Predictive power of the Financial Activity Indexes - A case study of banking crisis in multiple countries -

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 fs 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.