Evaluating the Effectiveness of Early Warning Indicators: An Application of Receiver Operating Characteristic Curve Approach to Panel Data

Early warning indicators (EWIs) of banking crises should ideally be judged on how well they function in relation to the choice issue faced by macroprudential policymakers. However, the effectiveness of EWIs depends upon the strength of the predicting power, stability, and timeliness of the signal. Using a balanced panel of 6 countries’ experience with banking and currency crises in recent times, this paper evaluates the effectiveness of EWIs using Receiver Operating Characteristics. Following the drivers of the banking crisis and currency crisis, the paper evaluates the effectiveness of aggregate credit growth, sectoral deployment of credit along and other macroeconomic indicators generally used as EWI. The paper observes that credit disbursements to non-financial sectors and the central government provides stable signals about systemic risks. Further debt service ratio, interbank rates and total reserves are also found to be useful in predicting these crises. Lastly, the effective EWIs are combined using shrinkage regression methods to evaluate the improvement of signal strength of the combination of EWIs. The predictive power of the combination of EWIs provides better signal strength in predicting the macroprudential crisis

Sustainability of the regional financial system: a case study of the Northwestern Federal District

[EN] This article provides an assessment of the sustainability of Russian regions' financial systems. The study is based on the methods of generalization and synthesis, correlation-regression analysis, and multivariate classification. Since the structure of the regional financial system is complex, several works are devoted to studying its sustainability issues. The relevance of the study topic is confirmed by the lack of a systematic approach to assessing the integral index of sustainability and the possibility of using various tools in determining the complex indicator. Methods: This methodology with application of mathematical statistics methods makes it possible to assess the financial system sustainability in four sectors, to include the leading indicators in the assessment, and to identify regions with extreme values of debt burden indicators. The method was tested for the regions of the Northwestern Federal District (NWFD) for the period 2010 - 2019 to classify the regions according to three levels of debt sustainability. Data collection from the 1 st January to 30 th April 2022 included statistical data from government open internet sources, sectors studied relate to government, and municipal budgets in the NWFD. Authors analyzed regional debt sustainability indicators and identified themes in the field of sustainability studies for the NWFD. Results: An increased level of financial system sustainability was observed among the NWFD regions in the corporative and personal finance sectors, indicating a significant contribution of businesses and households to maintaining the balance and sustainability of the financial system in Russia as a whole. The results of the study also identified that the NWFD regions belong to three clusters: cluster 1 - high debt sustainability; cluster 2 - medium debt sustainability; and cluster 3 - low debt sustainability.: The research of E.G.K., S.E.B, and N.S.A. is partially funded by the Ministry of Science and Higher Education of the Russian Federation under the strategic academic leadership program 'Priority 2030' (Agreement 075-15-2021-1333, dated 30.09.2021).Barykin, S.; Mikheev, A.; Kiseleva, E.; Putikhin, Y.; De La Poza, E.; Alekseeva, N. (2023). Sustainability of the regional financial system: a case study of the Northwestern Federal District. F1000Research. 11(908):1-21. https://doi.org/10.12688/f1000research.123197.21211190

Measuring Financial Stability in Ghana: A New Index-Based Approach

We compute aggregate financial stability index (AFSI) for Ghana to gauge the performance of the financial system since the adoption of inflation targeting in 2017. The index is derived from four sub-indices, namely financial development index (FDI), financial soundness index (FSI), financial vulnerability index (FVI), and the world economic climate index (WECI). The trend in AFSI identifies three distinct developments in Ghana’s financial system. These are (1) the period of financial strain following the global financial crisis (June 2007 – September 2010); (2) period of sustained improvement in financial stability (December 2010 – June 2015); and (3) a return to financial stress (September 2015 – December 2016). We observe that the risks to financial stability still persist as sub-indices especially FVI, FDI and FSI (in 2016) remain well below their respective levels in since 2012. Analysis of the sub-indices thus suggests that the risk factors to financial stability primarily emanates from the weakening domestic factors which could be linked to the uncertainties that surrounded the election in 2016. Our metric therefore provides a more powerful gauge of financial stability in Ghana and very relevant for monetary policymaking decision

The Impact of FinTech Credit on Financial Stability: An Empirical Study.

The advent of FinTech credit, a new technological-financial innovation engaged in bank- like activities, has created new dimensions in nonbank credit intermediation, with potential implications for financial stability. However, existing literature and policy debates provide mixed views about the impact of FinTech credit on financial stability. Moreover, the expansion of nonbank credit confronts the role of macroprudential policy in safeguarding financial stability beyond banking. This study aims to investigate whether FinTech credit disrupts or enhances overall financial stability and whether it impacts bank risk-taking. Additionally, the study explores the impact of macroprudential policies on the growth of FinTech credit. This study utilises cross-country unbalanced panel data from 25 economies over the period 2005Q1 to 2019Q4. A weighted sum approach is employed to construct the aggregate financial stability index used to measure financial stability. To measure bank risk-taking, five bank risk-taking measures, namely: credit, liquidity, portfolio, leverage, and insolvency risks, are used. Furthermore, the integrated macroprudential policy (iMaPP) dataset developed by Alam et al. (2019) is used to construct macroprudential policy variables. Several econometric models are employed for baseline estimations and robustness analysis. The main findings reveal significant evidence of a non-linear (inverted U-shaped) relationship between FinTech credit and overall financial stability and bank risk-taking. These findings suggest that FinTech credit may enhance overall financial stability to a certain threshold, after which a further increase in FinTech credit may disrupt financial stability. Similarly, the expansion of FinTech credit may initially increase bank risk- taking but later lessen it. The results also show that macroprudential policies promote the growth of FinTech credit, which may undermine its effectiveness and contribute to financial stability risks. The results remain stable based on the extensive and robust analysis performed. The study provides important policy implications and contributes to existing and emerging theories such as nonbank credit intermediation and financial innovations

A Financial Stability Index for Israel

AbstractAn integral financial stability index is constructed using Israel macroeconomic data. Approaches relying on the use of dependent variable as well as principal component method and its modifications are examined. Obtained indexes are compared in terms of their forecast quality. In the case of no dependent variable the influence of structural shift is analyzed