Identifying indicators of systemic risk

We operationalize the definition of systemic risk provided by the IMF, BIS, and FSB and derive a two-stage hierarchical hypothesis test to identify indicators of systemic risk. Applying the framework to a set of candidate variables for 45 countries, we detect two credit-based financial cycle variables that, by and large, pass our test. However, for many other variables, including the Basel III credit-to-GDP gap, we find that elevated systemic risk is signaled by high values in some countries and by low values in others. More generally, our results suggest that, ex ante, systemic risk can be clearly identified only once the turning points of indicators have been observed.