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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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FULL ARTICLE
FIGURES & DATA
REFERENCES
CROSSMARK POLICY
METRICS
LICENCING
PDF
Source: Author’s adjustment based on OECD (2012).
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Full name
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Risk category covered
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Unit measure
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New bank loans to households
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Credit developments
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Q sum of monthly new loans
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New bank loans to nonfinancial corporations
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Property prices
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Potential overvaluation of property prices
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Year-on-year change
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Household debt and gross disposable income
ratio
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Private sector debt burden
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Year-on-year growth rate
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Nonfinancial corporations debt and gross
operating surplus ratio
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Spread between rate on new loans to households
and 3M PRIBOR (multiplied with -1)
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Potential mispricing of risk
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% annually
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Spread between rate on new loans to
nonfinancial corporations and 3M PRIBOR (multiplied with -1)
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PX 50 stock index
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Three-month average
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Adjusted current account deficit and GDP ratio
(multiplied with -1)
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External imbalances
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% annually
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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).
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Risk category
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Variables
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Transformation
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Cyclogram
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Cyclogram+
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Lending market
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Credit-to-GDP gap HH
Credit growth HH
Credit growth NFC
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Credit-to-GDP gap HH
Credit-to-GDP gap NFC
Credit growth HH
Credit growth NFC
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HP gaps
Differences
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Risk appetite
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NPL values
Default rates of NFC
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NPL values HH
NPL values NFC
Default rates of NFC
Interest rate margin HH
Interest rate margin NFC
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Everything in levels
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Indebtedness
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Indebtedness of HH
Indebtedness of NFC
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Both in HP gaps and levels
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Property market
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Residential property price
Price to income ratio
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Residential property price
Residential property price in main city
Price to income ratio
Price to rent ratio
Flat to house price ratio
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Growth rate and levels
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Macroeconomy
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ESIŽUnemployment rate
Output gap
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ESI
Unemployment rate
Output gap
Revenue gap
Current account deficit to GDP ratio
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HP gaps and levels
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Note: The gap denotes the HP gap, NPL denotes nonperforming loans, HH and NFC are households and nonfinancial corporations, y-o-y is the year-on-year 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).
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Indicator
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Transformation
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Method of data aggregation
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Data selection criteria
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Advantages
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Shortfalls
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FCI
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Order statistics
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Nonlinear function (like portfolio variance)
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Financial cycle theory, previous literature, without
empirical evaluation of the variable characteristics before the crisis.
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Takes correlation into consideration, graphical
representation, no problems with statistical filters regarding data
transformation, robustness due to scaling variables.
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Lack of objective data selection criteria, variable
selection affects the dynamics of the indicator, harder to communicate, hart
to evaluate the results
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Cyclogram
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Max min or based on percentiles of distribution
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Average, weighted average
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Previous experience with variable dynamics tracking.
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Graphical representation, no problems with
statistical filters regarding data transformation, easy aggregation and
interpretation
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d-SRI
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Normalization, standardization or max min
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Early warning models of signaling crisis.
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Data selection criteria, simple aggregation and
interpretation, robust9
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Correlations not observed, biased results for one
country analysis
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PCA
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Normalization, standardization
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Weighted average based on loadings on the first
principal component
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Any of the previous three main approaches
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Simple aggregation
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Assumptions of PCA analysis, changing correlations,
bad predictive power of the first principal component.
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Geometric average
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Normalization, standardization
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Geometric average formula
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Hard to interpret results in economic way,
correlations not observed, depends on the main method of aggregation,
negative values in data.
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RMS
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Normalization, standardization
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Root mean square formula
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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.
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OI
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Binary variable depending on EWM results
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Average or weighted average
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If based on d-SRI approach, advantages as there
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Hard to interpret results in economic way,
correlations not observed, depends on the main method of aggregation,
negative values in data.
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Abbreviation
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Transformation
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Variable
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Risk category
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FCI variant
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ΔICSN
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Yearly growth rate
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House price index
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Potential overvaluation of property prices
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(1)
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A. 2ΔICSN
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Annualized two-year growth rate
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(2)
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ΔKK
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Yearly growth rate
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Bank loans to households
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Credit dynamics
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(1)
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A. 2ΔKK
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Annualized two-year growth rate
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(2)
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ΔKNFP
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Yearly growth rate
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Bank loans to nonfinancial corporations
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(1)
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A. 2ΔKNFP
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Annualized two-year growth rate
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(2)
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Δ(LR)
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Yearly change
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Leverage ratio
(multiplied with -1)
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Strength of bank balance sheets
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(1)
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A. 2Δ(LR)
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Annualized two-year change
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(2)
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Δ(LTD)
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Yearly change
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Credit to deposit ratio
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(1)
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A. 2Δ(LTD)
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Annualized two-year change
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(2)
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Δ(K/Y)
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Yearly growth rate
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Debt (households) to disposable income ratio
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Private sector debt burden
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(1)
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A. 2Δ(K/Y)
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Annualized two-year growth rate
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(2)
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Δ(NFP/BOV)
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Yearly growth rate
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Debt (nonfinancial corporations) to gross operating
surplus ratio
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(1)
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A. 2 Δ(NFP/BOV)
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Annualized two-year growth rate
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(2)
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ΔCROBEX
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Yearly growth rate
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CROBEX, stock market index
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Mispricing of risk
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(1)
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A. 2 ΔCROBEX
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Annualized two-year growth rate
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(2)
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Δ margin K
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Yearly change
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Household credits interest rate margin (difference
between average new credits interest rate to households and 3 month EURIBOR
interest rate)
(multiplied with -1)
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(1)
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A. 2 Δ margin K
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Annualized two-year change
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(2)
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Δ margin NFP
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Yearly change
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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)
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(1)
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A. 2 Δ margin NFP
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Annualized two-year change
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(2)
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ΔRN
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Yearly change
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Current account to GDP ratio (multiplied with -1)
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External imbalances
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(1)
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A. 2 ΔRN
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Annualized two-year change
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(2)
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Source: CNB, author’s calculation.
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Variant (1)
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Variant (2)
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Combination of variables that are transformed to
annualized two-year changes or growth rates, and HP gaps, 125.000 value of
the smoothing parameterr14.
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Variant with GDP and unemployment dynamics.
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Source: CNB, author’s calculation.
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Risk
categories
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Indicator
description
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Credit dynamics measures
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HP gap for the broad
definition of credit to households, smoothing parameter of 125,000
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HP gap for the broad
definition of credit to non-financial corporations, smoothing parameter of
125,000
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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
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Measures of credit
institution financing risk
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Annualized two-year change
in the negative ratio between credit institutions’ equity and assets
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Annualized two-year change
in the negative ratio between private sector deposits and credit
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Measures of potential real
estate price overvaluation
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Annualized two-year growth
rate in the residential real-estate price index
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Annualized two-year growth
rate in the residential real-estate price-to-disposable income ratio
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Annualized two-year growth
rate in the volume index of construction works
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Measures of private sector
debt burden
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HP gap for the ratio
between corporate debt and gross operating surplus, smoothing parameter of
125,000
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HP gap for the ratio
between household debt and disposable income, smoothing parameter of 125,000
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HP gap of debt service
measures – households, smoothing parameter of 125,000
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HP gap of debt service
measures – corporations, smoothing parameter of 125,000
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Measures of external
imbalances
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Annualized two-year change
in the negative share of net exports of goods and services in GDP
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Annualized two-year change
in the negative share of current account balance in GDP
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Measures of potential
mispricing of risk
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Annualized two-year growth
rate in CROBEX
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Annualized two-year change
in the negative interest margin on new loans to households relative to the
3-month EURIBOR
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Annualized two-year change
in the negative interest margin on new corporate loans relative to the
3-month EURIBOR
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Source: CNB, author’s calculation.
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Variant
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Description
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Variant (1)
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Variables from table 6, normalization via median and
standard deviation of each variable.
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Variant (2)
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Variables from table 6, normalization via max-min
approach of each variable.
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Source: CNB, author’s calculation.
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Indicator
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error T1
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error T2
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Sum
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Weight (%)
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HP gap,
household credit
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0,08
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0,08
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0,16
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8,84
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HP gap,
nonfinancial corporations credit
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0,08
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0,21
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0,29
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4,47
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HP gap,
narrow definition of credit
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0,00
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0,41
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0,41
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2,84
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2y change,
equity to assets ratio
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0,50
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0,00
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0,50
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2,15
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2y change,
deposit to credit ratio
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0,00
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0,09
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0,09
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15,82
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2y growth
rate, house price index
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0,00
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0,13
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0,13
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11,09
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2y growth
rate, house price to income ratio
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0,00
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0,09
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0,09
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17,14
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2y growth
rate, volume index of construction works
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0,00
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0,00
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0,00
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8,00
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HP gap,
ratio debt to gross operating surplus
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0,00
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0,22
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0,22
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6,10
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HP gap,
ratio debt to disposable income
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0,00
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0,49
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0,49
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2,24
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HP gap,
debt service ratio, households
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0,00
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0,49
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0,49
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2,24
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HP gap,
debt service ratio, nonfinancial corporations
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0,00
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0,33
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0,33
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3,73
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2y growth
rate, net exports to GDP ratio
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0,00
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0,61
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0,61
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1,57
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2y growth
rate, current account to GDP ratio
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0,08
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0,45
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0,53
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1,95
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2y growth
rate, CROBEX
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0,00
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0,00
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0,00
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8,00
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2y change,
interest margin, households
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0,33
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0,16
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0,49
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2,22
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2y change,
interest margin, nonfinancial corporations
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0,25
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0,19
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0,44
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2,60
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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.
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March, 2023
I/2023
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