Bank regulation, property prices and early warning systems for banking crises in OECD countries

Bubbles and Crises: The Role of House Prices and Credit

“…Note that the sample size drops when we include the banking sector variables, since these are available for only 14 of the 16 countries in our sample. The fact that the coefficient for banking sector capitalization (confer Column (3)) is negative and highly significant is in line with Barrell et al (2010) and Behn et al (2013). This is a reassuring finding for authorities deciding on countercyclical capital buffer rates or other capital requirements.…”

“…17 We also include the equity share, defined as the end-of-year amount of capital and reserves in the banking sector as a share of total assets, which has been shown to be an important predictor of financial crises, see e.g. Barrell et al (2010) and Behn et al (2013).…”

Systemic Risk Diagnostics: Coincident Indicators and Early Warning Signals

“…The main idea is that a comparison of credit and macro-financial conditions yields a useful early warning indicator for financial stability. It can be seen as related to the notion of tracking credit quantities over time, such as the private credit to GDP ratio, which is in line with the relevant early warning literature, see for example Lowe (2002), Misina andTkacz (2008), Borio and Drehmann (2009), Alessi andDetken (2009), andBarrell, Davis, Karim, andLiadze (2010). The main difference is that we suggest to compare credit risk instead of credit quantities to macro-financial conditions.…”

“…Inference on financial misalignments can be based on observed covariates, such as the private-credit-to-GDP ratio, total-lending-growth, valuation ratios, changes in property and asset prices, financial system leverage and capital adequacy, etc., see e.g. Borio and Lowe (2002), Misina and Tkacz (2008), and Barrell, Davis, Karim, and Liadze (2010). Despite recent progress, these models still display large errors when predicting financial stress.…”

Achieving a balance between the avoidance of banking problems and their resolution—can financial cycle dynamics predict bank distress?

“…The second relates to asset prices, particularly real estate. Barrell et al [3], for example, use property prices in their analysis to predict systemic banking crises. 5 While some authors focus on just one group of variables, others, such as Drehmann and Julius [23], who find that credit-to-GDP and debt service ratio also perform well as early warning indicators, use both.…”