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Abstract
This study sets up a detective system for Taiwan’s financial stability with two spindles of the market-based and the bank-based, and uses “Two-state Markov regime-switching” method to capture the turning points from Taiwan’s previous major financial crises through the volatility of Taiwan’s financial stress index between 1997Q1 and 2014Q4. On this basis, a further study to propose the research of “a robust set of indicators for the Taiwan’s financial stability” uses “noise to signal ratio” method from the candidate variables of bank-based Taiwan’s financial stability, to filter out composite indicator of Taiwan’s financial stability with early warning functions as a supervisory tool for financial stability, effectively to detect and alert Taiwan’s financial crises. Empirical results proves, “two-state Markov regime-switching” method with the market-based Taiwan’s financial stress index (FSI), it sure can rationally determine the turning points for Taiwan’s previous major financial crises and successfully identify Asian financial crisis, dot-com bubble, cross-strait political-economic tensions, global financial crisis (GFC), European debt crisis, etc., especially to capture the financial crisis triggered by cross-strait political and economic tensions in 2004Q2, which completely reveals an individual characteristic of political sensitive gene in Taiwan’s financial system. Moreover, a composite indicator of Taiwan’s financial stability (CITFS) constructed by bank-based measure has a good early warning capability to detect the events of Taiwan’s previous major financial crises, and provide Taiwan’s financial supervisory authority some important reference to build up the financial early warning mechanism.
Highlights
A strong and resilient financial system is the foundation for sustainable real economy, especially for the banking sector, which provides critical services for economic agents who rely on them to conduct their daily living and business, both at a domestic and international level.One of the main reasons the economic and financial crisis, which began in 2007 and exploded in 2008-09, became so severe was that the banking sector of many countries was not able to absorb the resulting systemic trading and credit losses due to either an excessive on and off-balance sheet leverage or an insufficient liquidity buffers
The weakness in the banking sector were rapidly transmitted to the rest of the financial system, the crisis was spread to a wider circle of countries around the globe because the global financial markets had lost confidence in the solvency and liquidity during the crisis periods
This paper considers the perspective of the financial stability problem is mainly that the existed banking supervising system creates a certain degree of market activities and the abnormal situations of market activities will produce a certain degree of the financial stress propagation process
Summary
A strong and resilient financial system is the foundation for sustainable real economy, especially for the banking sector, which provides critical services for economic agents who rely on them to conduct their daily living and business, both at a domestic and international level.One of the main reasons the economic and financial crisis, which began in 2007 and exploded in 2008-09, became so severe was that the banking sector of many countries was not able to absorb the resulting systemic trading and credit losses due to either an excessive on and off-balance sheet leverage or an insufficient liquidity buffers. In response to the deep pall cast by global financial crisis (GFC), the Federal Reserve Bank of the U.S implemented three rounds of “quantitative easing (QE)”, hoping to achieve the purpose of stimulating the job market and economic recovery by activating the financial market through the banking system with the monetary measures of trading time for space These operations relatively caused the worldwide central banks to declare a “currency war”, for example, Bank of Japan took the initial attack to depreciate Japanese yen a lot, and the national banks of the U.K., Europe, New Zealand, Australia, China, and other countries responded to cut down their interest. With the effect of the expansion of recent Greek debt crisis and China’s stock market crash, the situation had global financial markets afraid to fall into a higher volatility risk, and the threat of the systemic risk of the source of the global financial instability seems not yet to be lifted till today
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