Early warning models of banking crises applicable to non-crisis countries

Piotr Bańbuła and Marcin Pietrzak
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Piotr Bańbuła: Narodowy Bank Polski, Warsaw School of Economics

No 257, NBP Working Papers from Narodowy Bank Polski

Abstract: We built Early Warning Models (EWM) for determining the optimal moment for build-up phase of the countercyclical capital buffer. For this purpose we estimate a number of early warning models based on the wide panel of countries. We test many potential variables from the early 1970s until 2014, their combinations, and the stability of their signals. Our setting includes country-specific information without using country-specific effects. This allows for direct application of EWM we obtain to any country, including those that have not experienced a banking crisis. Models with three explanatory variables outperform models with smaller number of variates. The probability of extracting a correct signal from best-performing EWM exceeds 0.9. We find that low levels of VIX tend to precede crises, and this was also true before 2006. This corroborates Minsky’s hypothesis about periodic underestimation of risk in the financial sector. Other variables that generate signals with the highest accuracy and stability are those associated with credit growth, property prices and growth in the contribution of financial sector to GDP. This last finding suggests that substantial increases in measured value added of the financial sector seem to reflect augmented exposure to systemic risk, rather than welfare improvements.

Keywords: countercyclical capital buffer; early warning models; financial stability (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 (search for similar items in EconPapers)
Pages: 41
Date: 2017
New Economics Papers: this item is included in nep-ban and nep-mac
Note: 36th International Symposium on Forecasting in Santander; 2nd Policy Research Conference of the ECBN in Ljubljana
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:257

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