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Systemic indicators

This article explores systemic indicators for financial stability analysis and macroprudential policy, including early warning indicators, financial stability/vulnerability indicators, and macro-prudential indicators. It also discusses commonly used variables in financial stability reports and provides an overview of macroprudential policy frameworks.

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Systemic indicators

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  1. Systemic indicators Developing inputs on system-wide risks for financial stability analysis and macroprudential policy Paul Van den Bergh Head of Information, Statistics and Administration Monetary and Economic Department 1

  2. What are systemic indicators? • Early warning indicators • Financial stability/vulnerability indicators • Financial soundness indicators • Macro-prudential indicators • Mixture of “individual” indicators and “composite” indicators 2

  3. Commonly used variable in financial stability reports • Real economy: GDP, government fiscal position, inflation • Corporate sector: debt to equity, earnings (to interest and principal expenses),fx exposure, defaults • Household sector: assets and liability positions, income, consumption, debt service levels • External sector: (real) exchange rates, fx reserves, CA+capital flows, maturity/currency mismatches • Financial sector: money, (real) interest rates, bank credit, bank leverage, NPLs, CDS premia, capital adequacy, liquidity ratio, credit ratings, sectoral/regional concentration of exposures • Financial markets: stock index, corporate bond spread, market liquidity, volatility, house prices

  4. Macroprudential policy/framework • Much work in Basel, still confusion over its definition • Two features • Focus on financial system as a whole • Treat aggregate risk as dependent on collective behaviour of financial institutions (endogenous) • Contrast with microprudential which focuses on individual institutions and treats aggregate risk as exogenous • For 1: think of financial system as portfolio of securities with each security representing financial institution • For 2: think of link credit extension to economic activity, to asset price inflation, to increase in valuation of collateral to credit extension …

  5. Macroprudential policy/framework: dimensions • Risk distribution at a given point in time (cross-sectional) • Correlation of exposures across institutions (direct or through linkages) • Contribution of individual institution to system-wide risk • Likelihood of failure if others face distress at same time • Vulnerability to risk concentrations even if individual institutions are diversified • Risk evolution over time (time dimension) • How can system-wide risk by amplified by interaction financial system and real economy? • Procyclicality • Impact of macroeconomic sources of risk: asset prices, credit, leverage • Important implications for calibration of prudential tools

  6. Macroprudential policy/framework: cross-sectional • Measure likelihood of systemic event at given point in time • Use techniques applied to portfolios of securities • Data required • Size of institutions • Institution’s probability of default • Loss-given default in each case • Correlation of defaults • Information can be collected from supervisory assessments, prices of bank equity and debt • Overall level of systemic risk increases with institutions’ exposures to common risk factors

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  8. Macroprudential policy/framework: cyclical • Countercyclical capital requirements (CR) • Choose indicator that signals time to build up and release capital buffer • Choose formula to determine CR when indicator changes • Adjust actual CR (rule-based or discretionary) • Possible indicators • Credit spreads • Real asset prices • Composite indicator combining credit/GDP ratio and real asset prices • Example for US • Variable presented as deviations from long-term average

  9. Reprioritisation of Financial Soundness Indicators? • Significant statistical project developed with wide consultation • Large number of participating countries • Distinction core and encouraged sets? • Core set • various ratio’s of aggregate balance sheet items of deposit takers • concept of consolidation not clearly understood • difficult to integrate data with other banking datasets

  10. Reprioritisation of Financial Soundness Indicators? • Encouraged set • Includes indicators on indicators for other sectors, financial markets and real estate price indices • More emphasis on non-bank financial sectors? • Financial positions of other sectors through financial account/balance sheet approach? • More emphasis on housing and housing finance indicators (methodology on residential real estate price indices being developed by IWGPS/Eurostat)?

  11. Conclusions • Need to be clearer about what we want to measure (individual elements of “financial situation”, composites, leading indicators?) • Specific set of information requirements for macroprudential policy/framework (cross-sectional and cyclical analysis of aggregate risk; mixture of micro and macro data) • Possible to improve FSI’s both in terms of methodology and content (distinction core vs encouraged, better coverage of non-bank sector, more “agile” methodology)

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