Exploring the Interplay Between Early Warning Systems’ Usefulness and Basel III Regulation

14 Pages Posted: 7 Mar 2020

Date Written: February 10, 2020

Abstract

We analyse the ability of credit gap measures to predict banking crises by estimating the usefulness measure conditionally on policymaker's preferences. The results show that the signals based on the credit gap indicators are most useful when the policymaker’s preferences regarding Type I and Type II errors are approximately equal. However, according to the current consensus, the preferences to avoid missing a crisis are higher than issuing a false signal. This means that the usefulness of the credit-gap-based early warning systems is likely to increase once the static Basel III regulative measures are implemented (assuming that their implementation results in lower financial crises’ costs).

Keywords: Credit gap, Early warning system, Macro-prudential policy, Basel III regulation

JEL Classification: E37, E51, G01, G28

Suggested Citation

Deryugina, Elena and Guseva, Maria and Ponomarenko, Alexey, Exploring the Interplay Between Early Warning Systems’ Usefulness and Basel III Regulation (February 10, 2020). Available at SSRN: https://ssrn.com/abstract=3535781 or http://dx.doi.org/10.2139/ssrn.3535781

Elena Deryugina

Bank of Russia ( email )

12 Neglinnaya Street
Moscow, 107016
Russia

Maria Guseva

Bank of Russia ( email )

12 Neglinnaya Street
Moscow, 107016
Russia

Alexey Ponomarenko (Contact Author)

Bank of Russia ( email )

12 Neglinnaya Street
Moscow, 107016
Russia

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