Does the Credit-to-GDP Gap Predict Financial Crisis in Nigeria?

Peters. O Ihejirika ()

International Journal of Social and Administrative Sciences, 2020, vol. 5, issue 2, 109-126

Abstract: This study investigated the Credit-to-GDP Gap as an Early Warning Indicator (EWI) of banking/systemic crisis in Nigeria. Annual data on domestic credit to the private sector as a ratio of gross domestic product for the period 1981 to 2019 was used. The credit-to-GDP gap was calculated using the one-sided Hodrick-Prescott filter with Lamda set at 1600. The performance was analyzed using a couple of interrelated methods - the signal approach and the area under the receiver operating characteristic (AU-ROC) curve as well as graphical analysis for visualization. The results indicate that Credit-to-GDP Gap performs poorly in Nigeria with an area under the receiver operating characteristic (AU-ROC) curve of 63.68%. Further, this study shows that the Basel Committee on Banking Supervision’s (BCBS) recommendation that the prudential authorities set lower thresholds (L) at 2% above trend may not work for Nigeria as this study suggests an optimal threshold of 0.98%. This result emphasizes the need for prudential authorities to employ informed judgement in setting thresholds with a view to activating the countercyclical capital buffer on time before crisis occurs.

Keywords: Credit-to-GDP gap; Systemic/banking crisis. Early warning indicator; Signal analysis; AUROC curve; Nigeria (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
https://archive.aessweb.com/index.php/5051/article/view/94/184 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:asi:ijosaa:v:5:y:2020:i:2:p:109-126:id:94

Access Statistics for this article

More articles in International Journal of Social and Administrative Sciences from Asian Economic and Social Society
Bibliographic data for series maintained by Robert Allen ().