Speed Reads


These are the countries most in danger of a banking crisis

These are the countries most in danger of a banking crisis

As I argued earlier this month, rising levels of debt are a double-edged sword. While they spur more economic activity in the present, the more debt grows, the more money consumers and businesses have to set aside to service their debts. Debt becomes dangerous to the economy when it grows faster than the economy itself, and debt levels growing faster than the economy can herald a banking crisis, or recession.

The Bank for International Settlements is out with a new report that looks at this difference between the growth rate in their economy, and in the level of debt in their economy, also known as the credit-to-GDP gap. The BIS is worried that the post-2008 global recovery is far from sound, and that rising debt levels may imperil it.

The BIS argues that history suggests that when the difference between a country or region's credit-to-GDP gap exceeds 10 percent, it indicates that serious strain on a banking system will occur within 3 years. And many of the countries in the danger zone are in Asia, most notably China:

(Bank for International Settlements)

The U.S., happily, does not appear to be in the danger zone.

Of course, nobody knows whether banking crises or recessions will actually materialize. GDP might start rising faster, or debt accumulation may slow down. But this is certainly a worrying sign that a large amount of global economic activity seems to be built on sand rather than solid rock.