A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.

A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.

WESLEY PHOA is vice president of research at Capital Management Sciences in Los Angeles.he yield on a thrty-year Treasury bond is often, but not always, lower than the yield on a twentyyear bond. A common and plausible explanation

WESLEY PHOA is vice president of research at Capital Management Sciences in Los Angeles. MICHAEL SHEARER is vice president of quantitative research at Capital Management Sciences in Los Angeles. EXHIBIT 1 Yield Curve Reshapings (written as forward curve displacements) Change in Yield Curve Slope: fn,,(t) = fold(t) + (e-"* -0.163)/83.7 fold(t) + (te-?'lo -0.329)/58.0 fold(t) + te-'/25.0 Change in Curvature: fnew(t) = Hump Formation: f , , , W =