Charles Enoch Deputy Director Statistics Department, IMF July 9, 2009 Systemic Indicators: Developing Inputs on System-Wide Risks for Financial Stability and Macroprudential Policy

2 Financial Soundness Indicators: Introduction u FSIs intended as summary indicators of the financial soundness of institutions and markets in an economy. u Analysis of FSIs would therefore complement other assessments of soundness, such as early warning indicators and macroeconomic vulnerability exercises. u Multiple FSIs: evolving views on definitions, coverage, and measurement.

3 Financial Soundness Indicators: Legacy of Earlier Crises u Conclusion from 1994 Mexican crisis that data partly responsible. u Further focus on data after Asian crisis. u Development of data standards (SDDS and GDDS). u Recognition of gap between monetary data and microprudential information—focus on “macroprudential indicators” (MPIs).

4 Initial Usage of FSIs u Introduction of FSAPs. u Need for broad set of indicators used for strengthened surveillance: MPIs comprising aggregated prudential indicators. u Consultative meeting on Macroprudential Indicators held at IMF HQ September u Redesignation of MPIs as FSIs after 2001 IMF Board meeting (others, such as ECB, still use MPI terminology).

5 Survey and Selection u Surveys of member countries on availability and usefulness of potential MPIs. u 122 responses (covering 142 countries and jurisdictions); all covered user questionnaire, two-thirds the compilation and dissemination questionnaire. u IMF Board endorsed list (slightly modified in 2004) that comprises 15 core and 26 encouraged indicators.

6 Choice of Indicators u Issue of coordination across agencies. u Limited resources available for exercise. u Parsimony. u Reflecting prudential practices, CAMEL framework underpinned structure. u Recognition this was initial list.

7 Choice of Indicators (2) u Focus on core markets and institutions. u Analytical significance. u Revealed usefulness through high scores in the 2000 survey results. u Relevant in most circumstances. u Availability. u Compilation Guide drafted

8 Core Indicators u Regulatory capital to risk weighted assets. u Regulatory tier 1 capital to risk weighted assets. u Nonperforming loans net of provisions to capital. u Nonperforming loans to total gross loans. u Sectoral distribution of loans to total loans. u Return on assets. u Return on equity. u Interest margin to gross income. u Noninterest expenses to gross income. u Liquid assets to total assets. u Liquid assets to short-term liabilities. u Net open position in foreign exchange to capital.

9 Encouraged Indicators: Encouraged FSIs for Deposit Takers u Capital to assets. u Geographical distribution of loans to total loans. u Gross asset positions in financial derivatives to capital. u Gross liability positions in financial derivatives to capital. u Trading income to total income. u Personnel expenses to noninterest expenses. u Spread between reference rates and deposit rates. u Spread between highest and lowest interest rates. u Customer deposits to total noninterbank loans. u Foreign currency denominated loans to total loans. u Foreign currency denominated liabilities to total liabilities. u Net open position in equities to capital.

10 Encouraged Indicators: OFCs (2) and NFCs (5) u Assets to total financial system assets. u Assets to GDP. u Total debt to equity. u Return on equity. u Earnings to interest and principal expenses. u Net foreign exchange exposure to equity. u Number of applications for protection from creditors.

11 Encouraged Indicators Household (2), Market Liquidity (2), Real Estate (4) u Household debt to GDP. u Household debt service and principal payments to GDP. u Average bid-ask spread in securities markets. u Average daily turnover ratio in the securities market. u Residential real estate prices. u Commercial real estate prices. u Residential real estate loans to total loans. u Commercial real estate loans to total loans.

12 Coordinated Compilation Exercise u 62 countries invited to participate in Coordinated Compilation Exercise (CCE), modeled on CPIs—essentially the countries in SDDS. u 52 have committed to supply data and metadata. u First data points to be disseminated by end- July, with metadata, with commitment to maintain dissemination.

13 July 2009 Dissemination (1) u Expectation data for around countries will be disseminated; more (and more metadata) to follow. (Around seven countries disseminate more than one data point.) u 7-14 G20 countries expected to be among disseminators.

14 July 2009 Dissemination (2) u Nearly all countries disseminating will disseminate all the core indicators. u Around six countries will disseminate at least around 20 encouraged indicators, over half at least 10 encouraged indicators. u Around half will disseminate quarterly, one semi-annually, the rest annually.

15 Results of the CCE u Major efforts put into preparation of data and metadata in many countries. u Institutional arrangements put in place in many countries for interagency coordination. u Significant progress in understanding issues and moving towards harmonization, e.g., as regards consolidation. u Resource intensity of exercise has constrained e.g., countries’ willingness to construct past data. u Over time, time series will be generated for an increasing number of countries.

16 Issues Concerning FSIs u Periodicity—crisis shows importance of high frequency. u Heavy concentration of indicators on banks, especially in core indicators. u Aggregate figures hide variations in dispersion. u Lack of time series impedes analysis and empirical testing. u Questions whether (and which) existing FSIs “predicted” the present crisis. u Lack of clear “critical points” that would indicate problems.

17 Going Forward (1) u Review of FSIs to possibly rebalance between core and encouraged categories. u Increasing focus, for instance, on leverage ratios rather than capital as lead indicator of problems. u Increasing focus beyond the on-balance-sheet activities of commercial banks. u Recognition of real estate prices as key indicator of emerging problems. u Further focus also on balance sheet data and systemic risks.

18 Going Forward (2) u Revisions to, and increasing harmonization of, regulatory framework (especially in Europe), will lead towards international convergence in calculation of FSIs, might also complicate creation of consistent time series. u Present crisis may lead to added commitment at national level to devote resources to FSIs and other crisis-related statistics; could permit broadening in range of FSIs. u Continued collaboration needed between statistical and financial experts. u Any revision to IMF core and encouraged indicators needs approval of IMF Board.

19 FSIs and SDDS u In December 2008 IMF Executive Board invited staff to return within a year with work program to identify FSIs (and other financial indicators) for inclusion into SDDS on an encouraged basis. u If accepted, would represent significant enhancement to SDDS.

20 Feedback Requested... u Revisions and refinements to FSIs require feedback from users, to complement the ongoing in-house analytical and operational work. Thank you