Credit efficiency: Another early warning indicator for systemic risk

Credit booms can lead to either financial crises or economic growth, depending on their nature. Identifying harmful credit booms and providing early warnings of financial crises remain key challenges. This paper introduces a new Credit Efficiency Indicator that can distinguish between different types of credit boom and detect early signs of a financial crisis. Based on G20 data over 30 years and using panel regression models with interaction terms, as well as probit and logistic models for binary crisis prediction, the results show that a sustained decline in credit efficiency significantly increases the likelihood of a financial crisis. The paper critiques traditional indicators such as the credit gap and leverage ratio, which focus on debt size but fail to reflect the quality and efficiency of credit allocation. The study emphasizes that credit efficiency, representing effective credit allocation and its conversion into economic output, is crucial for both economic growth and financial stability. This research also offers policymakers new perspectives and tools to improve early warning systems and systemic risk management. • Construct credit efficiency as a systemic risk early warning indicator. • This indicator plays a crucial role in identifying harmful credit booms. • The indicator has unique capabilities in forecasting financial risks. • Emphasize the shift of macroprudential policy towards capital allocation efficiency. • Advocate targeted deleveraging policies to achieve a balance between growth and risk control.