(Bloomberg) — China, Canada and Hong Kong are among the
economies most at risk of a banking crisis, according to early-
warning indicators compiled by the Bank for International
Canada — whose economy grew last year at the fastest pace
since 2011 — was flagged thanks to its households’ maxed-out
credit cards and high debt levels in the wider economy.
Household borrowing is also seen as a risk factor for China and
Hong Kong, according to the study.
“The indicators currently point to the build-up of risks in
several economies,” analysts Inaki Aldasoro, Claudio Borio and
Mathias Drehmann wrote in the BIS’s latest Quarterly Review
published on Sunday.
The study offered some surprising results: for example,
Italy wasn’t shown as being at risk, despite its struggles with
a slow-growing economy and banks that are mired in bad debts.
While China was flagged, a key warning indicator known as
the credit-to-gross domestic product “gap” showed an
improvement, said the BIS, known as the central bank for central
banks. This may suggest the government is making progress in its
push to reduce financial-sector risk.
The gap is the difference between the credit-to-GDP ratio
and its long-term trend. A blow-out in the number can signal
that credit growth is excessive and a financial bust may be
looming. In China, the gap fell to 16.7 percent in the third
quarter of 2017, down from a peak of 28.9 percent in March 2016
and the lowest since 2012, the study showed.
The narrowing gap in China “suggests the efficiency of
financial intermediation is improving,” said Ding Shuang, chief
economist for Greater China and North Asia at Standard Chartered
Plc in Hong Kong. “This helps to slow the pace of the rise of
the debt-to-GDP ratio, creating conditions for an eventual
deleveraging of the economy.”
China is getting serious about dangers in its financial
system. While derisking has been the government’s mantra since
2015, the country’s most powerful politicians have been ramping
up directives on everything from shadow banking to stock-market
speculation. Since April last year, financial regulators have
targeted curbing the growth of wealth management products and
interbank borrowings, with a more recent focus on reining in
Read this QuickTake Q&A on how China is tackling financial
The Basel, Switzerland-based BIS routinely collects and
analyzes data to monitor vulnerabilities in the global financial
system. These figures typically include the amount of credit in
an economy and house prices, as well as borrowers’ ability to
service their debts.
For this study, the analysts assessed household borrowings
and cross-border or foreign-currency liabilities as potential
sources of vulnerability by back-testing them against earlier
crises. They then scored the indicators by the amount they
currently deviate from long-term trends.