Financial Stress Indices and Financial Crises

Abstract

This paper develops a Financial Stress Index (FSI) for 28 OECD countries and examines its relationship to crises using a novel database for financial crises. A stress index measures the current state of stress in the financial system and summarizes it in a single statistic. Our results suggest that even though our FSI is clearly related to the occurrence of crises, there is only a weak relationship between the FSI and the onset of a crisis, notably the onset of a banking crisis. Policymakers should therefore be aware of the limited usefulness of FSIs as an early warning indicator.

Credit Growth, the Yield Curve and Financial Crisis Prediction: Evidence from a Machine Learning Approach

“…the difference between the long and short-term interest rate, is often seen as a strong predictor of an impending economic recession (Estrella and Hardouvelis, 1991;Wright, 2006), especially of a longer horizon of 12-18 months (Rudebusch and Williams, 2009;Liu and Moench, 2016;Croushore and Marsten, 2016). But while some early warning models for financial crises have identified the slope of the yield curve as an important predictor of financial crises (Babeckỳ et al, 2014;Joy et al, 2017;Vermeulen et al, 2015), they have not explored the drivers of its predictive power in detail.…”

“…The domestic yield curve is a well-established leading indicator for economic recessions (Estrella and Hardouvelis, 1991;Wright, 2006;Rudebusch and Williams, 2009). But, only a few studies have have linked it empirically to the risk of financial crises and these studies have not discussed this result in detail or examined the role of the yield curve on the global level (Babeckỳ et al, 2014;Joy et al, 2017;Vermeulen et al, 2015). At the same time, our work is compatible with several theoretical models which investigate the relationships between nominal risk-free returns, risk taking, credit and financial stability (Aikman et al, 2015;Martinez-Miera and Repullo, 2017;Coimbra and Rey, 2017;Korinek and Novak, 2017).…”

Financial Stress in the Czech Republic: Measurement and Effects on the Real Economy

“…Due to the depth and consequences of the crisis, many supervisory authorities have begun to consider a new set of techniques designed to measure the potential vulnerability of financial institutions. In particular, a strong emphasis has been placed on research regarding the development of tools measuring risk and uncertainty as well as their ability to serve as early warning indicators (Vermeulen et al, 2015).…”

Leading indicators of financial stress: New evidence

“…Our paper expands the analysis of Slingenberg and de Haan (2011) using the Financial Stress Index that was recently developed by Vermeulen et al (2015) for 25 OECD countries. As a first step, we gather data for more than 20 potential early warning indicators of financial stress.…”

“…From a policy perspective, reliably predicting increases in financial stress is crucial, as this would provide policymakers some time to take measures to alleviate stress. As shown by Vermeulen et al (2015), spikes in financial stress may appear very abruptly. Since FSIs are now widely used in policy institutions for monitoring financial stability and even for activation of macroprudential tools, 1 it would be very useful to identify leading indicators of financial stress so that policymakers may try to avoid increases in financial stress rather than responding to high levels of stress reactively.…”