Using the balance sheet approach in financial stability surveillance: Analyzing the Israeli economy's resilience to exchange rate risk
AbstractThis paper presents a framework for analyzing an economy's resilience to exchange rate risk using the balance sheet approach (BSA), which is gaining prominence worldwide in the surveillance of financial stability. The framework is applied to Israel's economy, by using an unique and extensive dataset: a combination of new national balance sheet data and foreign currency balance sheet data. The analysis using the BSA shows that Israel's economy was highly vulnerable to a depreciation of the shekel in 1997, but from then until 2005 it became more resilient. The improvement was due mainly to the lowering of the business sector's high level of exposure to depreciation and its greater financial strength. This, together with higher capital adequacy in the banking system, made the latter more resilient to indirect damage that could be caused by depreciation. The analysis shows further that despite the heavy exposure of the economy as a whole and most sectors within it to appreciation of the shekel at the end of 2005, the economy was quite resilient to such appreciation, as the private sector and the banks suffered little direct or indirect damage through it. The analysis stresses the central, but not exclusive, role played by the banks' resilience in the economy's financial stability, and thus also favors the continuation of the process of reducing the banks' dominance in financing the business sector, so that their indirect exposure to financial risks will fall. The findings yielded by the BSA are highly significant, because an analysis using the traditional approach leads to very different results, viz., that in 1997 the economy was not vulnerable to changes in the exchange rate, and that in 2005 it was highly vulnerable to shekel appreciation. The conclusions in the paper support the use of the balance sheet approach as an important instrument in surveillance of financial stability, the formulation of other similar frameworks for analyzing financial risks, and the provision of more detailed data in the national balance sheet that would enable a deeper analysis of overall economic risks and the risks in the major sectors.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Stability.
Volume (Year): 6 (2010)
Issue (Month): 2 (June)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jfstabil
Balance sheet approach Exchange rate risk;
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.