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Detecting Financial Stability Vulnerabilities in Due Time: Can Simple Indicators Identify a Complex Issue?

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Author Info

  • Benjamin Neudorfer

    ()
    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

  • Michael Sigmund

    ()
    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

  • Alexander Trachta

    ()
    (Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division)

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    Abstract

    This 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.

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    File URL: http://www.oenb.at/dms/oenb/Publikationen/Finanzmarkt/Financial-Stability-Report/2011/Financial-Stability-Report-22/chapters/fsr_22_special_topics_01_tcm16-242312.pdf
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    Bibliographic Info

    Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Financial Stability Report.

    Volume (Year): (2011)
    Issue (Month): 22 ()
    Pages:

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    Handle: RePEc:onb:oenbfs:y:2011:i:22:b:1

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    Postal: Oesterreichische Nationalbank, Documentation Management and Communications Services, Otto-Wagner Platz 3, A-1090 Vienna, Austria
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    Related research

    Keywords: bank performance; financial crisis; stress testing; early warning;

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    References

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    1. 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.
    2. Pierluigi Bologna, 2010. "Australian Banking System Resilience," IMF Working Papers 10/228, International Monetary Fund.
    3. 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.
    4. 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.
    5. 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.
    6. Tigran Poghosyan & Martin Cihák, 2009. "Distress in European Banks," IMF Working Papers 09/9, International Monetary Fund.
    7. Rocco Huang & Lev Ratnovski, 2009. "Why Are Canadian Banks More Resilient?," IMF Working Papers 09/152, International Monetary Fund.
    8. 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.
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