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Author/Editor:
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Natasha Xingyuan Che ; Yoko Shinagawa
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Publication Date:
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January 27, 2014
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Electronic Access:
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Free Full text
(PDF file size is 912KB).
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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
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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.
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Order a print copy
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Series:
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Working Paper No. 14/14
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Subject(s):
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Financial soundness indicators | Banks | Risk management | Business cycles | Economic models
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