IMF Working Papers

Financial Soundness Indicators and the Characteristics of Financial Cycles

By Natasha X Che, Yoko Shinagawa

January 27, 2014

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Natasha X Che, and Yoko Shinagawa. Financial Soundness Indicators and the Characteristics of Financial Cycles, (USA: International Monetary Fund, 2014) accessed November 23, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Credit, Credit cycles, Exchange rate risk, Financial cycles, Financial regulation and supervision, Financial sector policy and analysis, Financial soundness indicators, Money

Keywords: Bank supervision, Capital-asset ratio, Credit, Credit cycles, Credit growth, Downturn regression, Europe, Exchange rate risk, Financial cycle, Financial cycles, Financial soundness indicators, IMF-FSI database, Liquid-asset ratio, NOP-capital ratio, SRF-FSI coefficient, WP

Publication Details

  • Pages:

    26

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2014/014

  • Stock No:

    WPIEA2014014

  • ISBN:

    9781484386880

  • ISSN:

    1018-5941

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