Systemic Indicators: Developing Inputs on System-Wide Risks for Financial Stability and Macroprudential Policy

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

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

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

4. Initial Usage of FSIs • Introduction of FSAPs. • Need for broad set of indicators used for strengthened surveillance: MPIs comprising aggregated prudential indicators. • Consultative meeting on Macroprudential Indicators held at IMF HQ September 1999. • Redesignation of MPIs as FSIs after 2001 IMF Board meeting (others, such as ECB, still use MPI terminology).

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

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

7. Choice of Indicators (2) • Focus on core markets and institutions. • Analytical significance. • Revealed usefulness through high scores in the 2000 survey results. • Relevant in most circumstances. • Availability. • Compilation Guide drafted 2002-2004

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

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

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

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

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

13. July 2009 Dissemination (1) • Expectation data for around 25-35 countries will be disseminated; more (and more metadata) to follow. (Around seven countries disseminate more than one data point.) • 7-14 G20 countries expected to be among disseminators.

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

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

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

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

18. Going Forward (2) • 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 . • 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. • Continued collaboration needed between statistical and financial experts. • Any revision to IMF core and encouraged indicators needs approval of IMF Board.

19. FSIs and SDDS • 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. • If accepted, would represent significant enhancement to SDDS.

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