Early Warning Systems for Banking Crises – Research Advances and Policy Utilisation

Abstract

As a result of the sub-prime crisis in 2007, usage of the terms Early Warnings Systems (EWS) and macroprudential surveillance have become inextricably linked in many discourses relating to systemic financial stability. However, macroprudential surveillance, as a policy term, existed decades before the last global financial crisis and EWS system design also evolved prior to this, mainly in the wake of the 1997 Asian crises. As policy makers and international financial institutions further developed their understanding of systemic risk with each successive crisis, their policy objectives changed, and so too has the design of EWS. In light of these developments, we present a survey of academic investigation of banking crises and their prediction, and use made of early warning systems in the process of surveillance underlying the use of macroprudential tools. We conclude with some brief suggestions on the way forward in this area.