Detecting Financial Stability Vulnerabilities in Due Time: Can Simple Indicators Identify a Complex Issue?
AbstractThis paper analyzes the resilience of credit institutions to instances of financial instability based on simple publicly available balance sheet and income statement figures. In the course of the recent financial crisis and the related credit turmoil, the loss absorption capacity of the global financial system has been stretched to its limit. Globally active financial institutions, many of them systemically relevant, needed government support to keep their capital ratios above regulatory and/or market required minima. Central banks had to step in to provide liquidity when large parts of the financial markets ceased to function. From an ex-post perspective, the crisis provided a real stress scenario which we use to explain bank performance by examining simple indicators such as capitalization, liquidity, funding structure and asset-side exposure. To cover systemically important European banks we choose a subset from the bank sample used by the European Banking Association for the EU-wide stresstesting exercise in 2011. We add three Austrian banks to arrive at a sample of 90 European banks in total (including altogether six Austrian banks). To measure bank performance, we use return on average assets, return on average equity, operating profits, required government support and equity prices. We show that these performance measures can be explained adequately by our simple indicators. We are able to identify the strong, respectively weak, banks that did not, respectively did, need government support in 2009. Regarding the other performance measures we give a forecast for 2011 about which banks are expected to perform well, ordinarily and poorly.
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.
Bibliographic InfoArticle provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Financial Stability Report.
Volume (Year): (2011)
Issue (Month): 22 ()
Postal: Oesterreichische Nationalbank, Documentation Management and Communications Services, Otto-Wagner Platz 3, A-1090 Vienna, Austria
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Konrad Banachewicz & André Lucas & Aad van der Vaart, 2008.
"Modelling Portfolio Defaults Using Hidden Markov Models with Covariates,"
Royal Economic Society, vol. 11(1), pages 155-171, 03.
- Konrad Banachewicz & Aad van der Vaart & Andr� Lucas, 2006. "Modeling Portfolio Defaults using Hidden Markov Models with Covariates," Tinbergen Institute Discussion Papers 06-094/2, Tinbergen Institute.
- Pierluigi Bologna, 2010. "Australian Banking System Resilience," IMF Working Papers 10/228, International Monetary Fund.
- Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
- Beltratti, Andrea & Stulz, Rene M., 2009.
"Why Did Some Banks Perform Better during the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation,"
Working Paper Series
2009-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Andrea Beltratti & René M. Stulz, 2009. "Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation," NBER Working Papers 15180, National Bureau of Economic Research, Inc.
- Berger, Allen N. & Udell, Gregory F., 2004.
"The institutional memory hypothesis and the procyclicality of bank lending behavior,"
Journal of Financial Intermediation,
Elsevier, vol. 13(4), pages 458-495, October.
- Allen N. Berger & Gregory F. Udell, 2003. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Finance and Economics Discussion Series 2003-02, Board of Governors of the Federal Reserve System (U.S.).
- Allen N. Berger & Gregory F. Udell, 2003. "The institutional memory hypothesis and the procyclicality of bank lending behaviour," BIS Working Papers 125, Bank for International Settlements.
- Tigran Poghosyan & Martin CihÃ¡k, 2009. "Distress in European Banks," IMF Working Papers 09/9, International Monetary Fund.
- Liliana Rojas-Suarez, 2001. "Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators," Working Paper Series WP01-6, Peterson Institute for International Economics.
- Asli Demirguc‐Kunt & Enrica Detragiache & Ouarda Merrouche, 2013.
"Bank Capital: Lessons from the Financial Crisis,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 45(6), pages 1147-1164, 09.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stefan W. Schmitz).
If references are entirely missing, you can add them using this form.