Developing a Composite Financial Stability Indicator for South Africa

Topics: Economics, Investment, Bank Pages: 7 (2248 words) Published: October 29, 2013


Abstract
As a result of the financial crises faced by the world in the last two decades, financial authorities worldwide have realized the importance of maintaining a sound financial system as a precursor for economic growth and stability. Central Banks across the world have included financial market stability as a part of their mandate. However, one of the major stumbling blocks in analyzing financial system stability is the lack of a composite indicator for measuring it. In this paper we analyze the work done on Financial Stability Indicators and look to build upon that to come up with a composite indicator for the South African economy.

Contents

I. Introduction
As a result of the financial crises faced by the world in the last two decades, financial authorities worldwide have realized the importance of maintaining a sound financial system as a precursor for economic growth and stability. The global financial crisis that started in 2008 – the after effects of which are still being felt – demonstrated how insufficient traditional micro-regulation is to identify vulnerabilities in the financial system. The level of interconnectedness of financial markets has necessitated the need for a macro-prudential approach for addressing financial market stability. Central Banks across the world have included financial market stability as a part of their mandate. It makes logical sense for central banks to assume this responsibility in an economy as they are better placed than any other institution to understand the linkages between various financial institutions and markets. Moreover, given their mandate of maintaining price stability and economic growth they have an inherent interest in maintaining stability in the financial system as these objectives cannot be achieved without having a sound and healthy financial system. One of the major stumbling blocks in analyzing financial system stability is the lack of a composite indicator for measuring it. Unlike other macroeconomic objectives like price stability and economic growth which can be measured, financial market stability is a much more complex concept as it deals with all kinds of financial institutions operating under an increasingly interconnected scenario – not just domestically but across economies. The generally accepted norms for assessing financial stability are the Financial Soundness Indicators (FSIs), specified by the IMF, which are a set of indicators used for evaluating the health of financial institutions within a country. These comprise of a set of “core indicators” targeted specifically at the deposit taking financial institutions and another set of “encouraged indicators” targeted at all other financial institutions. With the advent of unconventional (read accommodative) monetary policy in a number of developed economies, the emerging economies across the globe have been exposed to potential risks because of the increase in international capital flows. Not to mention, with the financial system evolving rapidly in these countries as a consequence of robust economic growth there is a greater need in these economies for active assessment of the health of the financial system. The Reserve Bank of South Africa intensified its focus in this aspect towards the end of the last millennium. In 1999 it established a Financial Stability Committee with the primary mandate of enhancing financial stability. In 2001, a Financial Stability Department was established to monitor the stability of the financial system. In 2004, the Reserve Bank came out with its first edition of the “Financial Stability Review” which has now become a regular bi-annual publication. This paper is structured as follows – the first section lays out the objectives of this paper. Then we review some of the relevant research that has been done in the field of financial stability. The next section looks at the trends of various financial sector indicators (FSIs) in South Africa...

Bibliography: IMF (2013), Global Financial Stability Report: Transition Challenges to Stability, World Economic and Financial Surveys
Blaise Gadanecz and Kaushik Jayaram (2008), Measures of financial stability – a review, IFC Bulletin No 31, BIS
IMF (2006), Financial Soundness Indicators, Compilation Guide, March 2006 (http://www.imf.org/external/pubs/ft/fsi/guide/2006/index.htm)
Data Source – IMF eLibrary – Data (http://elibrary-data.imf.org/DataExplorer.aspx)
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