Annex VII.2 : Commonly used Variables in Financial Stability Analysis - આરબીઆઈ - Reserve Bank of India
Annex VII.2 : Commonly used Variables in Financial Stability Analysis
Sectors |
Measures |
Frequency |
What do they measure |
Signaling properties |
1 |
2 |
3 |
4 |
5 |
Real Economy |
GDP growth |
Q or A |
Indicative of the strength of the macro-economy, GDP is key measures especially used in conjunction with measures such as credit expansion, fiscal deficit. |
Negative, or low positive values would indicate a slowdown, excessively high values may show unsustainable growth. |
Fiscal position of Government |
A, Q or M |
Ability of Government to find financing, vulnerability of sovereign debtor to unavailability of financing |
High deficit values relative to GDP can mean unsustainable Government indebtedness and vulnerability of the sovereign debtor. |
|
Inflation |
M or A |
Rate of increase of various price indices |
High levels of inflation would signal structural weakness in the economy and increased levels of indebtedness, potentially leading to a tightening of monetary conditions. Conversely, low levels of inflation could potentially increase the risk appetite in the financial markets. |
|
Corporate sector |
Total debt to equity |
Q or A |
Corporations’ leverage |
Excessively high levels may signal difficulties in meeting debt obligations. |
Earnings to interest and principal expenses |
Q or A |
Corporations’ ability to meet payment obligations relying on internal resources |
Excessively low levels of liquidity may signal inability to meet debt obligations. |
|
Net foreign exchange exposure to equity |
Q or A |
Currency mismatch |
High levels of this ratio may signal difficulties in the corporate sector arising from adverse currency moves. |
|
Corporate defaults |
Q or A |
Insolvencies in the corporate sector |
High values can signal future problems in the banking sector, if insufficiently provisioned. |
|
Household sector |
Household assets (financial, real estate) |
A, Q or M |
Assets and debt can be used to compute net household assets |
Net household assets and disposable income can measure households’ ability to weather (unexpected) economic downturns. |
Household debt |
A, Q or M |
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Household income (labour income, savings income) |
A, Q or M |
Income, consumption and debt services payments can be combined to compute net disposable income |
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Household consumption |
A, Q or M |
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Household debt service and principal payments |
A, Q or M |
Annex VII.2: Commonly used Variables in Financial Stability Analysis (Contd.) |
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Sectors |
Measures |
Frequency |
What do they measure |
Signaling properties |
1 |
2 |
3 |
4 |
5 |
External Sector |
(Real) exchange rate |
D |
Over/undervaluation of a currency. |
Over or undervaluation of currency can trigger a crisis (capital outflows, massive inflows or loss of export competitiveness). |
Foreign exchange reserves |
D |
Ability of country to resist external shocks. |
Reserves below short-term foreign debt, or below three months’ worth of exports can signal problems. |
|
Current account/ capital flows |
A, Q or M |
Trade position of country. |
Significant trade deficits require large capital inflows in order to be financed; this raises sustainability issues about such inflows. |
|
Maturity/currency mismatches |
A, Q or M |
Disparity in the currency/ maturity composition of assets and liabilities. |
Maturity and Currency mismatches can expose the economy to adverse shocks in case of adverse currency movements or sudden reversals of capital inflows. |
|
Financial Sector |
Monetary aggregates |
M |
Transaction, saving, credit. |
Excessive growth can signal inflation pressures. |
(Real) interest rates |
D |
Cost of credit, ability to attract deposits sustainability of debt. |
Real interest rates above a threshold likely to exceed the trend rate of economic growth, making debt/ GDP ratios explosive; negative real rates may mean banks will struggle to attract deposits |
|
Growth in bank credit bank leverages ratios, NPLs Risk Premia (CDS); credit risk components of 3 month LIBOR - OIS spreads |
M |
Riskiness of the banking sector. |
Very rapid loan growth has often accompanied declining loan standards/ greater risk. Excessively high loan losses, leverage ratios and risk premia can foreshadow a banking crisis. Loan losses/GDP can measure cost of a banking crisis for economy. |
|
Capital adequacy |
Q or A |
Banks’ capital cushion size to address expected or unexpected losses. |
Excessively low levels of this ratio points to potential defaults and can be a forerunner of a banking crisis. |
|
Liquidity ratio |
Q or A |
Ratio of banks’ readily available short-term resources that can be used to meet short-term obligations. |
Excessively low levels of this ratio can lead to a systemic crisis. |
|
Standalone bank credit ratings |
Irregular |
Individual strength of banks, after the effect of Government or other guarantees has been taken into account. |
Possible coincident indicator of banks’ condition, likely to influence their future funding costs. |
|
Sector/ regional concentration, systemic focus |
Q or A |
Concentration of diversification of banks’ lending strategy |
Can proxy for speed of propagation of shocks in the economy. |
Annex VII.2: Commonly used Variables in Financial Stability Analysis (Concld.) |
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Sectors |
Measures |
Frequency |
What do they measure |
Signaling properties |
1 |
2 |
3 |
4 |
5 |
Financial markets |
Change in Equity Indices |
D |
Net worth of present value of future cash-flows of firms comprising the index. |
Above-trend growth in index, or very high levels of market to book value can be indicative of an equity price bubble. |
Corporate bond spreads |
D |
Riskiness of debt compared to risk-free instruments. |
Spikes in spreads can suggest higher levels of risk, changes in risk appetite, and changes in the incorporation of news into prices by the market. |
|
Market liquidity (Government bonds, liquidity risk component of 3m LIBOR - OIS spreads) |
D |
Price attached by the market to the ease with which liquid instruments can be traded. |
Spikes in these premia can reflect disruptions in market liquidity. |
|
Volatility |
D |
Intensity of price movements on markets Ease of trade on the market. |
Low volatility can be indicative of a calm market, but also of failings in the price discovery process. High volatility can mirror a disruption of market liquidity. |
|
House prices |
Q, A or M |
House price bubble, consumption boom fuelled by equity withdrawals, potential losses to financial sector in case of downturn in prices. |
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A : Annual. Q : Quarterly. M : Monthly. D : Daily. |