Explanation

The credit-to-GDP ratio (and its gap from trend) is the Bank for International Settlements' preferred early-warning indicator of the financial cycle: rapid credit growth relative to GDP signals overheating and banking-crisis risk. The tax-to-GDP and fiscal-deficit-to-GDP ratios describe the fiscal stance, and household consumption-to-GDP describes demand composition — none tracks the credit/financial cycle. Basel III norms use this credit-to-GDP gap to trigger the countercyclical capital buffer for banks.