Leading Indicators of Banking Crises: Was Asia Different?

IMF Working Papers, June 1, 1998

Source details

Paper examines episodes of banking system distress and crisis in a large sample of countries.
Empirical results identify several macroeconomic and financial variables as useful leading indicators.
Main macroeconomic indicators were of limited value in predicting the Asian crises; the best warning signs were proxies for the vulnerability of the banking and corporate sector.
Full-blown banking crises are shown to be more associated with external developments, while domestic variables are the main leading indicators of severe but contained banking distress.

Several macroeconomic and financial variables function as useful leading indicators of banking system distress and crises.
Main macroeconomic indicators had limited predictive value for the Asian crises.
Proxies for vulnerability of the banking sector and the corporate sector provided the best warning signs for the Asian episodes.
Full-blown banking crises correlate more strongly with external developments.
Severe but contained banking distress is primarily indicated by domestic variables.

Macroeconomic indicators (general predictive power limited for Asia).
Financial variables (identified as useful leading indicators).
Proxies for banking-sector vulnerability (highlighted as strong warning signs for Asia).
Proxies for corporate-sector vulnerability (highlighted as strong warning signs for Asia).
External developments (associated with full-blown banking crises).
Domestic variables (main leading indicators of severe but contained banking distress).

Asian crises: main macroeconomic indicators were of limited value; best warning signs came from banking- and corporate-sector vulnerability proxies.
Broader international sample: mix of macroeconomic, financial, external, and domestic indicators with external developments linked to full-blown crises and domestic variables linked to contained distress.

Monitoring should include financial-sector-specific and corporate-sector vulnerability indicators in addition to standard macroeconomic indicators.
Early warning systems for Asia should emphasize banking- and corporate-sector vulnerability proxies.
Policies addressing external exposure and managing external developments are crucial to prevent escalation to full-blown banking crises.
Domestic policy tools should be prioritized to detect and contain severe but localized banking distress.

International Monetary Fund. "Leading Indicators of Banking Crises: Was Asia Different?", IMF Working Papers 1998, 091 (1998).

Leading Indicators of Banking Crises: Was Asia Different? - WP/98/91
- Leading Indicators of Banking Crises: Was Asia Different? - WP/98/91 (Markdown version)
- Leading Indicators of Banking Crises: Was Asia Different? - WP/98/91 (PDF)