Predictive power of the Financial Activity Indexes
- A case study of banking crisis in multiple countries -
November 19, 2021
HIRANO Ryuichiro*, HOGEN Yoshihiko, SUDO Nao
Financial System and Bank Examination Department
- Currently at the Personnel and Corporate Affairs Department.
In the Financial System Report, the Bank of Japan monitors developments of the Financial Activity Indexes (FAIXs), which showed large deviations from the trend during Japan's bubble period of the late 1980s, as a means to detect early warning signals of financial imbalances caused by overheating of domestic financial activities. This article constructs corresponding FAIXs in 17 countries and asks if they are able to predict a banking crisis in these countries. The result shows that among the FAIXs, total credit to GDP ratio, which is an indicator that is considered to capture credit activities of the private sector as a whole, has a reasonable degree of predictive power for these crises. The nature of banking crises differs, however, and these indicators do not necessarily have high predictive power for banking crises that occur when domestic financial activity is not overheated. In addition, the probability of a banking crisis occurring rises when the "red" signal of the total credit to GDP ratio lasts for a prolonged period or when this "red" signal happens together with "red" signals of other indicators.
Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2021-E-5, is a translation of the original Japanese version, 2021-J-11, published in October 2021. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.
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