A Bank of Jamaica (BOJ) economist has proposed an early-warning tool designed to spot the warning signs of a financial crisis years before it hits, offering policymakers a chance to act preemptively. That’s the promise proposed by Romario Cameron, in his BOJ working paper published this month. Cameron lays out a risk indicator designed to detect the quiet build-up of vulnerabilities in Jamaica’s financial system long before they erupt into full-blown crises. “The findings indicate that the domestic cyclical systemic risk indicator is a valuable addition to Jamaica’s financial stability toolkit,” according to the working paper, ‘Identifying Financial Stress and Safeguarding Economic Growth: The Development of a Domestic Cyclical Systemic Risk Indicator for Jamaica’.Cameron, a financial research specialist in the Financial Stability Department at the BOJ, added that his research offers “timely signals that can support pre-emptive” policy interventions.HOW IT WORKSCameron is careful not to overstate his case, adding that the risk indicator is not an official BOJ policy tool. Rather, it is research in progress meant to generate discussion.The indicator is essentially a composite score that pulls together four key data streams: bank credit relative to the size of the economy, total real credit growth, real equity prices, and the current account balance. When these indicators move in certain ways, the risk indicator flashes a warning.Think of it like a weather forecast for the financial system. Cameron said that “using unbalanced quarterly data from 1996 to 2025, the results show that the risk indicator can identify key episodes of heightened stress”.The risk indicator is calibrated to spot “vulnerability periods” up to 12 quarters before a severe stress event hits the banking system. In Jamaica’s case, that typically means a sharp spike in non-performing loans (NPLs), which are loans that borrowers have stopped repaying for 90 days or more. NPLs currently hover at 2.4 per cent, well below the 10 per cent benchmark. The paper points to Jamaica’s devastating 1996–98 financial sector crisis as a case study. During that episode, non-performing loans surged to nearly 29 per cent of total loans, and the government had to step in with liquidity support worth roughly 44 per cent of GDP. The output losses were estimated at 37.8 per cent of trend GDP – a staggering blow to the economy.But it is not just about banking crises. The paper suggests the risk indicator can also signal broader economic trouble. Cameron’s research finds that an increase in the indicator tends to precede a measurable decline in economic growth.The paper finds that when the economy is already weak, a systemic risk shock hits harder and faster. When the economy is growing, the pain is delayed but lasts longer.“When output is below potential, systemic risk shocks are associated with sharper but shorter-lived effects on real GDP growth, whereas during expansions the adverse effects materialise with a delay and persist for longer,” the paper notes.A TOOL, NOT A CRYSTAL BALLThe paper reports that the risk indicator achieved an out-of-sample accuracy of 93 per cent in identifying vulnerability periods, with a near-perfect recall rate. In plain English: the indicator rarely misses a brewing crisis, even if it occasionally sounds a false alarm.The implications for policymakers: build buffers during the good times.business@gleanerjm.com