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.
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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
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