Predicting banking crises based on credit, housing and capital booms

Chung‐Hua Shen, Yen‐Hsien Lee and Hao Fang

International Finance, 2020, vol. 23, issue 3, 472-505

Abstract: This study examines how excessive growth in credit, housing and international capital flows, referred to as credit, housing and capital booms, can serve as an early warning signal (EWS) for an impending banking crisis. We examine 56 sample countries that comprise 32 advanced countries and 24 emerging countries. We have two novel results. The first supports the “more booms, stronger warning signal” argument for predicting the onset and persistence of a crisis. The joint consideration of credit, housing and foreign capital booms can be an important EWS for a systemic banking crisis. Second, the lead times for the three booms are different. Capital booms occur 1 year ahead of a crisis, but credit and housing booms occur 2 years ahead.

Date: 2020
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