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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.

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.

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

IMF surveillance of member countries’ economies under Article IV of its charter has always included, to some degree, the surveillance of financial systems, primarily with the aim of ensuring the effective functioning of monetary and exchange policy. Article IV staff reports have, on occasion, contained special annexes dealing with financial sector developments, but in-depth surveillance by the IMF of financial systems was generally limited, with the focus being primarily on the IMF’s provision of technical assistance in specific areas identified by member countries or previous IMF missions.

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

Abstract

This section reviews statistical issues pertaining to the two major types of statistical information used in macroprudential analysis: macroeconomic indicators pertaining to the financial sector (financial macrostatistics) and aggregated microprudential data. Financial macrostatistics—such as monetary statistics, financial accounts of the System of National Accounts (SNA), and sectoral balance sheets—are frameworks for organizing data into comprehensive overviews of the condition and transactions of the financial sector and its key components, and thus can provide indicators of the activity and operation of the financial system. Aggregated microprudential data are summations of (mostly) supervisory information on the condition of individual banks that may provide indications of the overall condition of the financial sector.

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

Abstract

This section reviews issues related to the public I dissemination of MPIs, in recognition of their crucial role in the strengthening of financial sector surveillance and the oversight of the global financial system. It discusses insights from IMF approaches to the data dissemination standards, taking into account the conclusions of the September 1999 consultative meeting on member countries’ and other experiences in MPI identification and dissemination.