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© 2002 International Monetary Fund
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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
Preface
List of abbreivations
I Overview
Part I. Selected Analytical Aspects
II Indicators for Macroprudential Analysis
The Macroprudential Framework
FSIs in the Context of the FSAP
Qualitative Aspects
III Banking System
Bank Behavior and Vulnerabilities
Banking Indicators
VI Other Sectors and Markets
Nonbank Financial Intermediaries
Corporate Sector
Household Sector
Real Estate Markets
V Stress Testing of Financial Systems
Defining System-Wide Stress Tests
Measurement Techniques
Part II. Country Practices
VI The IMF Survey on FSIs
Introduction
Response to the Survey
VII Usefulness of FSIs
FSIs by Usefulness Group
Additional FSIs Identified by Respondents
VIII Compilation and Dissemination Practices
Compilation and Dissemination of FSIs and Their Components
Periodicity
Accounting, Regulatory, and Statistical Issues
IX Analytical Frameworks and Research
Macroprudential Research
Coverage of Financial Institutions
Norms, Benchmarks, and Thresholds
Presentation
Composite Measures
Business Surveys
X Concluding Remarks
Identification of Core and Encouraged Sets of FSIs
Directions for Further Work
References
Appendices
I Explanation of FSI Terms
II Aggregation Issues
III Additional FSIs Identified by Respondents
IV Tables of Survey Results
V Survey on the Use, Compilation, and Dissemination of Macroprudential Indicators
Boxes
1.1. Definitions
3.1. Basel Capital Adequacy Ratio
3.2. Valuation of Capital
4.1. Sectoral Balance Sheet Analysis
6.1. Structure of the Survey on FSIs
8.1. Compilation and Dissemination Practices
8.2. Country Practices on Nonperforming Loans
Tables
1.1. Financial Soundness Indicators
2.1. FSIs Used in Financial System Stability Assessments
3.1. Income Summary
4.1. Determinants of Corporate Vulnerabilities
4.2. Indicators for the Corporate Sector
4.3. Cash Flow Summary
4.4. Household Indicators Used in Norway, Sweden, and the United Kingdom
4.5. Real Estate Indicators
5.1. Data Requirements for an Integrated VaR Analysis
6.1. Summary of the Responses by Type of Economy
6.2. Summary of the Responses by Indicator
7.1. Group I FSIs by Type of Economy
7.2. Group II FSIs by Type of Economy
7.3. Groups III–IV FSIs by Type of Economy
8.1. FSIs: Compilation and Dissemination Practices
8.2. Periodicity of FSIs
8.3. Valuation Practices Affecting FSIs by Data Source
10.1. Core Set of FSIs
10.2. Encouraged Set of FSIs
Figures
2.1. Components of Macroprudential Analysis
5.1. Decision Sequence for Stress Testing
7.1. Summary of the Usefulness of FSIs
9.1. Institutional Coverage of Analysis
9.2. Factors Used to Identify Key Subsectors
9.3. Presentation of FSIs
Appendix Tables
A1.1. Explanation of FSI Terms
A4.1. FSIs for Which Components Are Extensively Compiled
A4.2. SDDS Subscribers: Compilation and Dissemination of FSIs and Components
A4.3. Usefulness of FSIs by Type of User and Type of Economy
A4.4. Compilation and Dissemination of FSIs by Type of Economy
A5.1. MPI Survey—Part I (a): User Questionnaire
A5.2. MPI Survey—Part I (b): Supplementary Issues
A5.3. MPI Survey—Part II (a): Compilation and Dissemination Questionnaire
A5.4. MPI Survey—Part II (b): Supplementary Issues
A5.5. MPI Survey—Part II (c): Valuation Issues
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 |
| Director | Director |
| Statistics Department | Monetary and Exchange Affairs Department |
| Carol S. | Carson Stefan Ingves |
| Director | Director |
| Statistics Department | Monetary and Exchange Affairs Department |
List of Abbreviations
| BIS | 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 |