Indicator Inputs
Key Formulas
House Price Dev = (HPI/Trend - 1) × 100
Composite = equal-weighted average of 7 indicators.
Vulnerability Assessment
Vulnerability Radar
Normalization Breakdown
Historical Comparison
Similar to late-1990s equity bubble conditions
Historical comparisons are illustrative only. Different indicator mixes can produce the same composite score.
Model Assumptions
- Equal weighting (1/7 each) of all indicators. Real early warning systems use optimized or regression-based weights.
- Linear normalization to 0-100 scale. Real models may use non-linear transformations or percentile-based scoring.
- Static thresholds not dynamically calibrated to country or time period.
- Five of seven indicators (credit gap, house prices, CAPE, yield curve, leverage) are structural vulnerability measures. VIX is a coincident market stress measure, and current account is an external imbalance indicator.
- Historical comparisons are illustrative approximations. Actual pre-crisis conditions varied across indicators and economies.
- No interaction effects between indicators. Stress in one dimension does not amplify others in this model.
- Credit/GDP trend is user-supplied. The BIS methodology uses an HP filter on quarterly data.
- Bank leverage input is a simplified assets/equity proxy, not the Basel III leverage ratio.
- CAPE (Shiller P/E) used as equity valuation proxy. Equity indicators are less reliable crisis EWIs than credit or property measures.
- Traffic light thresholds are raw-value threshold alerts. Normalization feeds the composite score. They serve different purposes and do not align 1:1.
Educational disclaimer: For educational purposes only. Not financial advice. This dashboard provides a simplified view of systemic risk indicators. Actual financial crisis prediction requires sophisticated models, real-time data feeds, and professional risk analysis.
Understanding Financial Crisis Indicators
What Are Financial Crisis Early Warning Indicators?
Financial crisis early warning indicators are economic and financial metrics that have historically preceded banking crises and systemic financial stress in advanced economies. Research by the Bank for International Settlements (BIS) and academic economists (including Mishkin, Chapter 12) identifies credit booms, asset price bubbles, and leverage cycles as the most reliable precursors of financial crises.
The Credit-to-GDP Gap
The credit-to-GDP gap measures how far the ratio of private credit to GDP has deviated from its long-term trend. The BIS identifies a gap exceeding 2 percentage points as an early warning signal. Large credit gaps have historically been among the most reliable precursors of banking crises, reflecting the buildup of financial imbalances during credit booms.
Yield Curve as a Crisis Signal
An inverted yield curve (negative 10Y-2Y spread) signals that markets expect future economic weakness. While more commonly associated with recession prediction than banking crises per se, yield curve inversions have preceded most US downturns, typically with a variable lead time of roughly 6 to 24 months. The signal reflects expectations of tighter monetary conditions and declining growth.
Bank Leverage and Systemic Risk
High bank leverage (assets/equity) means the banking system has less capacity to absorb losses. Before the 2008 financial crisis, major investment banks operated at leverage ratios of 25-30x, meaning a 3-4% decline in asset values could wipe out their equity. Post-crisis Basel III regulations require minimum capital and leverage ratios to prevent excessive risk-taking.
Frequently Asked Questions
Disclaimer
This dashboard is for educational purposes only and uses simplified models of financial crisis indicators. Real-world crisis detection requires sophisticated econometric models, high-frequency data, and professional risk analysis. The composite vulnerability score is not a forecasting tool. Historical comparisons are illustrative approximations. This tool should not be used for investment decisions.
