BIS: An early warning indicator of financial crises
The Bank for International Settlements (BIS) has started publishing a new set of data—credit-to-GDP (gross domestic product) gaps of economies. “It is defined as the difference between the credit-to-GDP ratio and its long-run trend, and it has been found to be a useful early warning indicator of financial crises,” says BIS of this new measure.
The gap identifies any build-up of excessive credit and the Basel committee guideline on the countercyclical capital buffer for banks suggests looking at this yardstick.
The chart shows that India runs a negative credit-to-GDP gap, which means its credit-to-GDP ratio is lower than its long-term trend. On the other hand, China’s credit gap is as high as 30% of GDP, indicating a massive risk of a financial crisis there.
Indeed, as the chart shows, several other Asian countries also show indications of overheating. India stands out as a beacon of stability among them.