1. IMF-FSB Users Conference, Washington DC, 8-9 July 2009 Views expressed are those of the author and not necessarily those of the BIS or its associated organisations 1 Systemic indicators Developing inputs on system-wide risks for financial stability analysis and macroprudential policy Paul Van den Bergh Head of Information, Statistics and Administration Monetary and Economic Department 1

2. 2 What are systemic indicators? Early warning indicators Financial stability/vulnerability indicators Financial soundness indicators Macro-prudential indicators Mixture of “individual” indicators and “composite” indicators 2

3. 3 Commonly used variable in financial stability reports Real economy: GDP, government fiscal position, inflation Corporate sector: debt to equity, earnings (to interest and principal expenses),fx exposure, defaults Household sector: assets and liability positions, income, consumption, debt service levels External sector: (real) exchange rates, fx reserves, CA+capital flows, maturity/currency mismatches Financial sector: money, (real) interest rates, bank credit, bank leverage, NPLs, CDS premia, capital adequacy, liquidity ratio, credit ratings, sectoral/regional concentration of exposures Financial markets: stock index, corporate bond spread, market liquidity, volatility, house prices

4. 4 Macroprudential policy/framework Much work in Basel, still confusion over its definition Two features 1.Focus on financial system as a whole 2.Treat aggregate risk as dependent on collective behaviour of financial institutions (endogenous) Contrast with microprudential which focuses on individual institutions and treats aggregate risk as exogenous For 1: think of financial system as portfolio of securities with each security representing financial institution For 2: think of link credit extension to economic activity, to asset price inflation, to increase in valuation of collateral to credit extension …

5. 5 Macroprudential policy/framework: dimensions Risk distribution at a given point in time (cross-sectional) Correlation of exposures across institutions (direct or through linkages) Contribution of individual institution to system-wide risk Likelihood of failure if others face distress at same time Vulnerability to risk concentrations even if individual institutions are diversified Risk evolution over time (time dimension) How can system-wide risk by amplified by interaction financial system and real economy? Procyclicality Impact of macroeconomic sources of risk: asset prices, credit, leverage Important implications for calibration of prudential tools

6. 6 Macroprudential policy/framework: cross-sectional Measure likelihood of systemic event at given point in time Use techniques applied to portfolios of securities Data required Size of institutions Institution’s probability of default Loss-given default in each case Correlation of defaults Information can be collected from supervisory assessments, prices of bank equity and debt Overall level of systemic risk increases with institutions’ exposures to common risk factors

7. 7

8. 8 Macroprudential policy/framework: cyclical Countercyclical capital requirements (CR) Choose indicator that signals time to build up and release capital buffer Choose formula to determine CR when indicator changes Adjust actual CR (rule-based or discretionary) Possible indicators Credit spreads Real asset prices Composite indicator combining credit/GDP ratio and real asset prices Example for US Variable presented as deviations from long-term average

10. 10 Reprioritisation of Financial Soundness Indicators? Significant statistical project developed with wide consultation Large number of participating countries Distinction core and encouraged sets? Core set various ratio’s of aggregate balance sheet items of deposit takers concept of consolidation not clearly understood difficult to integrate data with other banking datasets

11. 11 Reprioritisation of Financial Soundness Indicators? Encouraged set Includes indicators on indicators for other sectors, financial markets and real estate price indices More emphasis on non-bank financial sectors? Financial positions of other sectors through financial account/balance sheet approach? More emphasis on housing and housing finance indicators (methodology on residential real estate price indices being developed by IWGPS/Eurostat)?

12. 12 Conclusions Need to be clearer about what we want to measure (individual elements of “financial situation”, composites, leading indicators?) Specific set of information requirements for macroprudential policy/framework (cross-sectional and cyclical analysis of aggregate risk; mixture of micro and macro data) Possible to improve FSI’s both in terms of methodology and content (distinction core vs encouraged, better coverage of non-bank sector, more “agile” methodology)