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Early warning models of banking crises applicable to non-crisis countries

Author

Listed:
  • Piotr Bańbuła

    (Narodowy Bank Polski, Warsaw School of Economics)

  • Marcin Pietrzak

    (Narodowy Bank Polski)

Abstract

We built Early Warning Models (EWM) for determining the optimal moment for build-up phase of the countercyclical capital buffer. For this purpose we estimate a number of early warning models based on the wide panel of countries. We test many potential variables from the early 1970s until 2014, their combinations, and the stability of their signals. Our setting includes country-specific information without using country-specific effects. This allows for direct application of EWM we obtain to any country, including those that have not experienced a banking crisis. Models with three explanatory variables outperform models with smaller number of variates. The probability of extracting a correct signal from best-performing EWM exceeds 0.9. We find that low levels of VIX tend to precede crises, and this was also true before 2006. This corroborates Minsky’s hypothesis about periodic underestimation of risk in the financial sector. Other variables that generate signals with the highest accuracy and stability are those associated with credit growth, property prices and growth in the contribution of financial sector to GDP. This last finding suggests that substantial increases in measured value added of the financial sector seem to reflect augmented exposure to systemic risk, rather than welfare improvements.

Suggested Citation

  • Piotr Bańbuła & Marcin Pietrzak, 2017. "Early warning models of banking crises applicable to non-crisis countries," NBP Working Papers 257, Narodowy Bank Polski.
  • Handle: RePEc:nbp:nbpmis:257
    Note: 36th International Symposium on Forecasting in Santander; 2nd Policy Research Conference of the ECBN in Ljubljana
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    References listed on IDEAS

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    1. Schüler, Yves Stephan & Hiebert, Paul P. & Peltonen, Tuomas A., 2015. "Characterising the financial cycle: A multivariate and time-varying approach," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112985, Verein für Socialpolitik / German Economic Association.
    2. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
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    Cited by:

    1. Elena Deryugina & Alexey Ponomarenko, 2017. "Real-time determination of credit cycle phases in emerging markets," Bank of Russia Working Paper Series wps17, Bank of Russia.
    2. Łukasz Kurowski, 2021. "Financial cycle − A critical analysis of the methodology for its identification," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(3), pages 99-116.
    3. Marcin Pietrzak, 2021. "Can Financial Soundness Indicators Help Predict Financial Sector Distress?," IMF Working Papers 2021/197, International Monetary Fund.
    4. Iwanicz-Drozdowska Małgorzata & Kurowski Łukasz, 2021. "Keep your friends close and your enemies closer – the case of monetary policy and financial imbalances," German Economic Review, De Gruyter, vol. 22(4), pages 383-414, November.
    5. Elena Deryugina & Alexey Ponomarenko, 2019. "Determination of the Current Phase of the Credit Cycle in Emerging Markets," Russian Journal of Money and Finance, Bank of Russia, vol. 78(2), pages 28-42, June.

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    More about this item

    Keywords

    countercyclical capital buffer; early warning models; financial stability;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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