Evaluating early warning indicators of banking crises: Satisfying policy requirements

Mathias Drehmann

No 421, BIS Working Papers from Bank for International Settlements

Abstract: Early warning indicators (EWIs) of banking crises should ideally be evaluated on the basis of their performance relative to the macroprudential policy maker's decision problem. We translate several practical aspects of this problem - such as difficulties in assessing the costs and benefits of various policy measures as well as requirements for the timing and stability of EWIs - into statistical evaluation criteria. Applying the criteria to a set of potential EWIs, we find that the credit-to-GDP gap and a new indicator, the debt service ratio (DSR), consistently outperform other measures. The credit-to-GDP gap is the best indicator at longer horizons, whereas the DSR dominates at shorter horizons.

Keywords: EWIs; ROC; area under the curve; macroprudential policy (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-08
New Economics Papers: this item is included in nep-ban and nep-cba
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Citations: View citations in EconPapers (75)

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Related works:
Journal Article: Evaluating early warning indicators of banking crises: Satisfying policy requirements (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:421

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