Banking Crises Are Unpredictable but Knowable

The New York Community Bank (NYCB) crisis recalls the banking crisis of last March. Similar to what happened last year, crises always emerge suddenly, without clear symptoms beforehand. At the end of January 2023, NYCB’s stock price plummeted by over 30 percent in a day and continued to drop to 30 percent in a few days afterward. We cannot easily claim the U.S. market is inefficient (in terms of information flow), but the iron fact is almost nobody is aware of a crisis of this kind until the collapse takes place. This seems to be the intrinsic nature of a crisis.

Since the financial tsunami in 2008, many types of early warning indicators or signals have been developed by academics and policymakers. Various scholars build different models and arrive at different conclusions. Some conclude that sharp changes in asset prices, like equity or housing busts, are indicative. In contrast, others conclude fundamentals like credit or debt or GDP ratios are the key indicators of bank health. Some even compare different composite indicators to evaluate which kinds are the best. As a least common multiple, almost everything counts.


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