Front Matter

Front Matter

Author(s):
International Monetary Fund
Published Date:
April 2002
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    © 2002 International Monetary Fund

    Production: IMF Graphics Section

    Figures: Joseph Kumar

    Typesetting: Alicia Etchebarne-Bourdin

    Cataloging-in-Publication Data

    Financial soundness indicators: analytical aspects and country practices/V. Sundararajan … [et al.]—Washington, D.C.: International Monetary Fund, 2002.

    p. cm.—(Occasional paper, ISSN 0251-6365; NO. 212)

    Includes bibliographical references.

    ISBN 9781589060869

    1. Financial institutions—Auditing. 2. Bank examination. 3. International Monetary Fund. I. Sundararajan, Vasudevan. II. International Monetary Fund III. Occasional paper (International Monetary Fund); no. 212.

    HF5686.F46F35 2002

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    Contents

    The following symbols have been used throughout this paper:

    • … to indicate that data are not available;

    • — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

    • – between years or months (e.g., 2000–01 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    • / between years (e.g., 2000/01) to indicate a crop or fiscal (financial) year.

    “Billion” means a thousand million.

    Minor discrepancies between constituent figures and totals are due to rounding.

    The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

    Preface

    The development of indicators of financial soundness responds to the need for better tools to assess financial systems’ strengths and vulnerabilities. A broad search for tools and techniques to detect and prevent financial crises was prompted by the international financial turmoil of the late 1990s. More recent episodes of instability have further highlighted the importance of continuous monitoring of financial systems as a crisis prevention tool. The IMF has undertaken a number of initiatives in this area, notably in support of strengthened surveillance of member countries through the joint IMF-World Bank Financial Sector Assessment Program, launched in 1999. Initial efforts were aimed at identifying a broad set of prudential and macroeconomic variables that are relevant for assessing financial soundness—referred to as macroprudential indicators. More recent work has focused on a subset of these indicators—both aggregate bank balance sheet and income statement information, and aggregate indicators of financial fragility of nonfinancial firms and nonbank financial markets—referred to as financial soundness indicators (FSIs).

    This paper brings forward recent advances in our understanding of financial soundness indicators with a view to supporting ongoing efforts by national authorities and private institutions worldwide to monitor financial system soundness. The paper also discusses the use of financial soundness indicators in the operational work of the IMF, and identifies significant gaps in knowledge and directions for further work. The material in this paper was originally prepared for discussions in the IMF Executive Board in June 2001.

    The insights contained in this paper are the result of the efforts of many. In particular, we would like to express our appreciation for member countries’ participation in the IMF Survey On the Use, Compilation, and Dissemination of Macroprudential Indicators, which helped to provide comprehensive information on country practices. A number of background documents by IMF staff and others referred to in this paper were also critical in distilling analytical lessons on the selection and use of the indicators. We would like to thank also Mahinder S. Gill, Alfredo M. Leone, Pamela Madrid, and Ewe-Ghee Lim for their inputs into this Occasional Paper; Jacqueline Irving and Lucy Ulrich of the External Relations Department for editing and production coordination; and Raja Hettiarachchi and Kiran Sastry for valuable research assistance. The views expressed in this paper are those of IMF staff and do not necessarily reflect the views of national authorities or of IMF Executive Directors.

    Carol S.Carson Stefan Ingves
    DirectorDirector
    Statistics DepartmentMonetary and Exchange Affairs

    Department
    List of AbbreviationsBIS

    Bank for International Settlements

    CAMELS

    Capital adequacy, asset quality, management soundness, earnings, liquidity, sensitivity to market risk

    CGFS

    Committee on the Global Financial System, BIS

    CPSS

    Committee on Payment and Settlement Systems, BIS

    EBIT

    Earnings before interest and tax

    EBITDA

    Earnings before interest, tax, depreciation, and amortization

    ECB

    European Central Bank

    FSAP

    Financial Sector Assessment Program

    FSI

    Financial soundness indicator

    FSSA

    Financial System Stability Assessment

    FX

    Foreign exchange

    G-7

    Group of Seven

    G-10

    Group of Ten

    GDP

    Gross domestic product

    IAIS

    International Association of Insurance Supervisors

    IMF

    International Monetary Fund

    IOSCO

    International Organization of Securities Commissions

    MPI

    Macroprudential indicator

    NBFI

    Nonbank financial intermediary

    NPL

    Nonperforming loan

    OECD

    Organization for Economic Cooperation and Development

    OTC

    Over-the-counter

    RAROC

    Risk-adjusted return on capital

    ROA

    Return on assets

    ROE

    Return on equity

    ROSC

    Report on Observance of Standards and Codes

    SDDS

    Special Data Dissemination Standard

    VaR

    Value at Risk

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