A Simpler and Better Alternative to the ‘Basel’ Gap

Most studies in the aftermath of the global financial crisis of 2008 have found the credit-to-GDP gap as the best single leading indicator for systemic banking crises associated with excessive credit growth, in a univariate setting. However there have been several critics levied on the credit-to-GDP gap with respect to its lack of theoretical soundness and its sensitivity to end-of-series data. The purpose of this paper therefore is to verify whether an alternative variable, ‘Absolute change in credit-to-GDP ratio’, can be proposed as an Early Warning System indicator for systemic banking crises as efficient as the credit-to-GDP gap, if not better