Current Developments in Monetary and Financial Law, Vol. 5

Chapter 7 Central Banks and Financial Stability: A Survey of Financial Stability Reports

International Monetary Fund
Published Date:
November 2008
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In the last three decades, financial stability has emerged as an important public policy objective. The main reasons for the increased interest in financial stability include the increased frequency and high costs of financial crises, the explosive growth in the volume of financial transactions within nations and worldwide, and the increased complexity of new financial instruments.1

One of the most visible signs of this increased focus on financial stability has been the rapid growth in the past decade in the number central banks publishing a financial stability report (FSR). As of the end of 2005, almost fifty central banks were publishing FSRs, and many others were considering publication.

This chapter builds extensively on the author’s work, which was the first comprehensive survey of the available FSRs (hereinafter Čihak 2006 or the survey).2 It surveyed 160 FSRs published in 47 countries over a period of more than 10 years (altogether, more than 10,000 pages of text, graphs, and tables).3 Relying on this research, the chapter focuses on the definition of financial stability, the aim of FSRs, and the central bank’s role in financial stability.

The chapter first discusses what an FSR is and how it differs from other central bank reports, then presents a survey of which central banks publish FSRs. The ensuing section describes several important features of FSRs, in particular the definition of financial stability in FSRs, objectives of an FSR, its role in central bank accountability, and the overall assessments in FSRs. Finally, the chapter illustrates, based on the survey of Čihák 2006, areas of needed improvement in the existing FSRs.

What is An FSR?

Defining an FSR is far from straightforward. Central banks and other institutions have been producing a number of outputs covering the financial sector, but varying widely in a number of respects. Virtually every central bank publishes an annual report or another report with some coverage of the financial sector. An FSR, however, is a more specific product.

For the purpose of this chapter, an FSR is defined as a regular, self-contained central bank publication that focuses on risks and exposures in the financial system. The key elements of this definition are as follows:

  • Focus on risks and exposures. General-interest publications, such as annual reports with a section describing the performance of the banking sector, do not qualify as FSRs if they only discuss performance without covering risks and exposures. Also, central banks in some countries publish separate reports on financial system structure or related development issues (e.g., the European Central Bank (ECB) publishes a regular report on banking structures in the European Union). These reports have an important function, but are not considered an FSR for the purposes of this study.
  • Systemic coverage. Some rating agencies publish reports on the soundness of specific institutions or even groups of institutions, focusing on individual institutions. By contrast, FSRs cover financial systems. Even though some calculations in FSRs are based on an individual institution’s data, most results are presented in aggregate form and the focus of the report is on systemic issues rather than on soundness of individual institutions.4 The systemic focus of the FSR reflects its role in the framework of financial sector regulation and supervision. In particular, an FSR is part of a central bank’s macroprudential surveillance function (see Table 1).
  • Publisher. Most FSRs are published by central banks. In several countries, a report on risks in the financial system is also published by a separate regulatory agency (these are not included in the survey of FSRs). At a global level, stability reports are also published by international organizations, in particular the IMF (the Global Financial Stability Report), which is a broader survey of financial stability than the country-specific reports. There have also been several reports on financial stability published by private-sector participants. Those reports, while interesting, tend to be one-off endeavors rather than regular documents.5 This chapter (and the Čihák survey) focuses on regular reports published by central banks.
  • Self-contained nature. FSRs are generally stand-alone documents, even though in some cases they are a part of another publication (e.g., an annual report or a bulletin). To qualify as an FSR, a text has to be relatively self-contained and have analytical depth. For example, a short section or several paragraphs describing banking sector developments in an annual report would generally not qualify as an FSR. A table of macroprudential indicators with a short commentary would not qualify. By contrast, Deutsche Bundesbank’s roughly 80-page “Report on the stability of the German financial system” in 2004 clearly qualified as an FSR, even though it was only a chapter in the central bank’s monthly report.6
  • Regularity of publication. FSRs are regular (typically annual or semi-annual) publications. A one-off report on the financial sector is not considered an FSR.
Table 1.General Structure of Financial Sector Regulation and Supervision
Type of

Market Failure




Regulatory/ supervisory areaMacro-prudential surveillance (financial stability)Micro-prudential supervision (individual institutions)Business supervision (consumer protection)Competition
Sub-sectorsBanksCentral bank, monetary authorityOneOneSeparate agency responsible for competition in general
Insurance companiesOrOr
Capital market firmsMoreMore
Other financial firmsagenciesAgencies
Source: The author, adapted from Martin Čihák and Richard Podpiera, “Is One Watchdog Better Than Three? International Experience with Integrated Financial Sector Supervision,” IMF Working Paper No. 06/57 (Washington, D.C.: International Monetary Fund, 2006).
Source: The author, adapted from Martin Čihák and Richard Podpiera, “Is One Watchdog Better Than Three? International Experience with Integrated Financial Sector Supervision,” IMF Working Paper No. 06/57 (Washington, D.C.: International Monetary Fund, 2006).

FSRs also have secondary features that vary from country to country. For example, they use different titles, such as Financial Stability Review (Bank of England or Bank Indonesia), Financial System Review (Bank of Canada), Monetary and Financial Stability Report (Hong Kong Monetary Authority), or Macroprudential Analysis (Croatian National Bank). Structure, length, and format also vary substantially.

Who Publishes FSRs?

The first FSRs were published in the mid-1990s in the United Kingdom and several Nordic countries. Since then, the number of central banks publishing FSRs has increased rapidly, from two in 1995 to almost fifty at the end of 2005 (Figure 1).7 In addition, several central banks produce FSRs internally and are considering their publication in the future.8

Figure 1.The Number of Countries Publishing FSRs, 1995–2005

Source: Author’s calculations, based on information available from individual central banks.

The characteristics of central banks that publish FSRs can be summarized as follows (see also Table 3):

Table 2.Financial Stability Reports Included In the Survey
CountryPublishing InstitutionFrequencyStarting Year
ArgentinaBanco Central de la Rep.ArgentinaSemi-annual1999
AustraliaReserve Bank of AustraliaSemi-annual2004
AustriaÖsterreichische NationalbankSemi-annual2001
BelgiumNational Bank of BelgiumAnnual2002
BrazilBanco Central do BrasilSemi-annual2002
CanadaBank of CanadaSemi-annual2002
ChileBanco Central de ChileSemi-annual2004
ChinaPeople’s Bank of ChinaAnnual2005
ColombiaBanco de la República ColombiaSemi-annual2002
CroatiaCroatian National BankSemi-annual2005
Czech Rep.Czech National BankAnnual2004
DenmarkDenmarks NationalbankAnnual2002
Euro AreaEuropean Central BankAnnual2004
EstoniaEesti PankSemi-annual2003
FinlandSuomen PankkiAnnual2003
FranceBanque de FranceSemi-annual2002
GermanyDeusche BundesbankAnnual2004
GhanaBank of Ghana5x per year12005
GreeceBank of GreeceAnnual22004
HungaryNational Bank of HungarySemi-annual2000
Hong Kong SARHong Kong Monetary AuthoritySemi-annual2003
IcelandCentral Bank of IcelandSemi-annual2000
IndonesiaBank IndonesiaSemi-annual2003
IrelandCentral Bank and Financial Services Authority of IrelandAnnual2000
IsraelBank of IsraelAnnual2003
JapanBank of JapanAnnual2005
KenyaCentral Bank of KenyaAnnual2004
KoreaBank of KoreaSemi-annual2003
LatviaBank of LatviaSemi-annual2003
MacaoMonetary Authority of MacaoSemi-annual2005
NetherlandsDe Nederlandsche BankSemi-annual2004
New ZealandReserve Bank of New ZealandSemi-annual2004
NorwayNorges BankSemi-annual1997
PhilippinesBangko Sentral ng PilipinasSemi-annual1999
PolandNational Bank of PolandSemi-annual2001
PortugalBanco de PortugalSemi-annual2004
RussiaBank of RussiaAnnual2001
SingaporeMonetary Authority of SingaporeSemi-annual2003
Slovak RepublicNational Bank of SlovakiaAnnual2003
SloveniaBank of SloveniaAnnual2004
South AfricaReserve Bank of South AfricaSemi-annual2004
SpainBanco de EspañaSemi-annual2002
Sri LankaCentral Bank of Sri LankaAnnual2004
SwedenSveriges RiksbankSemi-annual1997
SwitzerlandSchweizerische NationalbankAnnual2003
TurkeyTürkiye Cumhuriyet Merkez BankasýSemi-annual2005
United KingdomBank of EnglandSemi-annual1996
Note: Additionally, in Norway and the United Kingdom there are also FSR-like reports published by the unified supervisory agencies. In Russia, the central bank publishes two different reports qualifying as stability reports.

Available on the website since 2005 as Volume 5. Earlier volumes not available to the author.

A chapter on banking sector and its supervision included in the annual report. Given the extent of the chapter and its relatively self-contained nature, it is classified as an FSR since 2004 for the purpose of this text.

Note: Additionally, in Norway and the United Kingdom there are also FSR-like reports published by the unified supervisory agencies. In Russia, the central bank publishes two different reports qualifying as stability reports.

Available on the website since 2005 as Volume 5. Earlier volumes not available to the author.

A chapter on banking sector and its supervision included in the annual report. Given the extent of the chapter and its relatively self-contained nature, it is classified as an FSR since 2004 for the purpose of this text.

Table 3.Correlations between FSR Publication and Other Characteristics
FSR publishedFS in a separate organizational unitOfficial FS among objectivesIndependent monetary policyBanking supervision in the central bankAdvanced economyFSAP took place or requested by authorities 1/
FSR published1.000.910.13−0.31−0.260.550.37
FS in a separate organization al unit0.911.000.14−0.25−0.290.540.33
FS among official objectives0.
Independent monetary policy−0.31−−0.61−0.26
Bank supervision in central bank−0.26−−0.24−0.16
Advanced economy0.550.540.17−0.61−
FSAP took place or requested 10.370.330.08−0.26−
Source: The author’s calculations based on individual FSRs.Note: Each row and column corresponds to a dummy variable indicating whether the respective feature is present (1) or not (0). The values in the table are pairwise correlation coefficients for these dummy variables. FS refers to financial stability.

FSAPs up to end-2004.

Source: The author’s calculations based on individual FSRs.Note: Each row and column corresponds to a dummy variable indicating whether the respective feature is present (1) or not (0). The values in the table are pairwise correlation coefficients for these dummy variables. FS refers to financial stability.

FSAPs up to end-2004.

  • Income level. The FSRs are published by central banks in high-and medium-income countries (Figure 2). Low-income country central banks do not generally publish FSRs, even though many cover financial sector issues to some extent in their annual reports or other publications. Also, some countries publish general reports on financial sector performance, while others publish separate reports on financial sector structure and development.
  • Geography of FSRs. Europe accounts for a majority of the published FSRs. In the euro area, FSRs are published both by the ECB and by the individual central banks. Of the 30 OECD countries, 25 publish FSRs.
  • Institutional basis for financial stability analysis. Despite the growing interest in financial stability in central banks, it is rare to find a direct reference to financial stability as a central bank’s objective in its basic founding legislation. If financial stability is included, it is more likely to be found among “tasks” than among “objectives.” Financial stability is often bundled together with other standard tasks, such as the support for smooth functioning of the payment system, regulation and supervision of the banking system, or lender-of-last resort functions.9 Financial stability and the central bank’s role in it is more commonly specified in other documents, such as mission statements or memoranda of understanding (if there is an integrated financial supervisory agency outside the central bank). Central banks typically explain their interest in the stability and general health of the financial system by their role of lender of last resort and their monetary policy objectives.10 The correlation between the publication of an FSR and the explicit inclusion of financial stability among objectives in central bank legislation is therefore positive, but rather weak (see Table 3).
  • Organizational structure. The emphasis on financial stability is often reflected also in the organizational structure of the central bank. Central banks publishing FSRs are more likely to have a separate organizational unit covering financial stability, but the relationship is not one-to-one (some FSR-publishing central banks have the financial stability function located in bank supervision, research, or another organizational unit; and there are central banks that have a separate organizational unit, but do not publish an FSR).
  • Financial Sector Assessment Program. In 1999 the IMF and the World Bank launched the Financial Sector Assessment Program (FSAP), which provides countries with independent assessments of their financial sector and its regulatory framework. Participation in the program is voluntary. Interestingly, most FSRs published in the early years of the program (up to 2004) were by central banks that have participated or volunteered to participate (Table 3). This indicates that the reasons for publishing FSRs were similar to those prompting countries to volunteer early for the FSAP.

Figure 2.Countries Publishing FSRs, by Income Level

Source: Author’s calculations based on individual FSRs.

Selected Features of FSRs

To assess FSRs, Čihák 2006 has identified five main elements of the report: its aims; the overall assessment presented; the issues covered; the data, assumptions, and tools being used; and other features such as the reports’ structure; and three key characteristics: clarity, consistency, and coverage.11Table 7 (located at the end of this chapter) presents this “CCC framework” in a matrix format.

This section focuses on definitions of financial stability in FSRs, objectives of an FSR, its role in central bank accountability, and the overall assessments in FSRs. The CCC framework also contains other important elements, such as the scope and method of analysis. Those are covered in more detail in Čihák 2006.

How Do FSRs Define Financial Stability?

A basic question faced by a reader trying to understand an FSR is what the central bank means by the term financial stability. Some FSRs attempt to define the term while also recognizing that financial stability is a complex concept. Many FSRs make clear that they are not focused on problems in individual institutions but rather on system-wide issues. Furthermore, there is a general understanding that financial stability refers to smooth functioning of the components of the financial system (financial institutions; markets; and payments, settlement, and clearing systems). The prevailing view is that the analysis of financial stability covers phenomena that (1) impair the functions of the financial system; (2) create vulnerabilities in the financial system; and (3) lead to a negative impact on the financial system and thereby on the economy as a whole. Beyond that, the exact definitions of financial stability vary across the FSRs.

The survey of FSRs in Čihák 2006 suggests that financial stability can be defined narrowly or broadly.12 At one end of the spectrum, some FSRs define financial stability as the antithesis of system-wide financial crises in which the financial system fails to function and the institutional underpinnings of a monetary economy—payments and settlements systems, and the acceptability of bank deposits as money—are disrupted. Such episodes can be very costly, so policymakers need to assess the (usually low) risks of their occurrence. Financial crises of this sort are of particular concern to central banks because they disrupt the transmission mechanism of monetary policy (see Table 1). Table 4 illustrates this definition: financial crises are results of significant shocks in a situation when the system has large exposures (bottom right cell in the table); all other situations are identified with financial stability.

Table 4.Definitions of Financial Stability: Overview
Significant Exposures?
Not apparentApparent
Significant shocks?NoFinancial stabilityFinancial stability
Not now, but plausibleFinancial stabilityFinancial fragility
YesVolatility (turbulences, bubbles)Financial crisis
Source: The author, based on a survey of the literature.Note: The table covers only definitions based purely on risks and exposures. It does not cover some of the broader definitions mentioned in the text, in particular those incorporating efficiency.
Source: The author, based on a survey of the literature.Note: The table covers only definitions based purely on risks and exposures. It does not cover some of the broader definitions mentioned in the text, in particular those incorporating efficiency.

The definition of financial stability has obvious impacts on the scope of the financial stability reports. The broader the definition of instability, the more potential threats to stability (and the longer the report).13

Many FSRs use broad definitions of financial instability (see Table 5 for examples). In particular, most also include situations when the system—even though not in a state of crisis—is fragile, i.e., has significant exposures to plausible risks. Using such a broad definition of instability calls for the use of additional instruments. In particular, stress tests are used to distinguish whether the system has significant exposures to the plausible risks. If the stress tests suggest the existence of such exposures, the system is deemed fragile; otherwise, it is considered stable (robust).

Some FSRs also include, under the heading of instability, those situations when a system is subject to significant shocks, even though it does not seem to have major exposures. These include major volatility in financial markets (asset price bubbles), with uncertain impacts on financial institutions. Including these situations under the heading of instability is potentially more controversial than including the situations of fragility because the system does not have apparent exposures. However, some FSRs do this partly in recognition of the limitations of the available tools to uncover hidden exposures, e.g., those relating to institution-to-institution contagion or correlations of exposures across a range of portfolios. These FSRs, while noting the absence of apparent exposures, maintain that it is prudent to watch closely the sources of risk.

Some FSRs define financial stability even more broadly, as the situation when the efficiency of financial intermediation between ultimate borrowers and ultimate lenders is not subject to significant adverse shocks. If this definition is adopted, the remit of policymakers is correspondingly broader, and their analysis more encompassing. The assignment of responsibility to the central bank for safeguarding financial stability is less clear-cut if this definition is chosen. Supervisory and competition authorities, for example, would naturally have a close interest (see Table 1).

Table 5.Examples of Definitions of Financial Stability in FSRs
CanadaExplicit definition not provided, but a box on the inside cover lists components of the financial system and notes that serious disruptions to one or more of these components “can create substantial problems for the entire financial system and, ultimately, for the economy as a whole.” The same box also notes that “inefficiencies in the financial system may lead to significant economic costs over time and contribute to a system that is less able to successfully cope with periods of financial stress.”Box on the inside cover
DenmarkExplicit definition not provided, but the FSR contains an implicit definition in a description of its purpose, namely “to assess whether the financial system is so robust that any problems in the financial sector do not spread and impede the functioning of the financial markets as efficient providers of capital for companies and households.” It also notes that “The approach is to consider the general risks to the financial system rather than the situation of the individual financial institutions.”Introduction
Euro Area“A condition where the financial system is capable of performing well at all of its normal tasks and where it is expected to do so for the foreseeable future.”Preface
IcelandThe FSRs made several references to Andrew Crockett’s definition (see supra note 1) that financial stability broadly hinges upon the stability of the key institutions and markets that make up the financial system. “This requires (1) that the key institutions in the financial system are stable, in that there is a high degree of confidence that they continue to meet their contractual obligations without interruption or outside assistance; and (2) that the key markets are stable, in that participants can confidently transact in them at prices that reflect the fundamental forces and do not vary substantially over short periods when there have been no changes in the fundamentals.”Various places in the FSR
Norway“Financial stability means that the financial system is robust to disturbances in the economy and is able to mediate financing, carry out payments and redistribute risk in a satisfactory manner. Experience shows that the foundation for financial instability is laid during periods of strong growth in debt and asset prices. Banks play a central part in extending credit and mediating payments and are therefore important to financial stability.”Box on the inside cover
Sweden“The analysis of financial stability concerns the ability to withstand unforeseen shocks to financial companies as well as to the financial infrastructure, that is, the systems that are required for making payments and for trading and delivering financial products. The analysis of financial companies concentrates on the four major Swedish banking groups because it is these that are of crucial importance for the payment system’s stability.”Foreword
Switzerland“A stable financial system can be defined as a system where the various components fulfill their functions and are able to withstand the shocks to which they are exposed. This report focuses on two vital elements in the system: the banking sector and financial market infrastructure.”Introduction
United KingdomExplicit definition not provided, even though implicitly the overview section reviews the elements that the Bank of England assesses (e.g., the major institutions’ profitability, capitalization, resilience to shocks).
Source: the author, based on the individual country FSRs.
Source: the author, based on the individual country FSRs.

Most FSRs include a general definition of stability. With the possible exception of the Swiss National Bank’s FSR, no FSR includes an operational definition of stability, which would narrow the range of indicators to be considered when assessing stability of the financial system. This issue is particularly relevant for FSRs using the broader definition of financial instability that includes resilience to shocks, because the distinction between stable and unstable systems is likely to depend on the degree of plausibility of the potential shocks to which a system is subjected. The absence of an operational definition of financial stability contrasts sharply with the framework for price stability, where an operational definition of price stability has played a key role in recent years, with a trend towards setting more explicit inflation targets (Table 6).

Financial stability is a more complex concept than price stability, and expecting that it can be boiled down to a single indicator and a single target range would not be realistic (reflecting also the fact that research in this area is not as developed as in the area of price stability). Nonetheless, clarifying a set of basic indicators that need to be looked at and a set of threshold values would be a useful way of clarifying the framework underlying the assessment of financial stability. Of course, having a summary indicator or a basic set of indicators does not mean that there is no role for other indicators or for nonquantitative factors.

The Swiss National Bank’s FSR, which highlights a “stress index” as a key summary indicator, is the first example of an FSR going in this direction. Another example is a new, revamped version of the Bank of England’s FSR that the bank unveiled in July 2006. It includes a summary table highlighting the key vulnerabilities for the UK financial system (e.g., low risk premia, global imbalances, and UK household debt), and indicating for each of these vulnerabilities whether their probability and their impact significantly/slightly increased/decreased or remained broadly unchanged.

Table 6.Schematic Comparison of Price Stability and Financial Stability
Price StabilityFinancial Stability
General definitionClearA range of definitions
Operational definitionClear (variable and target), especially in inflation targetingTypically not specified
Legal base for central bank’s roleBased on lawBased on interpretation of law
Scope of central bank’s responsibilityFull responsibilityPartial/shared responsibility, exact boundaries in some countries unclear, in others delineated by a memorandum of understanding
ResearchWell developedDeveloping
Note: This is, of course, only a schematic comparison that does not apply to all countries. For example, numerous central banks do not have an explicit inflation target. Nonetheless, the adoption of such targets has clearly been a trend in recent years.
Note: This is, of course, only a schematic comparison that does not apply to all countries. For example, numerous central banks do not have an explicit inflation target. Nonetheless, the adoption of such targets has clearly been a trend in recent years.

Why Publish an FSR?

There are arguments both for and against the publication of an FSR. Before undertaking publication, a central bank should consider the sensitivity of information to be included and the expense of the project, weighed against the benefits that accrue from such a publication in pursuing financial stability.

Reasons not to Publish an FSR

Before discussing reasons for publishing FSRs, it is useful to list the main reasons against publishing an FSR. Based on a survey of the literature and on discussions with staff of central banks that do not publish FSRs, the main reasons not to publish an FSR can be grouped into the following three categories:

  • Financial sector issues are too sensitive to be discussed openly in the public. It is possible to conceive of circumstances in which publication of a central bank analysis at a time of increasing risk to financial stability might precipitate the very shocks or crisis that the central bank is trying to avoid, by inducing liquidity problems in particular markets or financial institutions. That danger is reduced if the central bank has established a track record of unbiased analysis during a period of low risks to financial stability. The experience of FSR-publishing central banks so far does not provide an example of an FSR that triggered liquidity problems in the system.
  • Central banks have an incomplete degree of control over policy outcomes in the area of financial stability. One of the basic rules of good inflation reports is “say what you do—do what you say.” For FSRs, however, what the central bank can do has arguably much less of an impact on financial stability than it can have on achieving an inflation target, partly because achieving financial stability requires actions from other parties, such as other agencies and market players. However, because the desired outcome depends on a number of parties, not the least including the market players, putting out a high-quality report is important. If the report is persuasive, it may be able to trigger a desired action by the market players.
  • Preparing and publishing FSRs requires resources. The resource intensity of the exercise may be an important argument, particularly in central banks in smaller countries with limited resources. It would be unwise to launch an FSR when its quality could not be sustained or the report could not be produced regularly. However, three mitigating factors should be taken into consideration. First, the drafting team of FSRs in most central banks is relatively small, from four to ten people. Second, in small central banks with limited resources it may be useful to choose a relatively narrower operating definition of financial stability—as recommended in the case of Norges Bank14—which means that the scope of the report can be relatively smaller and require less staff. Third, for most central banks the choice is not really whether to produce such a report. Given the importance of financial sector stability for their overall objectives, most central banks have to monitor financial sector stability and thus typically produce regular reports on the subject for internal purposes. The real question in most cases therefore is what the costs would be to turn such reports into full-blown publications.

Reasons to Publish an FSR

On close inspection, none of the above reasons against publishing an FSR appears strong. What, then, are then the main reasons for publishing an FSR? Based on the survey of FSRs, the ultimate objective of the FSR for most central banks is contribution to financial stability. Some FSRs even recognize reduction of financial instability as the ultimate objective. For example, the Bank of Canada flags in a cover box of its FSR that it is “one avenue through which it seeks to contribute to the longer-term robustness of the domestic financial system.”

How can FSRs contribute to financial stability? They can do so by:

  • Improving the understanding of (and contributing to dialogue on) risks to financial intermediaries in the economic environment;
  • Alerting financial institutions and market participants to the possible collective impact of their individual actions;
  • Building a consensus for financial stability and the improvement of the financial infrastructure.

An FSR can add value to work undertaken by private agents in the financial sector itself because a central bank can draw on its macroeconomic expertise and its role in payments and settlements.

Some FSRs list a range of general aims that relate to the above mechanism of contributing to financial stability and can be seen as subordinate to the “ultimate objective.” In particular, FSRs often stress the objective of monitoring and presenting to the public the central bank’s appraisal of developments relevant for the financial sector and of their impact on financial sector stability. Other often-stated objectives include encouraging an informed debate on financial stability issues, disseminating information for transparency purposes, and influencing market participants. Some central banks see their FSRs as a tool to encourage greater cooperation between supervisory and regulatory authorities. Some see their stability reports as a way of building trust in the financial services industry, based on permanent monitoring of risks and pointing out of dangers to participants (for examples, see Čihák 2006).

Publication of FSRs is only one of a number of tools that public authorities have to affect financial stability. The authorities can help achieve financial stability by (1) ensuring integrity of payment systems; (2) regulating and supervising financial intermediaries to limit risk exposures and ensure that there are appropriate buffers; (3) working on crisis management, mitigating effects of international spillovers, and minimizing risk of asset price collapses; and (4) monitoring new risks.15 The FSR should especially play a key role in monitoring of new risks.

An additional reason for publishing an FSR is the positive impact that such a regular publication may have on the central bank itself. FSRs typically do not mention this as an explicit aim, but it is certainly important in the consideration of whether to start publishing an FSR. Bowen, O’Brien, and Steigum argue that publication subjects the central bank’s analysis to scrutiny by a wide range of possible critics; it therefore provides a discipline for surveillance work as to its quality, frequency, and timing; and it demonstrates that the central bank is fulfilling its remit.16 Hence publication can fulfill an important role in improving the accountability and transparency of the central bank.

Role in Central Bank Accountability

For central banks that have financial stability among their objectives (or are able to derive it from their objectives), it is useful to think about the FSRs as one of their accountability instruments. As Allen, Francke, and Swinburne have noted, the FSR could serve as a vehicle to allow stakeholders to form a view about how effectively the central bank is undertaking its broader financial stability responsibilities.17 The concept of stakeholders is viewed here in a broad sense, including the industry and the general public. In some cases, there may be a specific accountability with respect to a relevant overseeing body. In Norway, for example, the FSR is submitted first for a discussion at a meeting of Norges Bank’s executive board, and the main conclusions of the FSR are then summarized in a submission to the Ministry of Finance. In most countries, a launch of the FSR is accompanied by presentations to the media, market analysts, and in some cases academics. In most cases, FSRs are prominently displayed on the central bank’s website, typically in a special section entitled “Financial Stability.” FSRs are also made available in hard copies.

Central banks follow a gradual approach to launching FSRs. For example, Norges Bank’s staff started preparing internal reports in 1995. In 1997 the bank started publishing semiannual external reports. The reports first appeared in the central bank journal as extracts from a fuller report. Since 2000 they have been published in a special publication.

FSRs are part of a broader communications strategy of the central bank. The strategy comprises a number of other reports, each with different aims and audiences. Virtually all central banks publish an annual report and a general publication focused on macroeconomic developments (e.g., an inflation report in inflation-targeting countries).

In the financial sector, there may also be several central bank publications. For example, the European Central Bank supplements its Financial Stability Review with EU Banking Sector Stability and EU Banking Structures. In the United Kingdom, the Bank of England publishes a separate Payment Systems Oversight Report, which is featured prominently alongside its Financial Stability Review. In Brazil, the central bank’s FSR is accompanied by a set of reports on the composition and evolution of the national financial system and on the payments system. In Croatia, in addition to the FSR (Macroprudential Analysis), the central bank also publishes a more descriptive report focusing on changes in the structure and functioning of the banking system and its supervisory and regulatory mechanism (Banks Bulletin). In Poland, in addition to its Financial Stability Review and Financial Stability Report, the central bank also publishes the Financial System Development Report, which focus on the structure of the system. A number of FSR-publishing central banks also have separate reports on supervisory developments. Several FSR-publishing central banks also issue separate brochures on financial stability that are less technical and addressed to a more general audience than an FSR.

Overall Assessments in FSRs

Most of the overall assessments in FSRs have been positive. In a survey of the latest issues of the FSRs, virtually all (96 percent) have started off with a positive overall assessment of soundness of the domestic system (characterizing the health of the financial system as being, e.g., “in good shape,” “solid,” or at least “improving”). There are several possible reasons why the positive assessments are so prevalent:

  • As good as it gets. The global financial system has been characterized by a period of relative calm. There has been no major financial crisis in recent years, and liquidity has been abundant globally. In that sense, FSRs have not yet been put to a real test.
  • Selection bias. Countries with robust financial systems and well-designed frameworks are more likely to start publishing FSRs than those with weaker financial systems and frameworks. Therefore the prevalence of positive overall assessments in FSRs may simply reflect the fact that the systems reviewed in FSRs are in general in a better shape than those for which FSRs are not available.
  • Presentation bias. Some central banks may prefer to present the financial system in a positive light, partly because problems may be seen as a result of bad policies, and partly because of the fear that a negative assessment might trigger a decline in confidence in the system. The drawback of this approach is that (1) if problems are unreported for a while, they may accumulate and become more difficult to address than if they were addressed earlier; and (2) a central bank’s credibility may be impaired if the reports are perceived as biased. Central banks therefore typically hedge their assessments by noting possible warning signals and external and other risks faced by the system. Some FSRs include these warning signals only as “small print” in later parts of the report, while others have clear “red flags” in the overall assessment. As an example, Bowen, O’Brien, and Steigum, in their generally positive survey of the Norwegian FSR, note that the discussion of weaknesses in the financial system is sometime limited, and illustrate it by a moderate tone used when commenting on unfavorable developments in the insurance sector, which culminated in a government intervention in the fall of 2001.18 Only in 2002 did the FSR recognize that the sector has gone through a turbulent period.

How Do Existing FSRs Compare to the Proposed Criteria?

How do the existing FSRs compare to the ideal characterized in Table 7? Ideally, a full assessment should be done by independent experts, such as has been done in Sweden and Norway.19 In the absence of such a panel of experts, an assessment was carried out by the author of this chapter, using the proposed CCC framework. 20

As summarized in Table 7, the framework comprises 26 principles, organized into 5 key elements (aims, overall assessment, issues, tools, structure and other features) and 3 characteristics (clarity, consistency, and coverage). Each FSR was assessed against each of the criteria, on a 4-point scale: 4 (fully compliant), 3 (largely compliant), 2 (partly compliant), and 1 (not compliant).21 Simple (unweighted) averages were used to arrive at the aggregate gradings.22

The result of the analysis (Figure 3) is that most FSRs have an overall grading in the 2–3 range, and only three are in the 3–4 range, suggesting that there are areas for improvement in most existing FSRs. Areas for particular improvement include the specification and clarity of aims of the reports, and the clarity of the overall assessment. Also, for those reports that have been published for a longer period of time, consistency across the reports remains an issue. More specifically, the following are the main gaps in the existing FSRs:23

Figure 3.How Do Existing FSRs Compare to the CCC Criteria?1

1 FSRs published in 2005. Each of the principles in Table 7 was given the same weight for simplicity.

  • More standardized “core.” Many central banks should consider making the core section of their FSR more standardized across the years. In each main subsection, changes relative to the assessment in the previous FSR could be highlighted.
  • Aims. Some FSRs do not contain even a very broad definition of aims. Of those that do, many could make the aims more specific, in particular to include the aim to help provide information to be used as one of the inputs into market participants’ risk assessment procedures, and also the aim to serve as an accountability instrument.
  • Operational definition of financial stability. Central banks often include a definition of financial stability, but they do so only in very general terms.
  • Underlying data. FSRs mostly use charts to illustrate the points made in the text. While these are often eye-catching, it makes FSRs much more useful to users if tables with the key underlying data are also made available. These can be included as a separate attachment available on the website, as done, for example, in Sweden and New Zealand.

What factors can explain differences in the quality of FSRs, measured by their compliance with the CCC framework? To answer this question, a panel data regression was estimated for the available FSRs. The dependent variable was the overall grading of an FSR and the dependent variables were: (1) the length of time a central bank publishes an FSR; (2) level of economic development, approximated by GDP per capita; (3) the importance of the financial system in the economy, approximated by financial sector assets to GDP; and (4) a dummy variable taking on a value of one if the publishing central bank carries out banking supervision, and a value of zero otherwise.

The calculations suggest that gradings of FSRs issued by the same central bank improve with time. As the coverage of the FSR increases, more sophisticated tools are used, and the central bank gains more experience with analyzing financial stability and presenting the results in a public document. Gradings are also positively correlated with economic development, approximated by GDP per capita, which may be a proxy for factors such as relative amount of resources available for the analysis of financial stability or the availability of market-based information. The sign for the size of the financial system is positive, but the estimate is not statistically significant. Interestingly, gradings are on average higher for central banks not directly involved in day-to-day supervision, partly reflecting the fact that the overall assessments in these reports are more candid. 24

Table 7.Proposed “CCC” Framework for Assessing Financial Stability Reports
ClarityConsistencyCoverage /Contents
A. AimsA1. The definition of financial stability should be clearly indicated.

A2. The aims of the report should be clearly indicated.
A3. The definition of financial stability should be a standard part of the report, presented consistently across reports.

A4. The statement of aims should be a standard part of the report, presented consistently across reports.
A5. The definition of financial stability should cover both the absence of crisis and resilience to crises. Financial stability should be defined both in general terms and in operational terms.

A6. The aims of the report should be comprehensive.
B. Overall assessmentB1. The overall assessment should be presented clearly and in candid terms.B2. The overall assessment should be linked to the remainder ofthe FSR.

B3. There should be a clear link between the overall assessments over time, making it clear where the main changes took place.
B4. The overall assessment should cover the key topics.
C. IssuesC1. The report should clearly identify the main macro-relevant stability issues.C2. The coverage of issues should be consistent across the reports.C3. The coverage of the financial system should be sufficiently comprehensive.
D. Data, Assumptions, and ToolsD1. It should be clear what data are used to arrive at the results presented in the report.

D2. It should be clear what assumptions are being used to arrive at the results presented in the report.

D3. It should be clear what methodological tools are being used to arrive at the results presented in the report.
D4. The results should be presented in a consistent manner across the reports.D5. The report should use available data, including those on individual institutions.

D6. The report should use the available tools.
E. Structure and other featuresE1. The structure of the report should be easy to follow.

E2. Other features of the report—such as its length, frequency, timing, public availability, and links to other central bank reports—should be designed to support its clarity.
E3. The structure of the report should be consistent across time to make it easier to follow for repeat users.

E4. The other features of the report should be designed to support its consistency.
E5. The structure of the report should allow covering the key topics.

E6. The other features of the report should be designed to support its coverage.
Note: All principles are assessed on a 4-point scale: 4 (fully compliant), 3 (largely compliant), 2 (partly compliant), and 1 (not compliant).
Note: All principles are assessed on a 4-point scale: 4 (fully compliant), 3 (largely compliant), 2 (partly compliant), and 1 (not compliant).


This chapter surveyed the stability reports published by central banks. It noted that there is a growing trend to publish such reports, and that the sophistication of the reports—especially the issues covered and tools used—has been on the rise.

Based on the survey of the available FSRs and a comparison with the proposed benchmarks, it can be concluded that FSRs provide useful insights into how central banks analyze financial stability. But there are areas for improvement. These include clarifying the aims of the reports, providing an operational definition of financial sector soundness, clarifying the core analysis that is presented in FSRs consistently across time, and making available the underlying data.

The survey also suggests that the clarity, consistency, and coverage of an FSR improves with time. Quality is also positively correlated with the level of economic development. The size of the financial system has a positive, but insignificant impact. Quality is higher for central banks not directly involved in day-to-day supervision.

1See, for example, Andrew Crockett, “Why is Financial Stability a Goal of Public Policy?” in Maintaining Financial Stability in a Global Economy, a Symposium (Jackson Hole, Wyoming: Federal Reserve Bank of Kansas City, 1997) and C.A.E Goodhart, “A framework for assessing financial stability?” Journal of Banking & Finance, Vol. 30, No. 12 (2006), at 3415–22. As regards the costs, see Glenn Hoggarth, Glenn, Ricardo Reis, and Victoria Saporta, “Costs of Banking System Instability: Some Empirical Evidence,” Bank of England Working Paper No. 144 (London: Bank of England, 2001) (suggesting that average output losses during banking crises amount to 15–20 percent of annual GDP). As regards the frequency, see Michael Bordo, Barry Eichengreen, Daniela Klingebiel, and Maria Soledad Martinez-Peria, “Is the crisis problem growing more severe?” Economic Policy, Vol. 32 (2001) at 51–82 (They point out there was only one banking crisis in 1945–70, but nineteen in 1971–2000. The frequency of financial crises appears to have declined in the 2000s, however.)
2Martin Čihák, “How Do Central Banks Write on Financial Stability?” IMF Working Paper No. 06/163 (Washington, D.C.: International Monetary Fund, 2006) [herineafter Cihak 2006].
3Table 2 contains a list of the FSRs surveyed in this chapter. The survey also involved publications by more than 100 other central banks to determine whether these documents or their parts satisfy the criteria for an FSR. The survey reviewed 157 central bank websites listed at (last visited December 31, 2005).
4Some central banks issue two publications on the risks and exposures in the financial sector: for example, the European Central Bank publishes its Financial Stability Review and a more narrowly focused report on banking sector stability in the European Union; the National Bank of Poland publishes the end-year Financial Stability Report and the more narrowly focused mid-year Financial Stability Review. The analysis in this text focuses on the broader designed publication as the FSR.
5See, for example, Counterparty Risk Management Policy Group, “Towards Greater Financial Stability: A Private Sector Perspective,” July 27, 2005, available at The authors of the report include private-sector practitioners from leading Wall Street houses. The report contains numerous recommended actions in three categories: (1) “actions that individual institutions can and should take on their own initiative” (2) “actions which can be taken only by institutions collectively in collaboration with industry trade groups” and (3) actions which require complementary and/or co-operative actions by the official sector.” (p.11)
6In 2005 the Bundesbank moved to stand-alone FSRs.
7See the list of the identified FSRs in Table 2. In some countries, e.g., Norway and the United Kingdom, a report similar to an FSR is published also by a supervisory agency. In the Euro area, FSRs are published both by the European Central Bank and many of the member central banks.
8Given the lack of consistent information on internal FSRs, this survey focuses on the publicly available ones.
9For an overview of institutional frameworks for financial stability analysis in a number of countries, see Juliette Healey, “Financial Instability and the Central Bank—International Evidence,” in R. A. Brealey et al., eds., Financial Instability and Central Banks—A Global Perspective, Centre for Central Bank Studies (London: Bank of England, 2001); Sander Oosterloo and Jacob de Haan, “A Survey of Institutional Frameworks for Financial Stability,” Occasional Studies, Vol. 1, No. 4 (Amsterdam: De Nederlandsche Bank, 2003).
10See Healey, supra note 9.
11As explained in more detail in Čihák 2006, the approach is based on the work of Fracasso, Genberg, and Wyplosz, who surveyed inflation reports by 19 inflation-targeting central banks. Their study assessed the quality of the inflation reports by using the following criteria: clarity, consistency, and coverage of key issues (policy objectives, decision making, analytical framework, input data, presentation of forecasts, and evaluation of past forecasts and policy). The study found a positive link between report quality and policy predictability. See Andrea Fracasso, Hans Genberg, and Charles Wyplosz, “How do Central Banks Write? An Evaluation of Inflation Targeting Central Banks,” CEPR/Geneva Reports on the World Economy Special Report 2 (London: Centre for Economic Policy Research, 2003).
12For a theoretical discussion of the concept of financial stability, see Garry Schinasi, Safeguarding of Financial Stability: Theory and Practice (Washington, D. C: International Monetary Fund, 2006).
13The fact that a broader definition of instability is correlated with longer stability reports may seem paradoxical at first, but becomes obvious on a closer observation. It is mostly because the FSRs, despite their name, are really reports about potential risks to stability rather than about stability itself.
14See Alex Bowen, Mark O’Brien, and Erling Steigum, “Norges Bank’s Financial Stability Report: A Review” (Oslo: Norges Bank, 2003).
15See Franklin Allen, Lennart Francke, and Mark Swinburne, “Assessment of the Riksbank’s Work on Financial Stability Issues” (Stockholm: Sveriges Riksbank, 2004).
16See supra note 14
17See supra note 15.
18See supra note 14.
19See Allen, Francke, and Swinburne, supra note 15; and Bowen, O’Brien, and Steigum, supra note 14.
20Carrying out full-fledged assessments under the CCC framework requires good knowledge of the financial systems being covered. Given this author’s lack of country-specific expertise (in most cases), the assessment presented here focused on clarity and consistency of the FSRs; it did not examine in detail the principles relating to coverage that would require underlying analysis of the financial system (in particular, principles B4 and C3, requiring an FSR to cover the key topics in a sufficiently comprehensive way) and of the available data (principle D5).The lack of detailed country-specific knowledge was to some extent compensated by the sheer volume of FSRs being reviewed. As part of this project, about 160 documents from 47 countries have been reviewed, comprising more than 10,000 pages.
21The principles relating to consistency across reports were assessed only for those central banks where three or more issues of the FSR are available.
22Not all the principles are likely to carry the same weight in practice. However, it is difficult to attribute a priori weights in a transparent manner. As more data become available, it might be possible to “back-test” the assumption of equal weights and see if better results (e.g., in terms of a correlation between the aggregate grading and a measure of financial sector stability) can be achieved for different combinations of weights.
23This list of areas for possible improvement focuses on the issues discussed above. The survey also results in suggestions for improvement in analytical tools, discussed in Čihák 2006.
24The underlying results are available from the author upon request. Ideally, one would also like to know whether the quality of an FSR is related to the inputs into the financial sector work (in terms of resources). However, good data on the inputs are unavailable. Partial data on some of the FSR-publishing central banks suggest that the combination of GDP per capita and the relative size of the financial sector (which are both included in the regression) might be used to approximate the inputs going into the financial stability report.

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