Financial System Standards and Financial Stability: The Case of the Basel Core Principles

IMF Working Papers, May 1, 2001

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Financial System Standards and Financial Stability: The Case of the Basel Core Principles

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Bibliographic details

• Authors: Dewitt D Marston
• Published: May 1, 2001
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451964745.001

Summary and central finding

• The relationship between the observance of financial system standards and financial stability is complex owing to the multitude of macroeconomic and structural factors affecting stability.
• Assessments of standards in terms of technical criteria for compliance need to be reinforced with additional information on other factors affecting risks in order to assess financial stability.
• Preliminary evidence from country data on observance of Basel Core Principles (BCPs) suggests that indicators of credit risk and bank soundness are primarily influenced by macroeconomic and macroprudential factors.
• The direct influence of compliance with Basel Core Principles on credit risk and soundness is insignificant.
• BCP compliance could, however, influence risk and soundness indirectly through its influence on the impact of other macro variables.

Evidence and analysis

• The paper uses preliminary evidence from country data on observance of Basel Core Principles (BCPs).
• Indicators examined include credit risk and bank soundness.
• Macro drivers highlighted as primary influences include macroeconomic and macroprudential factors.
• The analysis emphasizes the need to augment technical compliance assessments with information on other risk-affecting factors to evaluate implications for financial stability.

Policy implications and interpretation

• Technical assessments of compliance with financial system standards (such as the Basel Core Principles) should not be interpreted in isolation when assessing financial stability.
• Policymakers and supervisors should consider macroeconomic and macroprudential context alongside BCP compliance.
• Because BCP compliance may affect risk indirectly by altering how other macro variables transmit to risk and soundness, strengthening compliance could still be important for shaping the transmission of macro shocks.

Content in this bundle

• Financial System Standard and Financial Stability: The Case of the Basel Core Principles - WP/01/62
  • Financial System Standard and Financial Stability: The Case of the Basel Core Principles - WP/01/62 (Markdown version)
  • Financial System Standard and Financial Stability: The Case of the Basel Core Principles - WP/01/62 (PDF)