Global Financial Strategy - 'Gaps' in central bank stability reports

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‘Gaps’ in central bank stability reports – IMF paper

Tuesday 10 January 2012 – by Karina Whalley

International Monetary Fund economists have found holes in the financial stability reports produced by central banks which they criticised for being “less capable of assessing systemic risk”.

In a working paper released on Monday, it said that the reports need to take more forward-looking perspectives as well as a better view of financial interconnections in order to evaluate systemic risk accurately.

“Our analysis suggests that the FSRs, despite some improvements in recent years, still tend to leave much to be desired in terms of their clarity, coverage of key risks, and consistency over time,” the paper said.

“A major drawback of a number of FSRs is the lack of ‘forward-lookingness’ of the reports – that is, insufficient analysis of risks and vulnerabilities – making them less capable of assessing systemic risk,” it said.

FSRs aim to limit financial instability by pointing out key risks and vulnerabilities to policymakers, market participants and the public and as of 2011, around 80 central banks now issue these reports, according to the study.

The paper focused on financial stability reporting in eight countries: Brazil, Canada, Korea, Iceland, Latvia, New Zealand, South Africa and Spain.

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It found that the bulk of analyses and discussions of systemic risks tends to rely on the current levels of ratios as well as on the underlying factors behind past developments in the financial system, the paper said.

But the FSRs seldom include statements, assessments or even survey results that are indicative of what is to be expected in the near term. New Zealand and Korea were found to be the most forward-looking.

The study’s authors were concerned that none of the reviewed reports included an analysis of linkages or exposures among domestic banks or showed any information on systemically important financial institutions or financial conglomerates.

They also said that an analysis of the interconnectedness of banks in different countries was not reported on a regular basis in the examined FSRs.

“There is no regular analysis or explanation of cross-border banking linkages in the FSRs,” the study warned.

“More importantly, no analysis of sovereign exposures of the banking system is reported in the FSRs.”

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