When one thinks of unstable, risky banking systems, the first thing that comes to mind are visions of insolvent, state-backed building – with or without long ATM lines – in China, Greece, Italy or, in recent times, Germany. However, according to the most recent report by the Bank for International Settlements, the country with the riskiest banking system is neither of these, and is a rather “unusual suspect.”
As part of its latest quarterly report, the BIS looked at highlights of global financial flows, and found that after a modest slowdown in 2015, growth in both claims and international denominated debt securities resumed its rise in 2016, leaving banks even more exposed as counterparties to international issuers, especially should the world hit another “Dollar margin call” situation, where borrowers are unable to make payments on their obligations due to a surge in the global reserve currency.
However, cross-border international debt flows is just one aspect of bank riskiness. As part of a separate excercise profiling the domestic banking systems of some of the most prominent Developed and Emerging nations, the BIS looked at four distinct “risk” or crisis early warning indicators: i) Credit-to-GDP gap, or the difference in the current ratio from the long-run trend; ii) Property Price Gap, or the deviation of real residential property prices from their long-run trend, iii) Debt Service Ratio (DSR), which also is the deviation in the current DSR from the long-run average, and finally iv) DSR assuming a 2.50% increase in interest rates.
What it found is that the early warning indicators for financial crises continue to signal vulnerabilities in several jurisdictions. Here is what it found:
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