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Predicting Vulnerabilities in the EU Banking Sector: The Role of Global and Domestic Factors

Author

Listed:
  • Markus Behn

    (European Central Bank)

  • Carsten Detken

    (European Central Bank)

  • Tuomas Peltonen

    (European Systemic Risk Board)

  • Willem Schudel

    (De Nederlandsche Bank)

Abstract

We estimate a multivariate early-warning model to assess the usefulness of private credit and other macrofinancial variables in predicting banking-sector vulnerabilities. Using data for twenty-three European countries, we find that global variables and in particular global credit growth are strong predictors of domestic vulnerabilities. Moreover, domestic credit variables also have high predictive power but should be complemented by other macrofinancial indicators such as house price growth and banking-sector capitalization that play a salient role in predicting vulnerabilities. Our findings can inform decisions on the activation of macroprudential policy measures and suggest that policymakers should take a broad approach in the analytical models that support risk identification and calibration of tools.

Suggested Citation

  • 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.
  • Handle: RePEc:ijc:ijcjou:y:2017:q:4:a:5
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    1. repec:bis:bisifc:46-04 is not listed on IDEAS
    2. Cabral, Inês & Detken, Carsten & Fell, John & Henry, Jérôme & Hiebert, Paul & Kapadia, Sujit & Pires, Fatima & Salleo, Carmelo & Constâncio, Vítor & Nicoletti Altimari, Sergio, 2019. "Macroprudential policy at the ECB: Institutional framework, strategy, analytical tools and policies," Occasional Paper Series 227, European Central Bank.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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