The close link between the financial cycle and financial crises underlies the fourth empirical feature: it is possible to measure the build-up of risk of financial crises in real time with fairly good accuracy. Specifically, the most promising leading indicators of financial crises are based on simultaneous positive deviations (or “gaps”) of the ratio of (private sector) credit-to- GDP and asset prices, especially property prices, from historical norms (Borio and Drehmann (2009), Alessi and Detken (2009)). 3 One can think of the credit gap as a rough measure of leverage in the economy, providing an indirect indication.
