Abstract
Abstract Financial stability is an important part of the Central Bank of Jordan (CBJ) role in parallel with maintenance of monetary stability. The impact of the global financial crises from 2007-2009 and the economic slowdown has left the Jordanian banking sector in a generally weaker position than before. This paper constructs an index of financial stability of the Jordanian banking sector that will adequately reflects the effects of the crises in 2008-2009 and measure the resilience of the banking sector against negative shocks. The index is based on the aggregation of the fifteen announced soundness indicators into four main categories: (i) Capital Adequacy, (ii) Earnings and Profitability, and (iii) liquidity to build one aggregate composite index. Using two weighting schemes the Financial Stability Index (FSI) proved to be a good indicator of banking reactions to shocks and changing economic conditions. FSI is intuitively attractive as it could enable policy makers to better monitor the banking sector’s resilience to shocks and can help further in anticipating the sources and causes of financial stress to the system. The index of financial stability of the banking sector in Jordan shows that the banking system has been consciously resilient against shocks and negative economic conditions.
Highlights
Financial stability is a goal all central banks around the world seeks and give as much as it can to guarantee their local currencies stability and the soundness of their financial sector
Results show that the Banking Stability Index (BSI) of the banking sector in Jordan is a good predictor of general market movements and economic fluctuations
The capital adequacy indicators measure the banking sector’s ability to absorb sudden losses and their capacity to deal with potential risks, whereas the asset quality indicators are directly associated with potential risks to banks’ solvency
Summary
Financial stability is a goal all central banks around the world seeks and give as much as it can to guarantee their local currencies stability and the soundness of their financial sector. Financial stability can be defined as the smooth functioning of complex nexus of relationships among all segments of the financial systems operating with the given legal, fiscal and accounting framework, with each of them providing the highest possible level of flexibility to absorb potential shock (see Petrovska and Mucheva Mihailovska, 2013, Kocisova, 2015). In Jordan there is no clear definition of financial stability, but the central bank publishes a regular financial stability report concerned majorly with the banking sector. The report is concerned mainly with the soundness and immunity of the banking sector and the sector ability to absorb shock and high level of risks (CBJ, 2015)
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