Financial Soundness Indicators and the Characteristics of Financial Cycles
IMF Working Papers, January 27, 2014
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- Financial Soundness Indicators and the Characteristics of Financial Cycles
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Bibliographic details
- Authors: Natasha X Che, Yoko Shinagawa
- Published: January 27, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484386880.001
Summary and main findings
- Better “financial soundness” of banks could help mitigate the volatility of financial cycles by reducing banks’ risk exposure.
- However, trying to improve financial soundness in the midst of a downturn can do the opposite—further aggravating the contraction of credit.
- The paper found that:
- Better initial scores in certain financial soundness indicators (FSIs) are associated with milder and shorter downturns.
- Improving FSIs during a downturn worsens the shrinkage of credit and amplifies the cycle.
Policy implications
- Policy makers should be mindful about the timing of regulating changes in banks’ FSIs.
- Regulatory efforts to strengthen FSIs may be beneficial ex ante (before a downturn) but can be counterproductive if implemented procyclically during downturns.
Context and scope
- Subject areas covered: Banking; Credit; Credit cycles; Exchange rate risk; Financial cycles; Financial regulation and supervision; Financial sector policy and analysis; Financial soundness indicators; Money.
- Keywords listed by the authors include: 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.
IMF Working Paper — Natasha X Che and Yoko Shinagawa; January 27, 2014.