Financial Soundness Indicators Research Articles

Banks’ Profitability and Financial Soundness Indicators: A Macro-level Investigation in Emerging Countries

Abstract The banking sector profitability has shrunk considerably after the setup of the global financial crisis, both in developed and emerging countries. The non-sustainable credit policies practiced by banks before the crisis have largely contributed to this distress. In particular in emerging markets, an easy access to credits has generated, after the financial turbulences, a considerable amount of non-performing loans which have subsequently affected the banks’ profitability. In addition, the need for an increased capitalization is also susceptible of negatively influencing the profitability in the short-run. Against this background, we test the influence of financial soundness indicators on the banks’ profitability, at the macro-level, in a set of emerging countries. Different from previous studies which assess the impact of the banking sector characteristics and of the macroeconomic context on the profitability, we focus on the internal conditions of banks. Using the IMF monthly data for the period 2005-2013 and a panel data approach, we discover that non-performing loans have a negative impact on banks’ profitability under the fixed effect model. While the level of liquidity has a mixed influence, the capitalization and the interest rate margins positively affect the banks’ profitability. As expected, the non-interest expenses negatively impact the profitability. The results prove robust either if we use the return on assets or the return on equity indicator to measure the level of profitability.

Developing an Aggregate Index for Measuring Financial Stability in the Balkans

Financial stability continues to grow in importance and remains a hotly debated topic since the turn of the new century brought a string of financial episodes that culminated with the Global financial crisis of 2007. While the Balkans have traditionally been considered to lie on the periphery of financial phenomena, this wide assessment of the region has changed with the large-scale turmoil caused by the Greek Sovereign Debt crisis. Therefore, to curb nascent instability, financial authorities should remain alert and devise a mechanism able to effectively detect stress in their respective financial systems. So far – in the quest to build a comprehensive and universal Early Warning System – a number of broad measures and indicators have been proposed; however, none of them have been specifically tailored to reflect the distinct character of the Balkan countries with their diverse, yet analogous political, social and economic idiosyncrasies. This paper attempts to tackle this issue from a financial policy standpoint by contributing to the current literature on the subject in three separate ways. First, it builds upon the most recent findings in this area to develop an aggregate financial stability index that measures financial stability levels in nine countries geographically belonging to the Balkan region, entirely or at least in part. Most importantly, this index juxtaposes some well known IMF- backed Financial Soundness and macroprudential indicators with World Bank development indicators and CESifo measures of world economic climate. Second, the authors perform a Chanut-Laroque analysis of contribution to volatility levels in the aggregate stability index in order to explore which sub-indexes can explain the improvement or deterioration of the index value for the 1995-2011 period. Third, this paper compares and contrasts the evolution of financial stability of two sub-indices reflecting the diverging nature of the two groups of countries (Western Balkans vs. EU members) regarding their standing relative to European Union status.

Financial Soundness Indicators and the Characteristics of Financial Cycles

Better “financial soundness” of banks could help mitigate the volatility of financial cycles by reducing banks’ risk exposure. But trying to improve financial soundness in the midst of a downturn can do the opposite—further aggravating the contraction of credit. Consistent with this notion, the paper found that better initial scores in certain financial soundness indicators (FSIs) are associated with milder and shorter downturns; and improving FSIs during a downturn worsens the shrinkage of credit and amplifies the cycle. In this context, our results suggest that policy makers should be mindful about the timing of regulating changes in banks’ FSIs.

Financial Soundness Indicators and the Characteristics of Financial Cycles

Better “financial soundness” of banks could help mitigate the volatility of financial cycles by reducing banks’ risk exposure. But trying to improve financial soundness in the midst of a downturn can do the opposite—further aggravating the contraction of credit. Consistent with this notion, the paper found that better initial scores in certain financial soundness indicators (FSIs) are associated with milder and shorter downturns; and improving FSIs during a downturn worsens the shrinkage of credit and amplifies the cycle. In this context, our results suggest that policy makers should be mindful about the timing of regulating changes in banks’ FSIs.

St. Kitts and Nevis: Ninth and Final Review Under the Stand-By Arrangement, Request for Waiver of Nonobservance of Performance Criterion, and Proposal for Post-Program Monitoring-Staff Report; Press Release

KEY ISSUES Stand-By Arrangement (SBA): The 36-month SBA for SDR 52.51 million (590 percent of quota) was approved on July 27, 2011. The seventh and eighth reviews were completed on March 19, 2014, together with the 2014 Article IV consultation. The authorities plan to continue to treat the arrangement as precautionary, which they began at the last review, and have repaid early a portion of the Fund’s outstanding credit (about 125 percent of quota). Context: Growth is expected to continue at a relatively rapid pace, following a stronger- than-expected recovery of nearly 4 percent in 2013, after a four-year contraction. This reflects rapid expansion in construction related to large Citizenship-by-Investment inflows, and a substantial increase in public sector investment, as well as support from the People Employment Program (PEP). The ECCB is investigating the reclassification of two public sector loans targeted for restructuring that may adversely impact banks’ financial soundness indicators. Program performance: Substantial strides have been made under the government’s home-grown economic program. Fiscal sustainability has improved, debt was substantially reduced and is on a downward path, the financial sector has remained stable, and key structural reforms have been implemented. The fiscal program is on track and all performance criteria were met with the exception of the continuous performance criterion on external arrears. The external arrears were minor and quickly repaid. Progress on the implementation of structural reforms is slow, with delay in one of the two benchmarks that were to be completed for this review, which is now a prior action. Review: The authorities continue to demonstrate their commitment to their home- grown program, and are on track to meet the 2014 fiscal targets. They also plan to press ahead with their structural reform agenda and complete reforms initiated under the program. With ongoing implementation of prudent fiscal management, the authorities are on track to reduce debt to 60 percent of GDP by 2020. In accordance with Fund policy, the Managing Director is recommending the initiation of Post-Program Monitoring (PPM).

Financial Soundness Indicators and the Characteristics of Financial Cycles

Better “financial soundness†of banks could help mitigate the volatility of financial cycles by reducing banks’ risk exposure. But trying to improve financial soundness in the midst of a downturn can do the opposite—further aggravating the contraction of credit. Consistent with this notion, the paper found that better initial scores in certain financial soundness indicators (FSIs) are associated with milder and shorter downturns; and improving FSIs during a downturn worsens the shrinkage of credit and amplifies the cycle. In this context, our results suggest that policy makers should be mindful about the timing of regulating changes in banks’ FSIs.

Dynamic Provisioning: Case of Mongolia

The recent financial crisis has required implementing specific macro approach of financial regulation and supervision. Thus, macro-prudential policy recently attracted considerable attention among global central banks.Therefore this paper provides an investigation of Mongolian financial systemic risk using macro-prudential frame and the way to avoid financial systemic risk.Dynamic provision was determined as a countercyclical macro-prudential tool to avoid systemic risk. Procyclicality, cross- sectional systemic risk analysis, and financial soundness indicators proposed that Mongolian financial system is at credit risk because of large banking sector. After financial crisis, although provision was 389.64 billion tugriks in January of 2010, dynamic provision was calculated as 62.64 billion tugriks that confirmed dynamic provision is countercyclical capital buffering tool.

Modifications to the Current List of Financial Soundness Indicators

The purpose of this paper is to inform Executive Directors on the outcomes of consultations conducted by the IMF’s Statistics Department (STA) on revising the current list of FSIs in response to the global financial crisis and the adoption of a new regulatory framework under the Basel III Accord. In addition, the G-20 Data Gaps Initiative calls on the IMF to review the FSI list (Recommendation no. 2). STA has undertaken these consultations in close collaboration with a broad-based group of national and international experts, international standard setting bodies, IMF’s relevant departments and all FSI-reporting countries and concerned international organizations

Modifications to the Current List of Financial Soundness Indicators - Background Paper

Modifications to the Current List of Financial Soundness Indicators - Background Paper

A Structural Approach to Financial Stability: On the Beneficial Role of Regulatory Governance

This paper examines whether the governance of regulatory agencies – regulatory governance – is positively related to financial sector soundness. We model regulatory governance and financial stability as latent variables, using a structural equation modeling approach. We include a broad range of variables potentially relevant to financial stability, employing aggregate regulatory, banking and financial, macroeconomic and institutional environment data for a sample of 55 countries over a period from 2001 to 2005. Given the growing importance of macro-prudential analysis, we use the IMF’s financial soundness indicators, a relatively new body of economic statistics which focuses on the banking sector as a whole. Our empirical evidence indicates that regulatory governance has a beneficial influence on financial stability. Thus, our findings support the view that the improvement of regulatory governance arrangements should be a building block of financial reform.

Financial soundness indicators and financial crisis episodes

This paper studies the links between of financial soundness indicators and financial crisis episodes controlling for several macroeconomic and fiscal variables in 20 OECD countries. We focus our attention on aggregate capital adequacy, asset quality and bank profitability indicators compiled by the IMF. Our key findings suggest that in times of severe financial crisis regulatory capital to risk weighted assets is increased (by about 0.5–0.6 % points; p.p.) to abide by regulatory and supervisory demands, non performing loans (NPLs) to total loans increase dramatically (by about 0.5–0.6 p.p.), but loan loss provisions lag behind NPLs (they fall by about 12.3–18.8 p.p.) and profitability deteriorates dramatically (returns on assets (equity) fall by about 0.3–0.4 (5.0–7.0) p.p.).

Financial Soundness Indicators and Banking Crises

The paper tests the effectiveness of financial soundness indicators (FSIs) as harbingers of banking crises, using multivariate logit models to see whether FSIs, broad macroeconomic indicators, and institutional indicators can indeed predict crisis occurrences. The analysis draws upon a data set of homogeneous indicators comparable across countries over the period 2005 to 2012, leveraging the IMF’s FSI database. Results indicate significant correlation between some FSIs and the occurrence of systemic banking crises, and suggest that some indicators are precursors to the occurrence of banking crises.

Financial Soundness Indicators and Banking Crises

Financial Soundness Indicators and Banking Crises

A structural approach to financial stability: On the beneficial role of regulatory governance

This paper examines whether the governance of regulatory agencies – regulatory governance – is positively related to financial sector soundness. We model regulatory governance and financial stability as latent variables, using a structural equation modeling approach. We include a broad range of variables potentially relevant to financial stability, employing aggregate regulatory, banking and financial, macroeconomic and institutional environment data for a sample of 55 countries over a period from 2001 to 2005. Given the growing importance of macro-prudential analysis, we use the IMF’s financial soundness indicators, a relatively new body of economic statistics which focuses on the banking sector as a whole. Our empirical evidence indicates that regulatory governance has a beneficial influence on financial stability. Thus, our findings support the view that the improvement of regulatory governance arrangements should be a building block of financial reform

Financial Soundness Indicators and Financial Crisis Episodes

This paper studies the links between of financial soundness indicators and financial crisis episodes controlling for several macroeconomic and fiscal variables in 20 OECD. We focus our attention on aggregate capital adequacy, asset quality and bank profitability indicators compiled by the IMF. Our key findings suggest that in times of severe financial crisis regulatory capital to risk weighted assets is increased (by about 0.5-0.6 percentage points –p.p.) to abide by regulatory and supervisory demands, non performing loans (NPL) to total loans increase dramatically (by about 0.5-0.6 p.p.), but loan loss provisions lag behind NPLs (they fall by about 12.3-18.8 p.p.) and profitability deteriorates dramatically (returns on assets (equity) fall by about 0.3-0.4 (5.0-7.0) p.p.).

The Banking Sector of Pakistan: The Case of Its Growth and Impact on Revenue Generation 2007 to 2012

The banking sector of Pakistan played an important role in the growth and development of the economy of Pakistan. This study aims to find the reasons behind the growth of the banking sector and how it can influence the revenue generation of the sector. The reasons are investigated and the current state of the banking sector is also reviewed to study the growth patterns. The historical evidence is first collected and then analyzed, so the current survival of the sector could be studied even after the Global Financial Crisis. Financial Soundness Indicators provide further indept analyses of the factors which contributed towards the growth of the banking sector of Pakistan. The reforms in the banking sector which are the real reasons for the growth in the banking sector are summarized under the rationale behind growth in the banking sector of Pakistan. The banking sector of Pakistan is the only sector of the economy which survived the Global Financial Crisis. So, this study provides evidence that Pakistan's banking sector is still resilient and is profitable which suggests that it's still a healthy sector for the investors to make safe investments with reliable and consistent returns. The government and the common man both can be benefited by the positive performance of the banking sector of Pakistan.

Macro Prudential Supervision Tools in the European Banking System

The recent financial crisis has reoriented policymakers from micro prudential supervisory to systemic orientated regulation and macro prudential supervisory frameworks. This paper presents a macro prudential approach for monitoring the banking system soundness in the European Union. Using panel data techniques we have estimated the impact of the macroeconomic environment on two key financial soundness indicators of banking systems from 27 countries. Also, we have developed a macro prudential supervisory framework for identification and monitoring the systemic risks, from both backward and forward-looking perspectives.

A Study on Testing the Operating Efficiency of Indian Banking Sector with Special Reference to the Select Financial Soundness Indicators — An Empirical Approach

A decade of financial sector reforms has strengthened the fundamentals of Indian economy and paved the way for efficiency in operating performance of the banks. The most important achievement of the financial sector reforms is to bring a marked improvement in the financial health of commercial banks with respect to capital adequacy, profitability, asset quality and risk management. Now banks have to compete not only with the same business line but also with mutual fund, insurance, post office and NBFCs to attract the customers and they have to adopt the technology-oriented reforms to stay in their business. Further deregulation has opened up new opportunities for banks to enhance their revenues by diversifying into investment banking, insurance, credit cards, depository services, mortgage financing etc. A positive outcome of competition is the emergence of choice system in selecting the services by the customers and increased levels of sophistication and technology in banks have facilitated the customers to get the services at their door-step. the government also has adopted many initiatives, which changed the face of traditional banking sectors. In the light of the recent measures initiated by the government, the wings of the banks have spread across the country to improve their operating performance. This paper has made an attempt to analyze the operating performance of the Indian banking sector on the basis of the indicators like Capital adequacy ratio, Non-performing Assets (NPA), Cost of funds, Return on funds, Spread and Credit — Deposit ratio.

The Impact of the Global Financial Crisis on the Management of Banking Risks

The international macroeconomic and financial environment has undergone major negative changes since the global financial crisis. The magnitude and intensity of the economic and financial crisis have been underestimated by authorities worldwide. The uncertainties surrounding future developments remain high. In Romania, the main challenges posed by the external sector refer to the worsening perception of risks, including contagion effects from the adverse regional developments, the contraction of external markets, the less readily available external financing and the replacement of global liquidity risk by solvency risk. In spite of this, the banking sector continued to report positive financial soundness indicators, displaying and noticeable financial results. Stress testing analyses indicate a solid absorption capacity of moderate shocks. On the other hand, we proposed ourselves to quantify the degree of correlation between the European and Romanian banking systems through the solvency indicator using the trend analysis.

Bank Disclosure Index: Global Assessment of Bank Disclosure Practices

The report assigns a composite bank disclosure index to each of the 180 countries surveyed in the study, yearly since 1994. Using a checkbox approach to analyze financial statements of individual banks, the index seeks to quantitatively measure the actual disclosure practices of commercial banks around the world, in relation to their assets, liabilities, funding, incomes, and risk profiles. The measurement framework is compatible with International Monetary Funds (IMF's), Financial Soundness Indicators (FSI) system, as well as Basel Committee's prescriptions on bank accounting disclosures. The framework is applicable to banks in low and mid-income countries. Specific policy prescriptions can be made automatically based on the sub-index and sub-component scores linked to individual disclosure categories. The report also utilizes the time-series and cross-sectional variations of the index to conduct a series of assessments and diagnoses on several systematically important developing countries and regions, as examples to demonstrate the index's policy applications.