Do we hear warning bells of a banking crisis?

The Bank of International Settlements (BIS) indicated the possibility of some countries facing a banking crisis. These countries include China, Hong Kong, Canada and Australia. The BIS report merely spoke of indications and did not provide any substantial assurance of a crisis.

The report studied various indicators including debt servicing ratio and the credit-to-GDP gap. The debt servicing ratio measures the ability to repay debt based on income while the credit-to-GDP gap measures the growth of debt and its impact on the economy.

The study indicated that China’s debt and its debt servicing ratio stood at levels which were likely to jeopardize its banking system.

A report published by the International Monetary Fund at the end of last year had hinted at three key issues in China’s financial system which included an increase in risky credit, shadow banking and excessive hazardous risk-taking. The Chinese authorities were said to have taken actions to remedy these issues.

Hong Kong and Canada were also found to be vulnerable to a banking crisis due in part to increasing property prices.

Although not at the same risk level, Australia too seems to be facing the risk of a banking crisis. The country’s debt service ratio and cross-border claims to GDP indicators seemed to stand at stress levels.

The BIS said that the global economy and financial markets are likely to face volatility going forward and such situations would be hard to avoid.