## Financial Cycles – Early Warning Indicators of Banking Crises?

_IMF Working Papers, April 29, 2021_

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**Canonical URL:** [Financial Cycles – Early Warning Indicators of Banking Crises?](https://www.imf.org/en/publications/wp/issues/2021/04/29/financial-cycles-early-warning-indicators-of-banking-crises-50257)

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## Bibliographic details
- Authors: Sally Chen, Katsiaryna Svirydzenka
- Published: April 29, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513582306.001

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### Overview
- Research question: Can the upturns and downturns in financial variables serve as early warning indicators of banking crises?
- Sample: data from 59 advanced and emerging economies.
- Main conclusion: Financial overheating can be detected in real time, and aggregating signals from financial variables can flag crises many years before occurrence.
- Additional finding: The length of financial cycles is of medium-term frequency, which challenges the longer frequency often used for estimating countercyclical capital buffers.

### Key findings
- Leading indicators by market type:
  - Advanced markets: equity prices and output gap are the best leading indicators.
  - Emerging markets: equity prices, property prices, and credit gap are the best leading indicators.
- Aggregation of indicators:
  - Combining information from multiple financial variables flags financial crises many years before the crisis.
- Financial cycle periodicity:
  - Financial cycles are of medium-term frequency, calling into question the longer frequency widely used in the estimation of countercyclical capital buffers.

### Implications for policy and supervision
- Early detection: Real-time monitoring of equity prices, output gap, property prices, and credit gap can provide early warning signals of financial overheating.
- Macroprudential frameworks:
  - The medium-term frequency of financial cycles suggests reassessing the frequency assumptions used for countercyclical capital buffer calibration.
- Cross-market emphasis:
  - Different sets of indicators matter in advanced versus emerging markets; surveillance frameworks should be tailored accordingly.

### Methodology and scope (as described)
- Scope: 59 advanced and emerging economies.
- Approach: Identification of leading financial indicators and assessment of aggregated signals for early warning capability.
- Frequency conclusion: Estimation and analysis indicate financial cycles operate at medium-term frequency.

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_Source: https://www.imf.org/en/publications/wp/issues/2021/04/29/financial-cycles-early-warning-indicators-of-banking-crises-50257_