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Bank of Finland Research Discussion Papers, Bank of Finland

No 14/2014:
Leading indicators of systemic banking crises: Finland in a panel of EU countries

Patrizio LainÓ, Juho Nyholm and Peter Sarlin ()

Abstract: This paper investigates leading indicators of systemic banking crises in a panel of 11 EU countries, with a particular focus on Finland. We use quarterly data from 1980Q1 to 2013Q2, in order to create a large number of macro-financial indicators, as well as their various transformations. We make use of univariate signal extraction and multivariate logit analysis to assess what factors lead the occurrence of a crisis and with what horizon the indicators lead a crisis. We find that loans-to-deposits and house price growth are the best leading indicators. Growth rates and trend deviations of loan stock variables also yield useful signals of impending crises. While the optimal lead horizon is three years, indicators generally perform well with lead times ranging from one to four years. We also tap into unique long time-series of the Finnish economy to perform historical explorations into macro-financial vulnerabilities.

Keywords: leading indicators; macro-financial indicators; banking crisis; signal extraction; logit analysis; (follow links to similar papers)

JEL-Codes: C43; E44; F30; G01; G15; (follow links to similar papers)

30 pages, June 13, 2014

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