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An explorative analysis of Italy banking financial stability

Author

Listed:
  • Matteo Foglia

    (Department of Economics, “G.d''Annunzio†University of Chieti-Pescara)

  • Eliana Angelini

    (Department of Economics, “G.d''Annunzio†University of Chieti-Pescara)

Abstract

This paper provides a quantitative measure for the financial stability of Italy banking sector. First, we construct an indicator that summarizes the information about the health of Italy's banking system, the Bank Condition Index (BCI). The index is constructed with capital adequacy, asset quality, earnings and liquidity (CAEL) indicators. The major advantage of BCI is that can be useful for initial identification of bank soundness and can be helpful to identify the principal areas of weakness. Furthermore, we apply AR model to evaluate the predictive power of the BCI on GDP growth. The results identify that the BCI is an important predictor of real economic activity. Finally, we study the relationship between the BCI and systemic risk measures (DCoVaR, SRISK, DCI), finding that an increase of systemic risk implies a reduction of bank-financial stability.

Suggested Citation

  • Matteo Foglia & Eliana Angelini, 2019. "An explorative analysis of Italy banking financial stability," Economics Bulletin, AccessEcon, vol. 39(2), pages 1294-1308.
    • Handle: RePEc:ebl:ecbull:eb-19-00071
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    References listed on IDEAS

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    More about this item

    Keywords

    Composite Index; Bank vulnerability; Financial Stability; Systemic risk;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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