Another measure is to compare the prediction of the model with actual events (within-sample prediction). Figure 12 plots the estimated probability of a crisis for six of the eight countries that had banking crises in 2008–09 compared with the average predicted risk for all countries during the same period.<sup>9</sup> In all cases, the model suggests an above-average risk of crisis for those countries that did have a crisis. Moreover, for all countries, the predicted risk of crisis increased rapidly before and including the year of crisis. However, in the cases of Mongolia and Nigeria, the predicted likelihood of banking crisis was only marginally higher than the average for all countries.

# _Assessing current risks_

Given current conditions, empirical analysis of banking crisis risks suggests that several countries might be subject to heightened vulnerabilities.

Figure 13 presents key domestic risk factors in these countries. The shaded area in the center indicates average values of risk indicators in each region. The thick line represents the average values of risk indicators for countries whose predicted crisis risk are particularly elevated (one standard deviation above the average predicted risk of the entire sample).

Although conditions on the ground will vary and these kinds of gross indicators need to be interpreted with a great deal of caution, the results are instructive and point to areas of vulnerability that individual countries may need to address if they are to reduce risks of a crisis as external conditions tighten.

- In the East Asia and Pacific region, rapid credit expansions over the past five years and a rising ratio of short-term debt in total debt are common areas of concern.

- A high external debt to GDP ratio, which exposes countries to exchange rate and rollover risk, is an issue in several Central and Eastern European economies, with a heightened share of short-term debt in that total being a further concern in several others. A high short-term debt ratio makes a given level of debt much more sensitive to the short-term swings in investor sentiment or capital flows that might occur in the fast tightening and overshooting scenarios discussed earlier. Rapid credit growth is a further issue of common concern in the region, with credit to GDP ratios have risen sharply over the past five years in several economies— increasing the sensitivity of loan quality (and bank solvency) to the kind of sharp rise in interest rates discussed above.

- In Latin America and the Caribbean, fewer countries appear to be at immediate risk, with rapid credit growth combining with significant short-term debt ratios as the main sources of risk.

- In the Middle East and North Africa, political turmoil has cut deeply into economic growth in recent years (World Bank, 2014). Banking-sector risks stem mainly from its exposure to domestic credit quality and government financing needs, against the background of a deterioration in current account positions.

> 9 In the Laeven and Valencia (2012) data, eight developing countries had banking crisis in 2008–09 (compared with 15 in high-income countries): Hungary, Kazakhstan, Latvia, Mongolia, Nigeria, Russian Federation, Slovenia, and Ukraine. Hungary and Slovenia were not included in the prediction sample because of missing data in external debt (Slovenia) and short-term debt (Hungary and Slovenia).

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