Early Warning Models for Systemic Banking Crises : Can Political Indicators Improve Prediction?11

This study provides a novel attempt to evaluate whether an early warning system (EWS) for systemic banking crises can produce better predictions when political indicators are employed alongside traditional macrofinancial indicators. Based on a dataset covering 32 advanced economies for the period 1975-2017, we show that the inclusion of political indicators significantly improves the predictive performance of the model. Our results suggest several channels through which the political environment could affect the stability of a banking system. In particular, we find that majority governments, left-wing governments, and a longer time in office of the executive party are negatively correlated with systemic risk. This is robust to a large number of different specifications. Furthermore, we find that long-established institutional systems and plurality electoral systems (compared to proportional representation systems) are associated with a lower likelihood of crises. At the same time, crises are more likely when the incumbent government constitutes a nationalist platform