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Early warning models for systemic banking crises: Can political indicators improve prediction?

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  • Huynh, Tran
  • Uebelmesser, Silke

Abstract

This study provides a novel attempt to assess whether an early warning system (EWS) for systemic banking crises can produce better predictions when political indicators are used alongside traditional macro-financial indicators. Based on a dataset covering 32 advanced economies for the period 1975–2017, we show that the inclusion of political indicators significantly improves the predictive performance of the model. Our results suggest several channels, related to the role of constitutions and policy predictability, through which the political environment could affect the stability of a banking system. In particular, we find that majority governments, left-wing governments, and a longer time in office of the executive party are negatively correlated with systemic risk. This is robust to a large number of different specifications. Furthermore, we find that long-established institutional systems and plurality electoral systems (compared to proportional representation systems) are associated with a lower likelihood of crises. At the same time, crises are more likely when the incumbent government represents a nationalist platform.

Suggested Citation

  • Huynh, Tran & Uebelmesser, Silke, 2024. "Early warning models for systemic banking crises: Can political indicators improve prediction?," European Journal of Political Economy, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:poleco:v:81:y:2024:i:c:s0176268023001283
    DOI: 10.1016/j.ejpoleco.2023.102484
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    More about this item

    Keywords

    Early warning systems; Systemic banking crises; Vulnerability; Political indicators; Macro-financial indicators;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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