Identifying Indicators of Systemic Risk

59 Pages Posted: 30 Jun 2020

See all articles by Benny Hartwig

Benny Hartwig

Deutsche Bundesbank; Goethe University Frankfurt

Christoph Meinerding

Deutsche Bundesbank

Yves S. Schüler

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: 2020

Abstract

We operationalize the definition of systemic risk provided by the IMF, BIS, and FSB and derive testable hypotheses to identify indicators of systemic risk. We map these hypotheses into a two-stage hierarchical testing framework, combining insights from the early-warning literature on financial crises with recent advances on growth-at-risk. Applying this framework to a set of candidate variables, we find that the Basel III credit-to-GDP gap does not indicate systemic risk coherently across G7 countries. Credit growth and house price growth also do not pass our test in many cases. By contrast, a composite financial cycle signals systemic risk consistently for all countries except Canada. Overall, our results suggest that systemic risk may be consistently measured only once the turning points of indicators have been observed. Therefore, pre-emptive countercyclical macroprudential policy may smooth the financial cycle in boom phases, which then indirectly mitigates the amount of systemic risk in the future.

Keywords: systemic risk, macroprudential regulation, forecasting, growth-at-risk, financial cycles

JEL Classification: E37, E44, G17

Suggested Citation

Hartwig, Benny and Meinerding, Christoph and Schüler, Yves S., Identifying Indicators of Systemic Risk (2020). Deutsche Bundesbank Discussion Paper No. 33/2020, Available at SSRN: https://ssrn.com/abstract=3638832

Benny Hartwig (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Christoph Meinerding

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Yves S. Schüler

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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