Financial Stability Reports’ Grading Jitters

An IMF working paper finds “major drawbacks” in the central bank financial stability reports now issued semiannually and yearly in 80 countries, especially in their forward-looking assessments of systemic risk as that topic grips both industrial and developing world economies contending with new crises. Before the 2008 shock only fifty authorities compiled publications, and recent big entrants include India and the US Federal Reserve. In Mexico and elsewhere it is produced by an intergovernmental council, although the central bank maintains a key role. The average document length is 100 pages and coverage has evolved beyond the banking sector to embrace a broad range of non-bank, household, infrastructure and regulatory issues and micro and macro data. Stress-testing at the industry and institution levels typically features, and increasingly results must be presented to national parliaments for examination and hearings. The Swedish Riksbank is hailed as a model with a 15-year record, and heavy emphasis on current capital-liquidity gaps and future prospects with the content submitted for outside evaluation. Its present head is chair of the Basel Committee, which just reiterated application of stricter global standards by mid-decade. In terms of clarity, consistency and scope a sampling of authors profiled – with Brazil, Iceland, Korea, Latvia and South Africa from emerging markets – has  more mixed content. They state objectives and offer financial market details but often lack reference to currency and securities interrelationships and cross-border banking and portfolio investment linkages. Ties between the biggest universal groups and diversified conglomerates, and sovereign exposures in light of the Eurozone crisis have not been explored. Risk mapping over time is absent, projections are unavailable or cursory, and stress-tests are only revealed in the aggregate in many cases. However Korean and South African indicators look at foreign exchange impact, and Latvia’s overall financial stress index incorporates numerous components.

Macro-prudential and monetary policy discussion is extensive, and Brazil and others regularly address international supervisory trends, even if foreign-language versions are not posted on websites. Iceland, which has endured a spectacular banking crash predating the Lehman Brothers debacle, has been notable in identifying missing balance sheet statistics particularly regarding non-resident and individual borrowers. Release delays have occurred as with Latvia’s 2010 summary issued in July 2011, and data is frequently circulated separately from the report body. Regressions using a range of ratings agency soundness and credit and stock market volatility measures show scant correlation between the analyses and subsequent stability. The Fund staff cites a loose “association” between higher-quality FSRs and healthier banking environments, and calls for more research into the specific channels for better information and discipline which tag tail risk.