Mapping the state of financial stability

Sarlin, Peter; Peltonen, Tuomas A.

doi:10.1016/j.intfin.2013.05.002

Cited by 69 publications

(53 citation statements)

References 42 publications

(25 reference statements)

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“…Instead of lagging explanatory variables, we define the dependent variable as a forecast horizon that includes a specified number of quarters prior to the event (8 quarters in the benchmark case). In order to account for the so‐called crisis and postcrisis bias (e.g., Bussire & Fratzscher, ; Sarlin & Peltonen, ), we exclude crisis and postcrisis periods from the estimation sample. As economic variables go through adjustment processes prior to reaching tranquil paths in times of crisis and recovery, these periods are not informative for identifying the path from precrisis regimes to crisis.…”

Section: Methodsmentioning

confidence: 99%

Interconnectedness of the banking sector as a vulnerability to crises

2018

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This paper uses macro‐network to measure the interconnectedness of the banking sector and relates it to banking crises in Europe. Beyond cross‐border financial linkages of the banking sector, the macronetwork also accounts for financial linkages to the other main financial and nonfinancial sectors within the economy. We find that a more central position of the banking sector in the macronetwork significantly increases the probability of a banking crisis. By analysing the different types of risk exposures, our evidence shows that credit is an important source of vulnerability. Finally, our early‐warning models augmented with interconnectedness measures outperform traditional models in terms of out‐of‐sample predictions.

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Section: Methodsmentioning

confidence: 99%

Interconnectedness of the banking sector as a vulnerability to crises

2018

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“…Starting from credit variables, Table 1 shows that credit‐related indicators have been included in all studies and most have also found one or several of them to be successful, such as credit‐to‐GDP gap by Borio and Lowe (2002) and similar global measures by Alessi and Detken (2011). Likewise, asset prices have been oftentimes both included in assessments and found significant, such as the deviation from trend of an aggregated asset price index by Borio and Lowe (2002) and deviation from trend of stockmarket capitalization to GDP by Lo Duca and Peltonen (2013) and Sarlin and Peltonen (2013). While financial regulation and financial sector size have been accounted in only a few studies, money aggregates have been used more frequently.…”

Section: Methodsmentioning

confidence: 99%

“…From the viewpoint of the applied methods, the studies have generally used signal extraction (also called the signaling approach) and multivariate logit or probit analysis. For instance, while Kaminsky and Reinhart (1999), Borio and Lowe (2002), Alessi and Detken (2011) and Lo Duca and Peltonen (2013) make use of signal extraction, Schularick and Taylor (2012), Lo Duca and Peltonen (2013) and Sarlin and Peltonen (2013) use logit or probit analysis. Moreover, the set of studies in Table 1 also included Self‐Organizing Maps (Sarlin & Peltonen, 2013), standard linear OLS regression (Kauko, 2012) and Bayesian Model Averaging (Babecký et al, 2013).…”

Section: Methodsmentioning

confidence: 99%

Leading indicators of systemic banking crises: Finland in a panel of EU countries

Lainà

Nyholm²,

Sarlin

2015

Rev Financ Econ

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Non-technical summary Terms of use: Documents in EconStor mayMacroprudential policies have an ultimate aim of preventing financial crises. Basel III and the EU's legislative acts CRD and CRR IV, among others, propose the implementation of macroprudential tools. These tools are designed for curbing booms in household, especially real estate, sectors through controlling the growth rate of private loan stocks and for restraining overall booms in the wider economy, as well as to strengthen the banking sector by enhancing its loss absorbing capacity and by reducing default probabilities and losses given default. Hence, this motivates further research on the identification of underlying vulnerabilities and risks through early-warning indicators that function as guidance for macroprudential policy.This paper investigates macro-financial factors as leading indicators of systemic banking crises in Europe, and particularly reflects over the case of the Finnish economy. The investigated questions in this paper relate to what factors lead the occurrence of a crisis and with what horizon the indicators lead a crisis. Ultimately, the studied indicators aim at providing guidance for the activation of macroprudential tools, such as countercyclical capital buffers, loan-to-value caps and risk weights.The previous literature has consistently found excessive growth in credit aggregates and asset prices to lead banking crises. Despite a large number of studies on leading indicators, only a few of them have a pure focus on European economies. While some studies only include Europe as an aggregate, those that include individual European countries also include economies from other continents, mainly covering OECD economies. Those studies that focus on distress in Europe have a different scope and aim. For instance, Betz et al. (2014) include country-level indicators, but aim at predicting distress at the level of banks in most European countries, whereas Behn et al. (2013) perform an exercise similar to building an early-warning model, but use it for setting countercyclical capital buffers. Accordingly, the latter study focuses mainly on the role of credit variables. Further, diverting from assessing core Europe, they also include Central and Eastern European transition or developing economies. This paper investigates leading indicators of systemic banking crises in a panel of 11 EU countries, with a particular focus on Finland. To enable and support the analysis of Finland, we...

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“…(). More closely related to the topic of visual dynamic clustering, Sarlin and Peltonen () introduced a self‐organizing map (SOM)‐based approach to mapping financial stability at the country level. Likewise, early applications of the SOM aimed at mapping banks based upon their financial ratios (Serrano‐Cinca, ).…”

Section: Introductionmentioning

confidence: 99%

“…A simple, yet commonly used, approach is a radar-chart visualization of six composite risk and condition indices, as outlined by Dattels et al (2010). More closely related to the topic of visual dynamic clustering, Sarlin and Peltonen (2013) introduced a self-organizing map (SOM)-based approach to mapping financial stability at the country level. Likewise, early applications of the SOM aimed at mapping banks based upon their financial ratios (Serrano-Cinca, 1996).…”

Section: Introductionmentioning

confidence: 99%

Visual Macroprudential Surveillance of Banks

Sarlin

2016

Intell. Sys. Acc. Fin. Mgmt.

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Summary We create a tool for visual surveillance of the European banking system from a macroprudential perspective. The tool performs visual dynamic clustering with the self‐organizing time map (SOTM) to visualize evolving multivariate data from two viewpoints: (i) multivariate cluster structures, and (ii) univariate drivers of changes in structures. In assessing the European banking system, the main tasks the SOTM can be used for are (i) identifying structural changes and breaking points in a large number of risk indicators, and their specific location in the cross‐section, and (ii) identifying the build‐up of, or generally changes in, individual risk indicators in the banking system as a whole. While the former view provides indications of changes in the banking system, the latter describes the sources of these changes. Copyright © 2016 John Wiley & Sons, Ltd.

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Mapping the state of financial stability

Cited by 69 publications

References 42 publications

Interconnectedness of the banking sector as a vulnerability to crises

Interconnectedness of the banking sector as a vulnerability to crises

Leading indicators of systemic banking crises: Finland in a panel of EU countries

Visual Macroprudential Surveillance of Banks

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