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Do Our Money Worries Predict Future Banking Problems?

January 9th, 2019

Money Anxiety Level chart

Could consumer financial worries predict trouble for the banking industry?

That's the claim of Dr. Dan Geller and Haifa University's Prof. Nahum Biger. Writing in the Journal of Applied Business and Economics, they show "how money anxiety is a major factor impacting liquidity levels and interest rates in the banking system." Their study uses Using Geller's Money Anxiety Index as an important new variable in the predictive models.

Geller developed the index, which "measures the level of financial anxiety of people based on what they actually do with their money rather than how they respond to consumer confidence surveys." The index has declined substantially since the depths of the Great Recession, but is now forecast to be leveling off. Geller says this "Could signal the beginning of an economic slowdown in 2019."

In announcing the use of the index for the banking industry, Geller says, "The ability to see ahead is paramount if we want to keep the banking system safe and stable."

Geller used the index as a predictor in two financial forecasting models developed by his financial analytics firm, Analyticom. The first provides banks and credit unions with an early alert before their loan defaults start rising. The second helps them to price their deposits optimally to avoid liquidity runoff and excessive interest expense.

Tests of the index show it can give financial institutions up to 8 months warning of a possible increase in the rate of loan defaults and allowance for credit losses.

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