Comparing early warning systems for banking crises

By E. Davis, D. Karim. 2008

492 citations recorded by the source corpus.

Despite the extensive literature on prediction of banking crises by Early Warning Systems (EWSs), their practical use by policy makers is limited, even in the international financial institutions. This is a paradox since the changing nature of banking risks as more economies liberalise and develop their financial systems, as well as ongoing innovation, makes the use of EWS for informing policies aimed at preventing crises more necessary than ever. In this context, we assess the logit and signal extraction EWS for banking crises on a comprehensive common dataset. We suggest that logit is the most appropriate approach for global EWS and signal extraction for country-specific EWS. Furthermore, it is important to consider the policy maker's objectives when designing predictive models and setting related thresholds since there is a sharp trade-off between correctly calling crises and false alarms.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/b94c6981183f28f4573dd0c31f4f4645d41dc5e8

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Citations in the corpus

The Financial Stress Index: Identification of Systemic Risk Conditions (2011, unknown): “However, Davis and Karim point out the “subjectivity associated with banking crisis identification” [5] (p.”
Financial Crises and Bank Failures: A Review of Prediction Methods (2010, background): “Davis and Karim [41] test whether EWS based on the Logit and binomial tree approaches (this technique is described below) could have helped predicting current subprime crisis in the US and UK.”
Capital and liquidity ratios and financial distress. Evidence from the European banking industry (2017, background): “See Fuertes and Kalotychou (2006) and Davis and Karim (2008) for a discussion on the appropriateness of a pooled approach.”
Could Early Warning Systems Have Helped To Predict the Sub-Prime Crisis? (2008, methodology): “The results of logit specifications have been discussed extensively in Davis and Karim (2008); suffice to note that only a subset of the Demirgüc-Kunt and Detragiache (2005) coefficients are significant determinants of banking crises in our re-estimate.”
Predicting Distress in European Banks (2014, methodology): “Demirgüç-Kunt and Detragiache (2000), Davis and Karim (2008a,b) and Sun (2011) analyse banking crises with a global country coverage, whereas Hutchison (2003) and Mody and Sandri (2012) focus on European countries, where the latter study concerns the recent crisis.”
Assessing systemic risks and predicting systemic events (2013, background): “33 As Davis and Karim (2008) state, a fixed effects model would mean that the estimated country-specific effect and the systemic event indicator would be perfectly correlated also for countries that never experienced a systemic event, while excluding these countries would generate a biased sample…”
Bank regulation, property prices and early warning systems for banking crises in OECD countries (2010, methodology): “Variables used in previous studies: Demirgüc-Kunt and Detragiache (2005); Davis and Karim (2008). 1.”
Macroprudential Policy - A Literature Review (2012, unknown): “Hutchinson and McDill, 1999; Kaminsky and Reinhart, 1999; Bell and Pain, 2000; Demirguç-Kunt and Detriagache, 2005; Davis and Karim, 2008; Dell’Arricia et al., 2008; Von Hagen and Ho, 2007. The large body of studies on early warning indicators of currency crises (e.g. Kaminsky et al, 1998) is beyond”
Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis (2012, background): “5Includes Berg et al. (2005); Manasse and Roubini (2009), Shimpalee and Boucher Breuer (2006), Davis and Karim (2008), Berkmen et al. (2009), Obstfeld et al. (2009), Rose and Spiegel (forthcoming).”
Assessing the Risk of Banking Crises – Revisited (2009, background): “For recent surveys, see Demirgüç-Kunt and Detragiache (2005) and Davis and Karim (2008a). Davis and Karim (2008b) examine whether different early warning indicators developed by them could have predicted the current crises but find them not to be successful. Alessi and Detken (2008) propose real-tim”
Operationalising the Countercyclical Capital Buffer: Indicator Selection, Threshold Identification and Calibration Options (2014, background): “Recent contributions in this field include Davis and Karim (2008b), Barrell et al. (2010b), Lund-Jensen (2012), Lo Duca and Peltonen (2013) and Behn et al. (2013a).”