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Credit gaps as banking crisis predictors: a different tune for middle- and low-income countries

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  • Vincent Bouvatier
  • Sofiane El Ouardi
Abstract
The aim of this paper is to assess the quality of credit-based variables as early warning indicators of systemic banking crises. The existing literature focuses mainly on developed economies and shows that the best performing indicator is the credit-to-GDP gap computed via one-sided HP filter (the so-called Basel credit gap). The empirical evidence legitimates the use of the credit-to-GDP gap as a key indicator in macro-prudential banking regulation, i.e., in the determination of the countercyclical capital buffer. We take advantage of a new database on bank credit series and credit gaps covering more than 160 countries (Bouvatier, Delatte and Rehault, 2022) to focus specifically on middle- and low-income countries. Our findings suggest that the credit-to-GDP gap remains the single best performing indicator regarding the high-income group while the same does not hold for middle- and low-income countries. This result highlights that a one-size-fits-all approach is not relevant in the design of the operational framework of the countercyclical capital buffer. Further, we show that the credit gap turns to be a fair banking crises predictor when the financial development, captured by the trend’s value in credit-to-GDP ratio, exceeds 20%.
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  • Vincent Bouvatier & Sofiane El Ouardi, 2021. "Credit gaps as banking crisis predictors: a different tune for middle- and low-income countries," Erudite Working Paper 2021-15, Erudite.
    • Handle: RePEc:eru:erudwp:wp21-15
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    1. Bouvatier, Vincent & Delatte, Anne-Laure & Rehault, Pierre-Nicolas, 2022. "Measuring credit procyclicality: A new database," Emerging Markets Review, Elsevier, vol. 52(C).

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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