Financial Soundness Indicators Research Articles

Crafting Banking Sector Stability Index for Sierra Leone

Stability in the banking sector of Sierra Leone is crucial because it gives confidence and trust in the banking ecosystem. However, it is vital to assess the health conditions of the sector, by means of a composite Banking Sector Stability Index (BSSI) for Sierra Leone. This BSSI will supplement the suite of early warning indicators of the financial system and offers a platform to keep policymakers informed about the dynamics in the ecosystem of Sierra Leone. This study developed a banking sector stability index (BSSI) for Sierra Leone, using a nest of financial soundness indicators and gauges the health of the banking ecosystem with short term forecasting tendencies conditions in the banking ecosystem. It applied statistical and Conference Board Methodology normalization processes on Sierra Leone’s banking data from 2019Q1 to 2022Q4. The resultant index traced fairly well the episodes of crisis in the system over the study period. It could, therefore, be employed as a complementary regulatory policy tool to gauge potential risks to enable monetary authorities take timely precautionary policy measures to assuage crisis in the banking ecosystem.

Measuring Financial Stability in Curaçao and Sint Maarten

Abstract Assessing the solidity of the financial system may be cumbersome since there is no single comprehensive indicator to measure financial stability. This paper presents two aggregate measures that can be deployed as early warning measures of financial stability for the monetary union of Curaçao and Sint Maarten, mainly focusing on the banking sector. As this sector comprises most of the monetary union's assets, the constructed measures are mainly focused on this sector. Following financial stability literature, we apply empirical normalization and aggregation to construct an Aggregate Financial Stability Index (AFSI) and a Banking Stability Index (BSI). These indices have been gaining popularity among central banks to assess financial stability on top of conventional measures such as Financial Soundness Indicators (FSIs) and credit cycles. The AFSI comprises banking-sector indicators, macro-financial developments, and international trends, while the BSI captures dimensions of banks' financial soundness. We benchmark the AFSI and the BSI to the period of deteriorating macro-financial conditions induced by the coronavirus crisis, and the development in the indices was as expected. Based on the robustness analyses conducted, we deem the constructed indices plausible for measuring and tracking financial stability within the monetary union of Curaçao and Sint Maarten. JEL classification numbers: C20, C45, E58, F15, G21. Keywords: Early warning indicators, Financial stability, Financial soundness indicators.

The Effects of IMF Financial Soundness Indicators of Turkish Commercial Banks on the Financial Development Index

The financial soundness of banks, which are the building blocks of the financial system, is an important indicator that reflects the effectiveness of the financial system. It can be stated that the financial development of countries with an effective financial system will be positively affected by this situation. The paper aims to evaluate the effects of IMF financial soundness indicators of the Turkish commercial banks which have an important share in the Turkish banks, on the financial development index of Türkiye. In this paper, an evaluation was made based on the IMF Financial development index and IMF financial soundness indicators. Panel data analysis was used and panel least squares model estimation was made within the analysis. In line with the findings, it has been determined that sensitivity to profitability, liquidity, and market risks of commercial banks negatively affect financial development while the capital adequacy and asset quality of commercial banks positively affect financial development.

Crafting Banking Sector Stability Index for Sierra Leone

Stability in the banking sector of Sierra Leone is crucial because it gives confidence and trust in the banking ecosystem. However, it is vital to assess the health conditions of the sector, by means of a composite Banking Sector Stability Index (BSSI) for Sierra Leone. This BSSI will supplement the suite of early warning indicators of the financial system and offers a platform to keep policymakers informed about the dynamics in the ecosystem of Sierra Leone. This study developed a Banking Sector Stability Index (BSSI) for Sierra Leone, using a nest of financial soundness indicators and gauges the health of the banking ecosystem with short term forecasting tendencies conditions in the banking ecosystem. It applied statistical and Conference Board Methodology normalization processes on Sierra Leone’s banking data from 2019Q1 to 2022Q4. The resultant index traced fairly well the episodes of crisis in the system over the study period. It could, therefore, be employed as a complementary regulatory policy tool to gauge potential risks to enable monetary authorities take timely precautionary policy measures to assuage crisis in the banking ecosystem.

Banking Regulation and Financial Soundness Nexus in View of the Crisis: An Islamic Banking Perspective

The COVID-19 pandemic significantly affected global finances and economies, posing a risk of global GDP decline. This research examines the soundness and dynamics of Islamic banks from 2017Q1 to 2023Q1. The study focuses on eight countries selected based on the systemic importance of their Islamic banks: Saudi Arabia, UAE, Bahrain, Oman, Pakistan, Malaysia, Brunei, and Indonesia. The analysis is based on several key indicators including size, profitability, non-performing financing, and capital adequacy. Our analysis shows that the Islamic banks' response to the pandemic is not uniform across jurisdictions. Saudi Arabia and Southeast Asian countries (Malaysia and Indonesia) are expected to remain stable. This reflects the Islamic banks' desire to integrate more closely into the global financial system by holding higher capital adequacy ratios. Effective banking regulation is necessary to ensure the stability and credibility of the financial industry. Other regions may face challenges that require additional policies to ensure the stability of their Islamic banking sectors. Several financial soundness indicators and jurisdictions have shown notable improvements, with some levels reaching pre-pandemic levels. This reflects the effectiveness of the COVID-19 policy support measures implemented since 2020.

Report on the Financial Soundness Indicators Technical Assistance Mission

Report on the Financial Soundness Indicators Technical Assistance Mission

Report on Financial Soundness Indicators Technical Assistance

Report on Financial Soundness Indicators Technical Assistance

Investigating the effect of financial inclusion on financial soundness indicators in the banking sector pre- and after-embedding of retail bank loans (RBL) as a control variable Using Panel Regression Analysis

Investigating the effect of financial inclusion on financial soundness indicators in the banking sector pre- and after-embedding of retail bank loans (RBL) as a control variable Using Panel Regression Analysis

A HYBRID APPROACH TO FINANCIAL SOLVENCY: A COMPARISON OF CONVENTIONAL AND ISLAMIC BANKING IN TURKEY

In this study, the financial soundness indicators of both conventional banks (referred to as deposit banks) and Islamic banks (referred to as participation banks) operating in Turkey are analyzed using different methods. The research utilizes financial ratios from the years 2017 to 2022, with the chosen financial ratios aligned with the Bankometer method. Ranking methods such as ARAS, CoCoSo, COPRAS, MABAC and TOPSIS are applied, and the ranking results are combined with the Borda Count method. The findings reveal a robust and healthy level of financial soundness among the analyzed banks, notably highlighting the superior performance of private conventional banks in financial soundness rankings. Importantly, this research makes a valuable contribution by showcasing the financial stability exhibited by both the conventional and Islamic banking sectors in Turkey, even when subjected to different methods, even in the face of adverse global conditions, such as those observed during the COVID-19 pandemic.

The Impact of Financial Soundness Indicators (FSIs) on the Market Value of Palestinian Public Shareholding Banks

This study aimed to explore the financial soundness of the Palestinian banking sector. It also aimed to examine its impact on the market value of banks listed on the Palestine Stock Exchange (PEX) which lists six (6) banks. For this purpose, Financial Soundness Indicators (FSIs) were utilized including capital indicators, asset quality indicators, profitability indicators, and liquidity indicators. The study employed a descriptive-analytical approach, utilizing the published financial statements of these banks to calculate the necessary ratios for measuring FSIs. Additionally, publications from the PEX were used to measure market value for the period of 2012-2021. The study revealed several noteworthy findings, including the adherence of listed banks on PEX to the Basel III Committee's regulations regarding FSIs. The data also showed that the Palestinian banking sector ranks at intermediate to advance level in terms of banking safety. Furthermore, FSIs have a significant impact on the market-to-book value ratio.

What is the optimal capital ratio implying a stable European banking system?

AbstractThis paper aims to determine the ‘new normal’ for banking stability in terms of capital adequacy, reviewing the incidence of banking stress episodes by lagged solvency ratios, based on the experience at the European level after the global financial crisis. We provide rating ladders for both risk‐weighted solvency ratios and a simple gearing (leverage) ratio for time horizons of up to 3 years using well‐known credit risk scoring procedures. Our findings empirically confirm that the recent dual metric structure of the capital adequacy framework is conducive to enhancing the accuracy of banking stability assessment. Specifically, our empirical analysis suggests that both tier 1 capital ratio and leverage ratio generally remain statistically significant in multivariate combinations for crisis probability measurement purposes. Robustness checks with well‐established macrofinancial indicators as control variables suggest that this tandem is hardly replaceable in multivariate early warning systems by combinations of macroimbalance and financial soundness indicators traditionally employed as leading factors of banking crises. Moreover, the pandemic period provides meaningful evidence that robust capital positions, in line with our estimate, have so far been ‘part of the solution’ for dealing with systemic events.

The effect of capital adequacy on the Value of Commercial Banks in Kenya

Well-functioning banks diminish not only the transaction costs, but also the moral hazard and asymmetric information issues observed in the financial market. Despite the role played in financial inclusion, commercial banks in Kenya have seen increased liquidity risk, declining profitability and credit risk that has weakened the sector's stability. This research sought to establish the effect of capital adequacy on value of commercial banks in Kenya. The study was anchored on four main theories including Capital Structure Irrelevance Theory, Interest Rate Theory, Signaling theory and liquidity preference theory. This study adopted an explanatory research design and followed a positivism research philosophy. The study involved all the 43 commercial banks in Kenya which were selected using census sampling. The study covered a 7-year period between 2014 and 2021. Secondary data was used for the study and was obtained from the audited annual financial reports of the commercial banks in Kenya and CBK. The collected data was analyzed by uses of descriptive and inferential analysis with the help of Statistical Package for Social Sciences (SPSS) version 26 and STATA. Tables and figures were used to present the analyzed data. The study established that Capital adequacy has a positive impact on the commercial banks value in Kenya. The study concludes that financial soundness indicators such as capital adequacy are more important in determining the ability of a bank to produce value for its share-holders. The study recommends banks to improve their capital adequacy by retaining profits or raising new capital through various means such as issuing new shares, selling assets, or borrowing from financial institutions. Additionally, banks to improve their asset quality by adopting effective risk management strategies and banks should improve their management efficiency by investing in employee training and development programs, adopting technology to automate processes, and streamlining operations. Commercial banks can improve their liquidity by implementing effective liquidity risk management strategies.

Effect of commodity prices on financial soundness; insight from adaptive market hypothesis in the Ghanaian setting

Commodity revenue is a greater portion of total merchandise export in Ghana. Fluctuations in commodity prices directly and indirectly affect the financial soundness of an economy. Hence, we assessed the effect of commodity prices on banking sector's financial soundness indicators (BsFSI) under diverse market (bullish, normal and bearish) conditions. We employed monthly data on commodity prices and BsFSI from January 2007 to March 2022. We employed quantile regression and causality in quantile estimation techniques. The results from the quantile regression showed that commodity (cocoa, gold and crude oil) prices significantly affect Ghana's BsFSI at diverse market conditions asymmetrically. The specific predictive power noticed depends on the financial soundness indicator as well as the condition of the market. The results confirm the adaptive market hypothesis in the Ghanaian economy implying the inefficiency in the soundness of the financial sector. This allows traders and investors to adapt their strategies in response to changing financial sector conditions. Our findings are important to policy makers for the implementation of commodity price stabilisation schemes and hedging strategies while considering market conditions.

Sudanese Banking Sector and Stress Testing

The repercussions of the 2008 Global Financial Crisis helped to reconsider the foundations used in assessing the banks’ withstand potential crises. In 2009, the BCBS issued a document entitled “Principles for Sound Stress Testing Practices and Supervision” as a basis for early evaluation of the performance of banking institutions and their ability to overcome sudden shocks and crises. The study aims to examine the ability of the Sudanese Banking Sector to pass stress testing and withstand sudden shock in light of the Basel II standards of stress test. The methodology was based on analyzing the performance of Sudan's economy, consolidated balance sheet, and financial soundness indicators of the banking sector (2005-2021). Additionally, it was based on a scenario designed for reverse stress testing (2022-2025). The results show that the Sudanese banking sector failed to bear sudden shocks and pass the stress testing due to its lack of commitment to applying the supervisory standards of Basel II. The war that broke out in the state of Khartoum on April 15, 2023, led to a deterioration in the political and economic conditions. It is expected to reduce the banking sector's power to absorb shocks. The paper recommends the Central Bank of Sudan follow up on the commitment of banks to apply the stress testing and financial soundness standards recommended by Basel II, especially capital adequacy, liquidity requirements, and political risk. Furthermore, the implementation of contractionary monetary policies serves to reduce inflationary pressures, which helps banks avoid credit and market risks.

The Determinants of Capital Adequacy in the Jordanian Banking Sector: An Autoregressive Distributed Lag-Bound Testing Approach

The current study aims to examine the determinants of the capital adequacy ratio (CAR) in the context of Jordanian banks through a literature review and analysis of empirical evidence. The aggregate data were obtained from Globaleconomy.com, the Financial Soundness Indicators, the Central Bank of Jordan, and World Bank Data covering the period from 2003 to 2021. The aggregate data were analyzed using autoregressive distributed lag (ARDL), utilizing Econometric Views (EViews) software. The empirical results suggest a short-run causality relationship running from banks’ credit-to-deposits ratio, banks’ leverage ratio, banks’ liquidity ratio, and one-year-lagged ROE to the CAR. The results also suggest the existence of short-run causality running from the capital-to-assets ratio, one-year-lagged capital-to-asset ratio, liquid-assets-to-deposits ratio, and coverage ratio to CAR. In addition, the results show the leverage ratio and liquidity ratio as having positive long-run associations with CAR. A positive and significant long-run association was also found between CAR, on the one hand, and the capital-to-assets ratio and the liquid assets to deposits ratio; the coverage ratio, on the other hand, showed a negative and statistically significant long-run association with CAR. The pairwise Granger causality test results reveal that liquid asset to deposits, money supply, profitability, and the capital-to-assets ratio Granger cause CAR. The study findings emphasize the importance of understanding the factors impacting CAR, the direction of the influence, the magnitude of the influence of the determinants of CAR in emerging economies such as Jordan and taking appropriate measures to safeguard the stability and resilience of the banking industry.

증권산업의 NCR제도 개정과 회계정보의 가치관련성

With the revision of the NCR system in 2014, there was a controversy over the predictive power of bankruptcy and the reliability of indicators between the indicators before and after the revision. Therefore this paper compared and analyzed the information usefulness of each indicator in terms of the value relevance. The results of analysis are that the higher the net capital ratio (pre-revision indicator), the higher the value relevance of profit or loss and the lower the value relevance of equity book value, but there was no differentiation in value relevance depending on the level of the net operating capital ratio (post-revision indicator). The typical relationship between financial soundness and value relevance revealed by previous studies is that the higher the soundness, the higher the relative value relevance of profit or loss. Results of this study imply that the net capital ratio has a typical relationship of financial soundness indicators to the value relevance of accounting information. Therefore, it can be seen that the net capital ratio is considered more important than the operating net capital ratio as a proxy for financial soundness in the process of evaluating the firm value by market participants. This study is significant in that it compared and analyzed the usefulness of the securities industry supervisory index from the perspective of the capital market.

The psychology of behavioral finance and its impact on financial Soundness indicators - An analytical study for a sample of banks listed in the Iraq Stock Exchange

The study aims to identify the primary elements that explain patterns of investor behavior in financial markets and assess them using behavioral financial indicators, as understanding such psychological factors aids in the correct forecast of such investors' future actions. The study's problem was to evaluate the impact of financial behavior psychology knowledge on achieving financial soundness. The study employed a descriptive-analytical technique based on financial analysis tools to evaluate behavioral financial and financial soundness indicators; additionally, statistical analysis was performed to determine the extent of the impact of behavioral finance on financial soundness indicators. The study concluded several findings and recommendations, the most important of which is the close relationship between the returns of market shares and the returns achieved by the bank as a result of its banking activity, and this close relationship is due to an increase in the sale and purchase orders of the bank's shares, which encourages investors to deal with banks in the form of deposit and borrowing, then using the money by the banks to invest. Finally, it was determined that accounting returns have a longer-term link with stock returns than a shorter-term relationship.

On the efficient synthesis of short financial time series: A Dynamic Factor Model approach

In this paper, we present a fully data-driven statistical approach to building a synthetic index based on intrinsic information of the considered ecosystem, namely the financial one. Among the several methods made available in the literature, we propose the employment of a Dynamic Factor Model approach which allows us to compare observations at hand in space and time. We contribute to the research field by offering a statistically sound methodology which goes beyond state-of-the-art techniques on dimension reduction, mainly based on Principal Component Analysis. We adopt a country-by-country fitting strategy to elicit the inner country-specific characteristics and then we combine results together by means of a Vector Autoregressive and Kalman filter approach. To this aim, we analyze a set of 17 Financial Soundness Indicators provided by the International Monetary Fund ranging from 2010 to 2020 for 116 countries that span the globe, including both strong and developing economies. Results show that our index is able to identify banking and debt crisis and the contribution of the latent variables can isolate countries that experienced crisis, representing a valid aid to policy makers and institutions in understanding countries movements, reactions and suffering periods.

Impact of strategic agility on the financial performance of commercial banks in Jordan

The Jordanian banking sector has been able to achieve remarkable growth rates at various levels. This sector is based on a robust infrastructure and is subject to the supervision of the Central Bank, which guarantees the likes of banks operating to financial reporting standards in order to maintain good financial soundness indicators. Therefore, this study aimed to examine the impact of strategic agility on the financial performance of commercial banks in Jordan. The study population was represented by senior managers. The purposeful sampling method was used to collect primary data from (188) respondents who constituted (81.74%) of the sent questionnaires. Structural Equation Modeling (SEM) was applied to test the study's hypotheses. The results showed that strategic agility had a positive impact on financial performance, as the greatest impact was strategic sensitivity, followed by resource fluidity, and finally leadership unity. This study contributed to the development of a logical framework supported by empirical evidence about the possibility of developing financial performance in dynamic environments. Hence, senior managers recommended focusing on making rational decisions derived from studying the reality of the work environment and adjusting organizational structures to become more flexible in response to the volatile business environment.

Measuring financial soundness around the world: A machine learning approach

We use a fully data-driven approach and information provided by the IMF’s financial soundness indicators to measure the condition of a country’s financial system around the world. Given the nature of the measurement problem, we apply different versions of principal component analysis (PCA) to deal with the presence of strong cross-sectional and time dependence in the data due to unobserved common factors. Using this comprehensive sample and various statistical methods, we produce an alternative data-driven measure of financial soundness that provides policy makers and financial institutions with a monitoring and policy tool that is easy to implement and update. We validate our index by using alternative macroeconomic factors, confirming its predictive power. Our index captures important aspects of financial intermediation around the world.