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Mr. Roger Nord

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

Substantial progress has been made during recent years in forging a consensus on the importance of strengthening the architecture of the international financial system. The international community, acting through various forums, has identified a number of priorities in this work, including the need to enhance its own—and the markets’—ability to assess the strengths and vulnerabilities of financial systems, and to develop the analytical and procedural tools needed to perform this task. In particular, the importance of assessing the soundness of financial systems as part of the IMF’s surveillance work was given prominence by the Group of Twenty-Two finance ministers and central bank governors in the Report of the Working Group on Strengthening Financial Systems in October 1998. The working group recommended that financial sector surveillance be anchored to the IMF surveillance process, with expert support from the World Bank and elsewhere. This process is now well under way as part of the joint World Bank-IMF Financial Sector Assessment Program (FSAP), and the related Financial System Stability Assessments (FSSAs).1 The development and possible dissemination of so-called macroprudential indicators (MPIs)—defined broadly as indicators of the health and stability of financial systems—have been encouraged recently by both the Group of Seven (G–7) and the IMF Interim Committee.2 Such indicators will be critical in producing reliable assessments of the strengths and vulnerabilities of financial systems as part of IMF surveillance, and to enhancing disclosure of key financial information to markets.

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

The ability to monitor financial soundness presupposes the existence of indicators that can be used as a basis for analyzing the current health and stability of the financial system. These macroprudential indicators comprise both aggregated microprudential indicators of the health of individual financial institutions, and macroeconomic variables associated with financial system soundness. Aggregated microprudential indicators are primarily contemporaneous or lagging indicators of soundness;4 macroeconomic variables can signal imbalances that affect financial systems and arc, therefore, leading indicators. Financial crises usually occur when both types of indicators point to vulnerabilities, that is, when financial institutions are weak and face macroeconomic shocks.

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

This chapter reviews the theoretical and empirical literature, other than work done by the IMF,39 which would support the selection of a core set of MPIs. In general, these studies look at the features of crisis-prone systems, with a view to anticipating future crisis events. By attempting to identify leading indicators of crises, rather than contemporaneous indicators of financial soundness, much of the earlier literature did not specifically review the full range of potential MPIs. More recently, the focus of many studies has shifted toward contemporaneous indicators of financial health. No consensus has yet emerged, however, from this body of work on a set of indicators that is most relevant to assessing financial soundness, or to building effective early warning systems. The statistical significance of individual indicators is often found not to be strong, and some of the studies have produced conflicting results. This may be due to differences among crises, so that specific indicators may be more or less relevant to each case.

International Monetary Fund
The adverse impact of the crisis on Luxembourg’s growth outlook is partly mitigated by the authorities’ well-conceived fiscal policy response. The staff report for Luxembourg’s 2009 Article IV Consultation highlights economic developments and policies. It combines substantial fiscal stimulus, including subsidies aimed at stabilizing employment, with the full functioning of the automatic stabilizers. All major expenditure components of GDP are likely to be adversely affected by the financial crisis, waning confidence, and euro area recession.
International Monetary Fund. External Relations Dept.
The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy. www.imf.org/external/pubs/ft/survey/so/home.aspx
International Monetary Fund. External Relations Dept.
L’édition web du Bulletin du FMI est mise à jour plusieurs fois par semaine et contient de nombreux articles sur des questions de politique générale et de politique économique d'actualité. Accédez aux dernières recherches du FMI, lisez des interviews et écoutez des podcasts proposés par les principaux économistes du FMI sur des questions importantes de l'économie mondiale. www.imf.org/external/pubs/ft/survey/so/home.aspx
Mr. David M. Cheney

The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy. www.imf.org/external/pubs/ft/survey/so/home.aspx

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

In response to the recent crises, many institutions have initiated or intensified work on developing macroprudential indicators and macroprudential analysis capabilities. A selection of these efforts is summarized in this section. The statistical frameworks that are in place in some of the institutions are discussed in Appendix I.

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

Following the severe financial crises of the 1990s, identifying and assessing financial sector vulnerabilities has become a key priority of the international community. The costly disruptions in global markets underscored the need to establish a set of monitorable variables for evaluating strengths and weaknesses in financial institutions and to alert authorities of impending problems. These variables, indicators, of financial system health and stability known collectively as macroprudential indicators, are the subject of this Occasional Paper by the Monetary and Exchange Affairs Department and the Statistics Department. Macroprudential indicators take measures at both the level of aggregated financial institutions and at the macroeconomic level; financial crises often occur when weaknesses are identified in both. The authors provide a breakdown and explanations of these indicators and a review of the theoretical and empirical work done thus far. Work at other international and multilateral institutions is included as well as the experiences of several national central banks and supervisory agencies. This paper provides a valuable reference source of current knowledge about macroprudential indicators and issues related to their analysis, identification, measurement, and possible dissemination.