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Banking crisis prediction with differenced relative credit

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  • Kauko, Karlo
  • Tölö, Eero

Abstract

Indicators based on the ratio of credit to GDP have been found to be highly useful predictors of banking crises. We study the difference in this ratio as an early warning indicator. We test a large number of different versions of the differenced credit-to-GDP ratio with data on Euro area members. The optimal time interval of the difference is about two years. Using the moving average of GDP instead of the latest annual data has little impact on forecasting performance. The indicator is a particularly promising choice at relatively short forecasting horizons, such as two or three years.

Suggested Citation

  • Kauko, Karlo & Tölö, Eero, 2019. "Banking crisis prediction with differenced relative credit," BoF Economics Review 4/2019, Bank of Finland.
    • Handle: RePEc:zbw:bofecr:42019
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    References listed on IDEAS

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    More about this item

    Keywords

    banking crises; early warning indicators; differenced relative credit; credit intensity; countercyclical capital buffer;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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