Quantitative Assessment of the Financial Sector: An Integrated Approach

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper suggests a strategy designed to make best use of the available quantitative techniques of financial sector assessment. It incorporates early warning systems, financial sector forecasts, stress tests for systemically important financial institutions, interbank contagion analysis, and corporate and household financial indicators. It will seldom be possible to employ every one of these techniques, but the wider the range of methodologies used, the greater may be the insight into the strengths and vulnerabilities of the financial sector. The quantitative assessment is always complemented by a qualitative assessment, including reviews of relevant standards and codes. JEL Classification Numbers: G20, G21, G10

Explaining bank distress in Eastern European transition economies

“…Although the literature warns that bank distress is hard to predict, particularly in a multi-country study and transition context (Worrell, 2004), we challenge our results by exploring the in and out-of-time predictive power of the model. We use the'early warning' version of our model in prediction -looking a year ahead -and include all 19 transition countries.…”

“…There were 16 distress episodes spread over eight countries in 2003-2004 in Russia and one in each of the remaining countries. Due to deficient data three of the distress episodes in Bosnia could not be estimated and predicted.…”

A comparative analysis of macro stress-testing methodologies with application to Finland

“…In particular, Blaschke et al (2001) review the basic analytical tools used by FSAPs across countries, while describe a number of approaches and results of macro stress-tests carried out as part of the FSAP for the UK. Jones et al (2004) provide a general non-technical description of macro stress-testing and Worrell (2004) discusses an integrated approach to macro stress-tests, early warning systems and financial soundness indicators.…”

“…5 SeeWorrell (2004) for further discussion of how these tools could be combined into an integrated framework.…”

Use of causal analysis to improve the monitoring of the banking system stability

“…Swamy (2013) built a recursive micro VAR model, which explains the link between the parameters of measuring banking stability and the level of financial stability in developing countries. Worrell (2004) proposes to assess the stability of the financial sector based on a methodology that includes: use of financial stability indicators for early warning of a crisis, financial sector forecasting models and stress-testing of systemically important banks (SIBs). Financial imbalance is the reason for macroeconomic instability.…”