Stability Mapping for Risk Management in Banking Companies

Abstract

challenging task for most banks. Numerous approaches are used to assess financial stability to determine the operation of the banks under stress conditions and to identify the indicators that affect the financial developments of the system. The relationship between the macroeconomic variables and financial markets can be assessed by performing stability mapping. Risk management can be performed by accurate identification of stability indicators, appropriate assessment of deterioration in asset quality, and other economic aspects. Financial stability reports (FSRs) and heat maps are used in several banks to assess risk factors that affect financial stability using minimal indicators. This paper provides a detailed study of the banking sector's stability mapping schemes used for risk management. Mapping schemes like banking stability map (BSM), Global financial stability map (GFSM), Self-Organizing Map (SOM), and construction of financial stability maps (FSM) are discussed. An overall evaluation of underlying parameters and inherent risk factors that affect the banking stability is performed using a banking stability map. The indicators involved in the profitability of the capital and banking sector and the financing and liquidity of the system are discussed thoroughly. Stability mapping enables appropriate risk management by identifying the crucial indicators for shock absorption in banking.