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Assessing the risk of banking crises - revisited

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  • Claudio Borio
  • Mathias Drehmann

Abstract

Historically, unusually strong increases in credit and asset prices have tended to precede banking crises. Could the current crisis have been anticipated by exploiting this relationship? We explore this question by assessing the out-of-sample performance of leading indicators of banking system distress developed in previous work, also extended to incorporate explicitly property prices. We find that they are fairly successful in providing a signal for several banking systems currently in distress, including that of the United States. We also consider the complications that arise in calibrating the indicators as a result of cross-border exposures, so prominent in the current episode.

Suggested Citation

  • Claudio Borio & Mathias Drehmann, 2009. "Assessing the risk of banking crises - revisited," BIS Quarterly Review, Bank for International Settlements, March.
    • Handle: RePEc:bis:bisqtr:0903e
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    References listed on IDEAS

    as
    1. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123, Central Bank of Chile.
    2. Detken, Carsten & Alessi, Lucia, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
    3. Nikola A. Tarashev, 2008. "An Empirical Evaluation of Structural Credit-Risk Models," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 1-53, March.
    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. 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.
    6. Patrick McGuire & Philip Wooldridge, 2005. "The BIS consolidated banking statistics: structure, uses and recent enhancements," BIS Quarterly Review, Bank for International Settlements, September.
    7. Claudio Borio & Patrick McGuire, 2004. "Twin peaks in equity and housing prices?," BIS Quarterly Review, Bank for International Settlements, March.
    8. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
    9. Asli Demirgüç-Kunt & Ms. Enrica Detragiache, 1997. "The Determinants of Banking Crises: Evidence From Developing and Developed Countries," IMF Working Papers 1997/106, International Monetary Fund.
    10. Mr. Fabian Valencia & Mr. Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 2008/224, International Monetary Fund.
    11. Davis, E. Philip & Karim, Dilruba, 2008. "Comparing early warning systems for banking crises," Journal of Financial Stability, Elsevier, vol. 4(2), pages 89-120, June.
    12. 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.
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    More about this item

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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