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Banking Crisis Prediction with Differenced Relative Credit

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  • Karlo Kauko
  • Eero Tölö

Abstract

Indicators based on the ratio of credit to GDP have been found to be highly useful predictors of banking crises. Differences in this ratio seem a highly promising early warning indicator. We test a large number of slightly 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 over several years rather than the latest annual data is shown to have little impact on forecasting performance. The proposed indicator demonstrates particular promise at relatively short forecasting horizons (2 – 3 years).

Suggested Citation

  • Karlo Kauko & Eero Tölö, 2019. "Banking Crisis Prediction with Differenced Relative Credit," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot GmbH, Berlin, vol. 65(4), pages 277-297.
    • Handle: RePEc:dah:aeqaeq:v65_y2019_i4_q4_p277-297
    DOI: 10.3790/aeq.65.4.277
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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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