Casu, Barbara and Clare, Andrew and Saleh, Nashwa (2011): Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries.
Download (943kB) | Preview
Using a signal extraction framework and looking at OECD countries over a 30 year period this paper attempts to identify a number of variables significant in predicting near-crises as a pre-cursor to full-fledged crises. These include growth in pension assets as an indicator for the development of liquidity bubbles, equity market dividend yields as a proxy for corporate balance sheet health, banking sector assets growth and relative size to GDP. We also study the development of asset price bubbles through an equity markets indicator and a house price indicator. Finally we also look at a banking sector funding stability indicator and liquidity indicator on a micro-level. Simultaneously, a dynamic research design improves on previous static set-ups and enhances the model predictive power and applicability to different time periods.
This paper shows that as early as 2004, clear signals were being given for a number of countries that vulnerabilities were building up with out-of-sample performance better than in-sample in terms of overall noise to signal ratios, showing a significant improvement compared to earlier work. EWS design has significant implications for financial stability and financial regulation.
|Item Type:||MPRA Paper|
|Original Title:||Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries|
|Keywords:||financial crises, financial fragility, liquidity bubbles, early warning signals, financial stability, financial regulation|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Nashwa Saleh|
|Date Deposited:||02. Mar 2012 20:04|
|Last Modified:||13. Sep 2015 08:48|
Abiad, Abdul, Enrica Detragiache, and Thierry Tressel. “A New Database of Financial Reforms.” IMF Working Paper. WP/08/266, 2008.
Abiad, Abdul. “Early Warning Systems: A Survey and a Regime-Switching Approach.” IMF Working Paper WP/03/32, 2003.
Alessi, Lucia (European Central Bank) and Carsten Dektken (European Central Bank), ‘Real Time’ Early Warning Indicators for Costly Asset Price Boom/Bust Cycles: A Role for Global Liquidity?. CREI (Universitat Pompeu Fabra), Barcelona, 21-23 November 2008.
Andreou, Irène, Gilles Dufrénot, Alain Sand and and Aleksandra Zdzienicka . “A Forewarning Indicator System for Financial Crises: The Case of Six Central and Eastern European Countries (April 2007).”
Barrell, Ray and E. Philip Davis. “The Evolution of the Financial Crisis of 2007/2008.” National Institute Economic Review no. 206, October 2008. Barrell, Ray. “The Great Crash of 2008.” National Institute Economic Review no. 206, October 2008.
Bell, J and Darren Pain. Leading Indicator Models of Banking Crises - A Critical Review.” Financial Stability Review. Bank of England, issue 9, article 3, pp. 113-29, 2000.
Berg, Andrew, Eduardo Borensztein, and Catherine Pattillo. “Assessing Early Warning Systems: How Have They Worked in Practice?” IMF Working Paper. WP/04/52, 2004.
Bhattacharyay, Biswa N. “Towards a Macro-Prudential Leading Indicators Framework for Monitoring Financial Vulnerability (August 2003).” CESifo Working Paper Series No. 1015.
Bordo, M.., B. Eichengreen, D. Klingebiel and M. S. Marinez-Peria. “Financial Crises: Lessons from the last 120 Years.” Economic Policy. April, 2001.
Borio, Claudio and Mathias Drehmann. “Assessing the Risk of Banking Crises Revisited.” BIS Quarterly Review, March 2009.
Borio, Claudio and P. McGuire. “The Macroprudential Approach to Regulation and Supervision: Where Do We Stand?” Kredittilsynet special 20th anniversary volume, 1z of, 2006.
Borio, Claudio and P. McGuire. “Twin Peaks in Equity and Housing Prices?” BIS Quarterly Review, March 2004.
Borio, Claudio and Philip Lowe. “Assessing the Risk of Banking Crises.” BIS Quarterly Review, December 2002.
Boss, Michael , Gerald Krenn, Claus Puhr and Martin Summer, “Systemic Risk Monitor: A Model for Systemic Risk Analysis and Stress Testing of Banking Systems.” Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 11, pp. 83-95, June, 2006.
Breuer, J.B. “An Exegesis on Currency and Banking Crises.” Journal of Economic Surveys, vol. 18, pp 293-320, 2004.
Bussiere, Mathieu and Marcel Fratzscher. “Towards a New Early Warning System for Financial Crises.” ECB Working Paper No. 145, May 2002.
Caprio, Gerard Jr., and Daniela Klingebiel. , Episodes of Systemic and Borderline Financial Crises, World Bank Research Data Set, 2003.
Caprio, Gerard Jr., and Klingebiel., “Bank Insolvencies: Cross-country Experience.” World Bank Policy Research Working Paper No. 1620, 1996.
Chan, Jorge A. and Toni Gravelle. “The END: A New Indicator of Financial and Non-Financial Corporate Sector Vulnerability.” IMF Working Paper, WP/05/231, December 2005.
Chang, Roberto and A. Velasco. “Financial Crises in Emerging Markets: A Canonical Model.” NBER Working Paper 6606, Boston, MA, 1998.
Chen, Yu-Fu, Michael Funke and Kadri Mannasoo. “Extracting Leading Indicators of Bank Fragility from Market Prices. “CESifo Working Paper No. 1647, Category 6, Monetary Policy and International Finance, 2006.
Cihak, Martin and Klaus Shaeck. “How Well Do Aggregate Bank Ratios Identify Banking Problems?.” IMF Working Paper, WP/07/275, 2007.
Cihak, Martin. “Systemic Loss: A Measure of Financial Stability.” Czech Journal of Economics & Finance, 57 (1-2), 2007.
Claessens, Stijn, Daniela Klingebiel and Luc Laeven. “Resolving Systemic Financial Crises: Policies and Institutions.” World Bank Policy Research Working Paper 3377, August 2004.
Curry, Timothy J., Peter J. Elmer and Gary S. Fissel. “Can Equity Markets Help Predict Bank Failure?.” FDIC Working Paper, July 2004.
Danielsson, Jon. “The First Casualty of the Crisis: Iceland.” VOX, November, 2008.
Davis E. Philip and Dilruba Karim. “Could Early Warning Systems Have Helped to Predict the Sub-Prime Crisis?”. National Institute Economic Review, 2008.
Davis, E. Philip and Dilruba Karim. “Comparing Early Warning Systems for Banking Crises.” Journal of Financial Stability, vol. 4, June 2008. pp 89-120.
Demirguc-Kunt, Asli and Enrica Detragiache, and Poonam Gupta. “Inside the Crisis: An Empirical Analysis of Banking Systems in Distress.” IMF Working Paper No. 00/156. , 2000.
Demirguc-Kunt, Asli, and Enrica Detragiache. “The Determinants of Banking Crises in Developing and Developed Countries.” IMF Staff Papers, vol. 45, pp 81-109, 1998.
Demirgüc-Kunt, Asli and Enrica Detragiache. “Cross-Country Empirical Studies of Systemic Bank Distress: A Survey.” IMF Working Paper WP/05/96, 2005.
Demirgüc-Kunt, Asli and Enrica Detragiache. “Monitoring Banking Sector Fragility: A Multivariate Logit Approach with An Application to the 1996/97 Banking Crises.” World Bank Economic Review, vol. 14, No. 2, pp. 287-307, 2000.
Drees, Burkhard and Ceyla Pazarbasioglu. “The Nordic Banking Crisis: Pitfalls in Financial Liberalization.” IMF Working Paper, 1995.
Duttagupta, Rupa and Paul Cashin. “The Anatomy of Banking Crises.” IMF Working Paper, WP/08/93, April 2008.
“Early Warning System Models: The Next Steps Forward.” IMF Global Financial Stability Report, Chapter IV, 2002.
Eichengreen, B. and C. Arteta. “Banking Crises in Emerging Markets: Presumptions and Evidence.” Centre for International and Development Economic Research Working Paper, C00-115, August, 2000.
Gaytan, Alejandro and Christian A. Johnson. “A Review of the Literature on Early Warning Systems for Banking Crises.” Working Paper No. 183. Central Bank of Chile, 2002
Ghosh, Swati and Atish Ghosh. “Structural Vulnerabilities and Currency Crises.” IMF Working Paper, 2002.
Gieve, John. Seven Lessons from the Last Three Years. Speech at LSE, February 19, 2009.
Godlewski, Christophe J. “Regulatory and Institutional Determinants of Credit Risk Taking and a Bank’s Default in Emerging Market Economies: A Two-Step Approach.” Journal of Emerging Market Finance, 2006.
Gonzalez-Hermosillo, Brenda. “Determinants of Ex-Ante Banking System Distress: A Macro-Micro Empirical Exploration of Some Recent Episodes.” IMF Working Paper, wp/99/33, 1999.
Gropp, Reint, Jukka Vesala and Giuseppe Vulpes. “Equity and Bond Market Signals as Leading Indicators of Bank Fragility.” Journal of Money, Credit and Banking, 2004.
Gunther, Jeffrey W., Robert R. Moore. “Early Warning Models in Real Time.” Journal of Banking and Finance, 27, 2003.
Haldane, Andrew, Simon Hall and Silvia Pezzini. “A New Approach to Assessing Risks to Financial Stability.” Bank of England, Financial Stability Paper No. 2, April 2007.
Hardy, Daniel C. and Ceyla Pazarbasioglu. “Leading Indicators of Banking Crises: Was Asia Different?” IMF Working Paper, WP/98/91, 1998.
Hasmann, R. and L. Rojas Suarez (eds). The Roots of Banking Crises: The Macroeconomic Context, Banking Crises in Latin America. Baltimore: Johns Hopkins University Press, pp 27-63, 1996.
Hawkings, John and Marc Klau. “Measuring Potential Vulnerabilities in Emerging Market Economies.” BIS Working Paper no. 91, October 2000.
Herrera, Santiago and Conrado A. Garcia Corado. “A User’s Guide to an Early Warning System for Macroeconomic Vulnerability in Latin American Countries (November 1999).” World Bank Policy Research Working Paper No. 2233. 1999.
Honohan, Patrick. “Banking System Failures in Developing and Transition Countries: Diagnosis and Prediction.” BIS Working Paper 39, January 1997.
Honohan, Patrick. “Risk Management and the Costs of the Banking Crises.” National Institute Economic Review no. 206, October 2008.
Jagtiani, Julapa, James Kolaris, Catharine Lemieux and Hwan Shin. “Early Warning Models for Bank Supervision: Simpler Could be Better.” Federal Reserve Bank of Chicago, Economic Perspectives, Q3, 2003.
Johnston, R. Barry, Jingqing Chair and Liliana Schumacher. “Assessing Financial System Vulnerabilities.” IMF Working Paper, WP/00/76, April 2000.
Kaminsky, G. L. and C. M. Reinhart. “The Twin Crises: The Causes of Banking and Balance-of-payments Problems.” American Economic Review, vol. 89 (3), pp 473-500, 1999.
Kaminsky, Graciela L. “Currency and Banking Crises: The Early Warnings of Distress.” International Finance Discussion Paper No. 629, October 1998.
Kaufman, George G. “Macro-Economic Stability and Bank Soundness.” University of Chicago Presentation at the Conference on Financial Reform and Stability, India, sponsored by the IMF, 2001.
King, Thomas B., Daniel A. Nuxoll, and Timothy J. Yeager. “Are the Causes of Bank Distress Changing? Can Researchers Keep Up?.” Federal Reserve Bank of St. Louis Journal, January/February 2006.
Laeven, Luc A. and Valencia, Fabian V. “Systemic Banking Crises: A New Database,” IMF Working Papers, 2008.
Lall, S., R. Cardarelli and S. Elekdag. “Financial Stress and Economic Downturns.” IMF WEO October, 2008, ch. 4.
Lestano, Jan Jacobs and Gerard H. Kuper, “Indicators of Financial Crises do Work! An Early-Warning System for Six Asian Countries, Department of Economics, University of Groningen.” Paper provided by EconWPA in its series International Finance with number 0409001, 2003.
Logan, Andrew. “G10 Seminar on Systems for Assessing Banking System Risk.” Bank of England FSR, June 2000.
Logan, Andrew. “The United Kingdom’s Small Banks’ Crisis of the early 1990s: what were the leading indicators of failure?” Bank of England Working Paper, 2001.
Manasse, Paolo and Nouriel Roubini “‘Rules of Thumb’ for Sovereign Debt Crises.” IMF Working Paper, 2005.
Manasse, Paolo, Nouriel Roubini and Axel Schimmelpfennig. “Predicting Sovereign Debt Crises.” IMF Working Paper, 2003.
Mishkin, Frederic S. “The Household Balance Sheet and the Great Depression.” The Journal of Economic History, vol. 38, no. 4 (December 1978) pp. 918-37.
Mulder, Christian Roberto Perrelli and Manuel Rocha. “The Role of Corporate, Legal and Macroeconomic Balance Sheet Indicators in Crisis Detection and Prevention.” IMF Working Paper, March 2002.
Nier, Erlend W., “Financial Stability Frameworks and the Role of Central Banks: Lessons From the Crisis.” IMF Working Paper, 2009.
O’Keefe, John, Virginia Olin. and Christopher A. Richardson. “Bank Loan-Underwriting Practices: Can Examiners’ Risk Assessments Contribute to Early-Warning Systems?” FDIC Working Paper No. 2003-06., 2003.
Pghosyan, Tirgan and Martin Cihak. “Distress in European Banks: An Analysis Based on a New Data Set.” IMF Working Paper, WP/09/9, 2009.
Reinhart, Carmen M. and Kenneth S. Rogoff. “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.” Harvard University and University of Maryland Working Paper, April 2008.
Rojas-Suarez, Liliana. “Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn From Financial Indicators.” Institute for International Economics Working Paper No. 01-06., 2003.
Rose, Andrew K. and Mark M. Spiegel. Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure. CEPR Discussion Papers , 7354, September, 2009.
Roubini, Nouriel and S. Mihm. “Crisis Economics. A Crash Course in the Future of Finance.” First ed. April 2010. Penguin Books.
Sachs, Jeffrey D. Aaron Tornell, Andres Velasco, Guillermo A. Calvo and Richard N. Cooper. “Financial Crises in Emerging Markets: The Lessons from 1995.” Brookings Papers on Economic Activity, 1996.
Savona, Roberto and Marika Vezzoli. “Multidimensional Distance to Collapse Point and Sovereign Default Prediction.” CAREFIN Research Paper no. 12/08., 2008.
Simpson, John L. “International Banking Risk Scoring During the Asian Debt and Banking Crisis (September 1999).” Curtin U Economics and Finance Working Paper no. 99-11.
Tieman, Alexander, F. and Andrea M. Maechler. The Real Effects of Financial Sector Risk,September 2009. IMF Working Paper, WP/09/198.
Van den Berg, Jeroen, Bertrand Candelon and Jean-Pierre Urbain. “A Cautious Note on the Use of Panel Models to Predict Financial Crises.” Economic Letters 101 (2008) 80-83.
White, William R. “Past Financial Crises, the Current Financial Turmoil, and the Need for a New Macrofinancial Stability Framework.” Journal of Financial Stability 4 (2008) 307-12.
Wong, Jim, Eric Wong and Phyllis Leung. “A Leading Indicator Model of Banking Distress - Developing an Early Warning System for Hong Kong and Other EMEAP Economies.” Hong Kong Monetary Authority, Working Paper 22/2007, 2007.