Systemic Risk Assessment in Low Income Countries: Balancing Financial Stability and Development
IMF Working Papers, August 12, 2015
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Bibliographic details
- Authors: Daniela Marchettini, Rodolfo Maino
- Published: August 12, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513545882.001
Overview
- Title: Systemic Risk Assessment in Low Income Countries: Balancing Financial Stability and Development
- Authors: Daniela Marchettini, Rodolfo Maino
- Date: August 12, 2015
- Format: IMF Working Papers, Working Paper No. 2015/190
- Core proposition: A toolkit for assessing systemic risk buildup in low income countries that adapts to stages of financial development.
Key findings
- Due to non-linearity in the relationship between credit and financial stability, systemic risk assessment should be conducted with different tools at different stages of financial development.
- When the level of financial depth is low, traditional leading indicators of banking crises have poor predictive performance.
- In early stages of financial development, analysis should be based on indicators that:
- account for financial deepening, and
- take into consideration countries’ structural limits.
- The framework is used to provide a preliminary assessment of systemic risk buildup in individual SSA countries.
Toolkit and methodological emphasis
- Proposed: a stage-sensitive toolkit for systemic risk assessment in low income countries.
- Emphasis on replacing or supplementing traditional Early Warning Indicators where financial depth is low.
- Recommended indicator characteristics:
- capture credit growth and excess credit dynamics (including credit booms, credit bubble, credit gap measure),
- reflect financial deepening progress,
- incorporate frontier gap and structural limits specific to low income contexts.
Policy implications and recommendations
- Use different assessment tools depending on the stage of financial development rather than a one-size-fits-all Early Warning Indicator approach.
- For countries with low financial depth:
- prioritize indicators that monitor financial deepening and structural capacity,
- adjust crisis-prediction frameworks to account for the poor predictive performance of traditional banking-crisis indicators.
- Apply the toolkit to produce country-level preliminary assessments to inform macroprudential policy and development-oriented financial sector policy and analysis.
Subjects and keywords (as provided)
- Subject: Credit, Credit booms, Economic sectors, Financial crises, Financial markets, Financial sector development, Financial sector policy and analysis, Money, Systemic risk
- Keywords: banking crisis, Credit, Credit booms, credit bubble, credit gap measure, credit growth, credit standard, Early Warning Indicators, excess credit, Financial Deepening, Financial sector development, frontier gap, Global, Sub-Saharan Africa, Systemic Risk