Financial Cycles – Early Warning Indicators of Banking Crises?

Author/Editor:

Sally Chen ; Katsiaryna Svirydzenka

Publication Date:

April 29, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Can the upturns and downturns in financial variables serve as early warning indicators of banking crises? Using data from 59 advanced and emerging economies, we show that financial overheating can be detected in real time. Equity prices and output gap are the best leading indicators in advanced markets; in emerging markets, these are equity and property prices and credit gap. Moreover, aggregating this information flags financial crisis many years before the crisis. Lastly, we find that the length of financial cycles is of medium-term frequency, calling into question the longer frequency widely used in the estimation of countercyclical capital buffers.

Series:

Working Paper No. 2021/116

Frequency:

regular

English

Publication Date:

April 29, 2021

ISBN/ISSN:

9781513582306/1018-5941

Stock No:

WPIEA2021116

Pages:

79

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