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Introducing a composite indicator of cyclical systemic risk in Croatia: possibilities and limitations*
Tihana Škrinjarić
Article  Year: 2023  Pages: 1  39  Volume: 47  Issue: 1 Received: June 1, 2022  Accepted: November 3, 2022  Published online: March 6, 2023

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FIGURES & DATA
REFERENCES
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Source: Author’s adjustment based on OECD (2012).
Full name

Risk category covered

Unit measure

New bank loans to households

Credit developments

Q sum of monthly new loans

New bank loans to nonfinancial corporations

Property prices

Potential overvaluation of property prices

Yearonyear change

Household debt and gross disposable income
ratio

Private sector debt burden

Yearonyear growth rate

Nonfinancial corporations debt and gross
operating surplus ratio

Spread between rate on new loans to households
and 3M PRIBOR (multiplied with 1)

Potential mispricing of risk

% annually

Spread between rate on new loans to
nonfinancial corporations and 3M PRIBOR (multiplied with 1)

PX 50 stock index

Threemonth average

Adjusted current account deficit and GDP ratio
(multiplied with 1)

External imbalances

% annually

Note: All variables in the table in the described form indicate that the greater the value, the greater the risk accumulation is. Source: Plašil et al. (2015).
Risk category

Variables

Transformation

Cyclogram

Cyclogram+

Lending market

CredittoGDP gap HH
Credit growth HH
Credit growth NFC

CredittoGDP gap HH
CredittoGDP gap NFC
Credit growth HH
Credit growth NFC

HP gaps
Differences

Risk appetite

NPL values
Default rates of NFC

NPL values HH
NPL values NFC
Default rates of NFC
Interest rate margin HH
Interest rate margin NFC

Everything in levels

Indebtedness

Indebtedness of HH
Indebtedness of NFC

Both in HP gaps and levels

Property market

Residential property price
Price to income ratio

Residential property price
Residential property price in main city
Price to income ratio
Price to rent ratio
Flat to house price ratio

Growth rate and levels

Macroeconomy

ESIŽUnemployment rate
Output gap

ESI
Unemployment rate
Output gap
Revenue gap
Current account deficit to GDP ratio

HP gaps and levels

Note: The gap denotes the HP gap, NPL denotes nonperforming loans, HH and NFC are households and nonfinancial corporations, yoy is the yearonyear change or growth rate, ESI is the economic sentiment indicator. All variables in the table in the described form indicate that the greater the value, the greater the risk accumulation is. Source: Rychtarik (2014, 2018).
Indicator

Transformation

Method of data aggregation

Data selection criteria

Advantages

Shortfalls

FCI

Order statistics

Nonlinear function (like portfolio variance)

Financial cycle theory, previous literature, without
empirical evaluation of the variable characteristics before the crisis.

Takes correlation into consideration, graphical
representation, no problems with statistical filters regarding data
transformation, robustness due to scaling variables.

Lack of objective data selection criteria, variable
selection affects the dynamics of the indicator, harder to communicate, hart
to evaluate the results

Cyclogram

Max min or based on percentiles of distribution

Average, weighted average

Previous experience with variable dynamics tracking.

Graphical representation, no problems with
statistical filters regarding data transformation, easy aggregation and
interpretation

dSRI

Normalization, standardization or max min

Early warning models of signaling crisis.

Data selection criteria, simple aggregation and
interpretation, robust^{9}

Correlations not observed, biased results for one
country analysis

PCA

Normalization, standardization

Weighted average based on loadings on the first
principal component

Any of the previous three main approaches

Simple aggregation

Assumptions of PCA analysis, changing correlations,
bad predictive power of the first principal component.

Geometric average

Normalization, standardization

Geometric average formula

Hard to interpret results in economic way,
correlations not observed, depends on the main method of aggregation,
negative values in data.

RMS

Normalization, standardization

Root mean square formula

Hard to interpret results in economic way,
correlations not observed, depends on the main method of aggregation,
negative values in data, lack of risk accumulation in one category is
substituted with high risk in other.

OI

Binary variable depending on EWM results

Average or weighted average

If based on dSRI approach, advantages as there

Hard to interpret results in economic way,
correlations not observed, depends on the main method of aggregation,
negative values in data.

Abbreviation

Transformation

Variable

Risk category

FCI variant

ΔICSN

Yearly growth rate

House price index

Potential overvaluation of property prices

(1)

A. 2ΔICSN

Annualized twoyear growth rate

(2)

ΔKK

Yearly growth rate

Bank loans to households

Credit dynamics

(1)

A. 2ΔKK

Annualized twoyear growth rate

(2)

ΔKNFP

Yearly growth rate

Bank loans to nonfinancial corporations

(1)

A. 2ΔKNFP

Annualized twoyear growth rate

(2)

Δ(LR)

Yearly change

Leverage ratio
(multiplied with 1)

Strength of bank balance sheets

(1)

A. 2Δ(LR)

Annualized twoyear change

(2)

Δ(LTD)

Yearly change

Credit to deposit ratio

(1)

A. 2Δ(LTD)

Annualized twoyear change

(2)

Δ(K/Y)

Yearly growth rate

Debt (households) to disposable income ratio

Private sector debt burden

(1)

A. 2Δ(K/Y)

Annualized twoyear growth rate

(2)

Δ(NFP/BOV)

Yearly growth rate

Debt (nonfinancial corporations) to gross operating
surplus ratio

(1)

A. 2 Δ(NFP/BOV)

Annualized twoyear growth rate

(2)

ΔCROBEX

Yearly growth rate

CROBEX, stock market index

Mispricing of risk

(1)

A. 2 ΔCROBEX

Annualized twoyear growth rate

(2)

Δ margin K

Yearly change

Household credits interest rate margin (difference
between average new credits interest rate to households and 3 month EURIBOR
interest rate)
(multiplied with 1)

(1)

A. 2 Δ margin K

Annualized twoyear change

(2)

Δ margin NFP

Yearly change

Nonfinancial corporations credits interest rate
margin (difference between average new credits interest rate to nonfinancial
corporations and 3 month EURIBOR interest rate)
(multiplied with 1)

(1)

A. 2 Δ margin NFP

Annualized twoyear change

(2)

ΔRN

Yearly change

Current account to GDP ratio (multiplied with 1)

External imbalances

(1)

A. 2 ΔRN

Annualized twoyear change

(2)

Source: CNB, author's calculation.
Source: CNB, author’s calculation.
Variant (1)

Variant (2)

Combination of variables that are transformed to
annualized twoyear changes or growth rates, and HP gaps, 125.000 value of
the smoothing parameterr^{14}.

Variant with GDP and unemployment dynamics.

Source: CNB, author’s calculation.
Risk
categories

Indicator
description

Credit dynamics measures

HP gap for the broad
definition of credit to households, smoothing parameter of 125,000

HP gap for the broad
definition of credit to nonfinancial corporations, smoothing parameter of
125,000

HP gap for the ratio of
narrow definition of credit and the sum of GDP of the current quarter and the
preceding three quarters, smoothing parameter of 125,000

Measures of credit
institution financing risk

Annualized twoyear change
in the negative ratio between credit institutions’ equity and assets

Annualized twoyear change
in the negative ratio between private sector deposits and credit

Measures of potential real
estate price overvaluation

Annualized twoyear growth
rate in the residential realestate price index

Annualized twoyear growth
rate in the residential realestate pricetodisposable income ratio

Annualized twoyear growth
rate in the volume index of construction works

Measures of private sector
debt burden

HP gap for the ratio
between corporate debt and gross operating surplus, smoothing parameter of
125,000

HP gap for the ratio
between household debt and disposable income, smoothing parameter of 125,000

HP gap of debt service
measures – households, smoothing parameter of 125,000

HP gap of debt service
measures – corporations, smoothing parameter of 125,000

Measures of external
imbalances

Annualized twoyear change
in the negative share of net exports of goods and services in GDP

Annualized twoyear change
in the negative share of current account balance in GDP

Measures of potential
mispricing of risk

Annualized twoyear growth
rate in CROBEX

Annualized twoyear change
in the negative interest margin on new loans to households relative to the
3month EURIBOR

Annualized twoyear change
in the negative interest margin on new corporate loans relative to the
3month EURIBOR

Source: CNB, author's calculation.
Source: CNB, author’s calculation.
Variant

Description

Variant (1)

Variables from table 6, normalization via median and
standard deviation of each variable.

Variant (2)

Variables from table 6, normalization via maxmin
approach of each variable.

Source: Author.
Source: CNB, author’s calculation.
Indicator

error T1

error T2

Sum

Weight (%)

HP gap,
household credit

0,08

0,08

0,16

8,84

HP gap,
nonfinancial corporations credit

0,08

0,21

0,29

4,47

HP gap,
narrow definition of credit

0,00

0,41

0,41

2,84

2y change,
equity to assets ratio

0,50

0,00

0,50

2,15

2y change,
deposit to credit ratio

0,00

0,09

0,09

15,82

2y growth
rate, house price index

0,00

0,13

0,13

11,09

2y growth
rate, house price to income ratio

0,00

0,09

0,09

17,14

2y growth
rate, volume index of construction works

0,00

0,00

0,00

8,00

HP gap,
ratio debt to gross operating surplus

0,00

0,22

0,22

6,10

HP gap,
ratio debt to disposable income

0,00

0,49

0,49

2,24

HP gap,
debt service ratio, households

0,00

0,49

0,49

2,24

HP gap,
debt service ratio, nonfinancial corporations

0,00

0,33

0,33

3,73

2y growth
rate, net exports to GDP ratio

0,00

0,61

0,61

1,57

2y growth
rate, current account to GDP ratio

0,08

0,45

0,53

1,95

2y growth
rate, CROBEX

0,00

0,00

0,00

8,00

2y change,
interest margin, households

0,33

0,16

0,49

2,22

2y change,
interest margin, nonfinancial corporations

0,25

0,19

0,44

2,60

Note: Abbreviations refer to variables from table 6, the following the sequence from first to last one as in the mentioned table. Source: CNB, author's calculation.
Source: CNB, author’s calculation.
Source: CNB, author’s calculation.
Source: CNB, author’s calculation.
Source: CNB, author’s calculation.


March, 2023 I/2023 