Basel III and the Prediction of Financial Crises

• Activity Number: 643
• Type: Contributed
• Date/Time: Thursday, August 13, 2015 : 8:30 AM to 10:20 AM
• Sponsor: Business and Economic Statistics Section
• Author(s): Simon Van Norden* and Marc Wildi
• Companies: HEC Montreal and ZHAW
• Keywords: banking crises ; macroprudential ; optimal filter design ; ROC curve ; financial stability ; credit cycles

Abstract

Novel features of Basel III require macroprudential authorities to take preventative measures a year or more in advance of potential systemic financial crises. Recent research has attempted to determine (a) the extent to which this is possible, and (b) which indicators of potential future crises are best.

This paper notes that some previous contributions may overstate the reliability of crisis indicators by using scoring rules that tend to assign positive forecasting power to purely random forecasts. We also show how optimal filtering theory can be used to sharpen measures of credit cycles and study their usefulness as crisis predictors.