(RP89) Strengthening Financial Stability Indicators In the Midst of Rapid Financial Innovation: Updates and Assessments
In response to the global financial crises in the 1980s and 1990s, national and international institutions started to monitor the soundness of the financial system more intensively. A wide range of instruments/indicators is used to assess financial system stability in analytical practice. These include in particular, analysis of quantitative indicators of financial system soundness and stability, including stress testing. These indicators strive to cover the issue of financial stability as a systemic phenomenon and therefore concern, not only financial institutions and markets, but also the real and government sectors as the main debtors of financial institutions, as well as the financial infrastructure. The inclusion of non-banking sector indicators in the financial stability indicators (FSIs) reflects the interconnectivity of the financial and real sectors, such as for example, unfavourable developments in the corporate sector pass-through to the loan portfolio of banks, thus having possibly a negative effect on financial stability.
Unlike price stability, financial stability has neither a fully established definition nor an aggregate indicator that the central bank can use as a measure of financial instability. Whereas at least some consensus has been reached on the definition of financial stability, the construction of an aggregate financial stability indicator continues to be in the research and experimental phase. The swift pace of financial innovation that has taken place over the course of the last decade further heightened the challenge to establish a comprehensive set of financial stability indicators. The rapid financial innovation has brought about a proliferation of new and increasingly sophisticated financial products and has led to the appearance of new types of institutions as well as created new and expanded roles for existing institutions.
The objective of this study is to assess and review the array of financial stability indicators employed by the SEACEN member central banks as well as the strength and the shortcomings of the available tools, especially in the context of the recent global financial crisis. It also assessed the comparability and consistency of the FSI indicators across the SEACEN economies as well as globally since the objective of a set of financial stability indicators is to provide users with a general idea of the soundness of the financial sector as a whole. Lastly, the study also examined the recent efforts undertaken to further enhance these indicators both globally and also at the SEACEN member central banks, especially in the wake of the recent global financial crisis.
By Dr. Yuthika Indraratna
By May Sokchetha
By Jinshik Son
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