Antunes, António & Bonfim, Diana & Monteiro, Nuno & Rodrigues, Paulo M.M., 2018. "Forecasting banking crises with dynamic panel probit models," International Journal of Forecasting, Elsevier, vol. 34(2), pages 249-275.
    11. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, March.
    12. Andreas Groth & Michael Ghil & Stéphane Hallegatte & Patrice Dumas, 2015. "The role of oscillatory modes in US business cycles," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2015(1), pages 63-81.
    13. Timotej Jagric, 2003. "Business Cycles in Central and East European Countries," Eastern European Economics, Taylor & Francis Journals, vol. 41(5), pages 6-23, January.
    14. Rafael Repullo & Jesús Saurina, 2011. "The Countercyclical Capital Buffer of Basel III: A Critical Assessment," Working Papers wp2011_1102, CEMFI, revised Jun 2011.
    15. Eero Tölö & Helinä Laakkonen & Simo Kalatie, 2018. "Evaluating Indicators for Use in Setting the Countercyclical Capital Buffer," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 51-112, March.
    16. Kauko, Karlo, 2012. "Triggers for countercyclical capital buffers," MPRA Paper 85692, University Library of Munich, Germany.
    17. repec:zbw:bofrdp:2016_014 is not listed on IDEAS
    18. Mathias Drehmann & Claudio Borio & Leonardo Gambacorta & Gabriel Jiminez & Carlos Trucharte, 2010. "Countercyclical capital buffers: exploring options," BIS Working Papers 317, Bank for International Settlements.
    19. Christian Castro & Ángel Estrada & Jorge Martínez, 2016. "The countercyclical capital buffer in spain: an analysis of key guiding indicators," Working Papers 1601, Banco de España.
    20. Claudio Borio & Philip Lowe, 2002. "Assessing the risk of banking crises," BIS Quarterly Review, Bank for International Settlements, December.
    21. Carsten Detken & Olaf Weeken & Lucia Alessi & Diana Bonfim & Miguel M. Boucinha & Christian Castro & Sebastian Frontczak & Gaston Giordana & Julia Giese & Nadya Jahn & Jan Kakes & Benjamin Klaus & Jan, 2014. "Operationalising the countercyclical capital buffer: indicator selection, threshold identification and calibration options," ESRB Occasional Paper Series 05, European Systemic Risk Board.
    22. Schüler, Yves S. & Peltonen, Tuomas A. & Hiebert, Paul, 2017. "Coherent financial cycles for G-7 countries: Why extending credit can be an asset," ESRB Working Paper Series 43, European Systemic Risk Board.
    23. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tölö, Eero, 2020. "Predicting systemic financial crises with recurrent neural networks," Journal of Financial Stability, Elsevier, vol. 49(C).
    2. Hartwig, Benny & Meinerding, Christoph & Schüler, Yves S., 2021. "Identifying indicators of systemic risk," Journal of International Economics, Elsevier, vol. 132(C).
    3. 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).
    4. 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.
    5. Jorge E. Galán & Javier Mencía, 2021. "Model-based indicators for the identification of cyclical systemic risk," Empirical Economics, Springer, vol. 61(6), pages 3179-3211, December.
    6. Christian Castro & Ángel Estrada & Jorge Martínez, 2016. "The countercyclical capital buffer in spain: an analysis of key guiding indicators," Working Papers 1601, Banco de España.
    7. Tihana Skrinjaric, 2023. "Leading indicators of financial stress in Croatia: a regime switching approach," Public Sector Economics, Institute of Public Finance, vol. 47(2), pages 205-232.
    8. Kauko, Karlo & Tölö, Eero, 2019. "On the long-run calibration of the credit-to-GDP gap as a banking crisis predictor," Bank of Finland Research Discussion Papers 6/2019, Bank of Finland.
    9. Jorge E. Galán & Javier Mencía, 2018. "Empirical assessment of alternative structural methods for identifying cyclical systemic risk in Europe," Working Papers 1825, Banco de España.
    10. repec:zbw:bofrdp:2019_006 is not listed on IDEAS
    11. Alessi, Lucia & Detken, Carsten, 2018. "Identifying excessive credit growth and leverage," Journal of Financial Stability, Elsevier, vol. 35(C), pages 215-225.
    12. Markus Behn & Carsten Detken & Tuomas Peltonen & Willem Schudel, 2017. "Predicting Vulnerabilities in the EU Banking Sector: The Role of Global and Domestic Factors," International Journal of Central Banking, International Journal of Central Banking, vol. 13(4), pages 147-189, December.
    13. Jorge E. Galán, 2019. "Measuring credit-to-gdp gaps. The hodrick-prescott filter revisited," Occasional Papers 1906, Banco de España.
    14. Kalatie, Simo & Laakkonen, Helinä & Tölö, Eero, 2015. "Indicators used in setting the countercyclical capital buffer," Bank of Finland Research Discussion Papers 8/2015, Bank of Finland.
    15. de Moraes, Claudio Oliveira & Costa, Ágata, 2023. "Credit behavior and financial stability in an emerging economy," Economic Systems, Elsevier, vol. 47(2).
    16. Kalatie, Simo & Laakkonen, Helinä & Tölö, Eero, 2015. "Indicators used in setting the countercyclical capital buffer," Research Discussion Papers 8/2015, Bank of Finland.
    17. repec:zbw:bofrdp:2015_008 is not listed on IDEAS
    18. Tran Huynh & Silke Uebelmesser, 2022. "Early warning models for systemic banking crises: can political indicators improve prediction?," Jena Economics Research Papers 2022-007, Friedrich-Schiller-University Jena.
    19. Eero Tölö & Helinä Laakkonen & Simo Kalatie, 2018. "Evaluating Indicators for Use in Setting the Countercyclical Capital Buffer," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 51-112, March.
    20. repec:zbw:bofrdp:2019_014 is not listed on IDEAS
    21. Beutel, Johannes & List, Sophia & von Schweinitz, Gregor, 2018. "An evaluation of early warning models for systemic banking crises: Does machine learning improve predictions?," Discussion Papers 48/2018, Deutsche Bundesbank.
    22. Schudel, Willem, 2015. "Shifting horizons: assessing macro trends before, during, and following systemic banking crises," Working Paper Series 1766, European Central Bank.
    23. Jon Danielsson & Marcela Valenzuela & Ilknur Zer, 2018. "Learning from History: Volatility and Financial Crises," Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2774-2805.

    More about this item

    Keywords

    banking crises; early warning indicators; differenced relative credit; credit intensity; countercyclical capital buffer;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bofecr:42019. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.