Evaluating early warning indicators of banking crisis: Satisfying policy requirements

M. Drehmann, M. Juselius | Bank for International Settlements (BIS)

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. The authors 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, they find that the credit-to-GDP gap and a new indicator, the debt service ratio (DSR), consistently outperform other measures.

Financial Crisis, Legal & Regulatory Environment, Banking
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