The objective of this study is to develop an early‐warning system (EWS) for identifying systemic banking risk, which will give policymakers and supervisors time to prevent or mitigate a potential financial crisis. It is important to forecast—and perhaps to alleviate—the pressures that lead to systemic crises, which are economically and socially costly and which require significant time to reverse (Honohan et al., 2003). The current . supervisory policy toolkit includes several EWSs for flagging distress in individual institutions, but it lacks a tool for identifying systemic-level banking Gramlich, Miller, Oet, and Ong (2010) review the theoretical foundations of EWSs for systemic banking risk and classify the explanatory.
