The impact of global imbalances: Does the current account balance help to predict banking crises in OECD countries?
Given the magnitude of 'global imbalances' in the run-up to the subprime crisis, we test for an impact of the current account balance on the probability of banking crises in OECD countries since 1980. This variable has been neglected in most early warning models to date, despite its prominence in theory and in case studies of crises. We find that a current account variable is significant in a parsimonious logit model also featuring bank capital adequacy, liquidity and changes in house prices, thus showing the patterns immediately preceding the subprime crisis were not unprecedented. Our model, even if estimated over an earlier period such as 1980-2003, could have helped authorities to forecast the subprime crisis accurately and take appropriate regulatory measures to reduce its impact.