Ending Over-Lending: Assessing Systemic Risk with Debt to Cash Flow

30 Pages Posted: 27 Mar 2015

See all articles by Bruce Ramsay

Bruce Ramsay

Cascadia Monetary Research; RiskLab Finland

Peter Sarlin

Hanken School of Economics; RiskLab Finland

Multiple version iconThere are 2 versions of this paper

Date Written: March 26, 2015


This paper introduces the ratio of debt to cash flow (D/CF) of nations and their economic sectors to macroprudential analysis, particularly as an indicator of systemic risk and vulnerabilities. While leverage is oftentimes linked to the vulnerability of a nation, the stock of total debt and the flow of gross savings is a less explored measure. Cash flows certainly have a well-known connection to corporations' ability to service debt. This paper investigates whether the D/CF provides a means for understanding systemic risks. For a panel of 33 nations, we explore historic D/CF trends, and apply the same procedure to economic sectors. In terms of an early-warning indicator, we show that the D/CF ratio provides a useful additional measure of vulnerability to systemic banking and sovereign crises, relative to more conventional indicators. As a conceptual framework, the assessment of financial stability is arranged for presentation within four vulnerability zones, and exemplified with a number of illustrative case studies.

Keywords: debt to cash flow, total debt to gross savings, systemic risk, early-warning indicator

JEL Classification: E21, F34, G01, H63

Suggested Citation

Ramsay, Bruce and Sarlin, Peter, Ending Over-Lending: Assessing Systemic Risk with Debt to Cash Flow (March 26, 2015). ECB Working Paper No. 1769, Available at SSRN: https://ssrn.com/abstract=2585412 or http://dx.doi.org/10.2139/ssrn.2585412

Bruce Ramsay (Contact Author)

Cascadia Monetary Research ( email )

Chestermere, Alberta

RiskLab Finland ( email )

Turku, 20520

Peter Sarlin

Hanken School of Economics

PO Box 479
FI-00101 Helsinki

RiskLab Finland ( email )

Turku, 20520

HOME PAGE: http://risklab.fi/people/peter/

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