Forecasting Romanian Financial System Stability using a Stochastic Simulation Model

The aim of this paper is to develop an aggregate stability index for the Romanian financial system, which is meant to enhance the set of analysis used by authorities to assess the financial system stability. The index takes into consideration indicators related to financial system development, vulnerability, soundness and also indicators which characterise the international economic climate. Another purpose of our study is to forecast the financial stability level, using a stochastic simulation model. The outcome of the study shows an improvement of the Romanian financial system stability during the period 1999-2007. The constructed aggregate index captures the financial turbulences periods like 1998-1999 Romanian banking crisis and 2007 subprime crisis. The forecasted values of the index show a deterioration of financial stability in 2009, influenced by the estimated decline of the financial and economic activity.financial stability, aggregate financial stability index, forecasting systemic stability, stochastic simulation model

Economic and Financial Integration of CEECs: The Impact of Financial Instability

The recent financial crisis had a powerful impact upon the European countries' economies, in particular on those from Central and Eastern Europe, with some small exceptions. Thus, applying a panel data approach for a large sample of CEECs, we demonstrate that financial instability negatively influences these countries economic and financial integration. If instability is measured by means of a financial instability index, we have used two classical indicators for the economic integration, namely trade openness and trade intensity index. Indicators such as the interest rates co-movement and the asset share of foreign-owned banks were chosen to calculate financial integration. We highlight the fact that the crisis events hinder the process of CEECs' integration into the EU, deepening the economic gaps between more and less developed EU members.Financial instability, financial instability index, economic and financial integration, Central and Eastern Europe

THE SPREAD OF THE CAPITAL MARKETSS GLOBAL CRISIS: DOES THE COUNTRIES INDUSTRIAL PROFILE MATTER?

The causes of 2007�s financial perturbations and mainly of the subprime crisis are well known at the beginning of 2008. Nevertheless, the specialists pay little attention to capital markets global crisis and to its consequences. In this study, we demonstrate using Infinancials data, that we are experiencing a global capital markets crisis, where the European financial markets are the most affected. The impact of the crisis upon the 45 analysed countries differs depending on their industrial structure. Among the other factors which led to a different impact of the global crisis we can range the capital markets development and the correction of the assets prices boom. The effects of this crisis on the real economy are less obvious at the beginning of 2008, especially at European level, but the economic growth forecasts became pessimistic. The credit activity is negatively influenced and the foreign exchange market crosses over a turbulent period. The financial crisis consequences in respect of the real economy will depend on the recovery capacity of the United States economy.capital markets contagion, global financial crisis, subprime crisis, stock prices, industrial profile

The Impact of the New Financial Products on the Volatility of the Economic Growth

The derivative financial products, the result of the financial innovation process undertaken during the last decades, have a priori an important role in the continuous financing of the economy and in the diversification of the risks. Consequently, these financial instruments have to enable, beyond their speculative character, a reduction of the volatility of the economic and financial activity. Looking at derivatives from the perspective of physiology rather than pathology, we have analyzed the impact the use of these products has upon the economic volatility in four European countries whose financial markets are members of the Euronext stock-exchange market and we discovered a positive relationship between the amount of the transactioned contracts and the reduction of the volatility of the macroeconomic activity. We have previously calculated the reduction of the volatility of the economic activity in the analyzed countries in the period 1988-2006, based on two different methods-the evolution of the standard deviation and the evolution of the contribution of the components to the volatility of an aggregate. The contributions of this article are, on one hand, the use of a more detailed analysis method for the reduction of the volatility, and, on the other hand, the testing of the relationship between the volatility of the real GDP, investments and commercial exchanges and the use of the derivative products. The results have to be interpreted with caution due to the assumptions taken into consideration because of the lack of complex statistic data.financial innovations, derivative products, volatiliy of the economic activity

Central Bank or Single Financial Supervision Authority: The Romanian Case

The process of regulation and supervision of the financial system represents a pillar for the financial stability. A recent trend in the institutional framework for financial supervision is the creation of a Single Supervision Authority for the supervision of the banking sector, the insurances and the capital markets. In the financial supervision literature, a lot of arguments highlight the fact that such institutions are necessary, but there are also other valid arguments which show that the banking supervision must be made by central banks. Taking into account these arguments we show that the institutional regulation and supervision framework reflects the structure of the Romanian financial system and the specialized supervision architecture in place in Romania is compatible with the European supervision framework. The National Bank of Romania has a solid experience in banking sector supervision and the activity of financial conglomerates is not yet a menace for the Romanian financial system stability. That is why the implementation of a unified supervision framework does not represent an optimal solution at the moment.supervision framework, single supervision authority, central banks, financial conglomerates

Forecasting The Romanian Financial System Stability Using A Stochastic Simulation Model

The aim of this paper is to develop an aggregate stability index for the Romanian financial system, which is meant to enhance the set of analysis used by authorities to assess the financial system stability. The index takes into consideration indicators related to financial system development, vulnerability, soundness and also indicators which characterise the international economic climate. Another purpose of our study is to forecast the financial stability level, using a stochastic simulation model. The outcome of the study shows an improvement of the Romanian financial system stability during the period 1999-2007. The constructed aggregate index captures the financial turbulences periods like the 1998-1999 Romanian banking crisis and 2007 subprime crisis. The forecasted values of the index show a deterioration of financial stability in 2009, influenced by the estimated decline in the financial and economic activity.financial stability, aggregate financial stability index, forecasting systemic stability, stochastic simulation model

Forecasting credit growth rate in Romania: from credit boom to credit crunch?

The specialists paid a special attention to credit growth in the transitions countries due to its sharp increase during the last years. However, once the financial crisis started in 2008, the credit activity evolution reversed. Consequently, forecasting the credit trend has become a subject of interest in the context of the present financial and economic conditions, because the credit market blockage has a negative impact on economic activity revival and leads to the amplification of the uncertainty on financial markets. The main objective of this paper is to highlight the recent credit developments in Romania and to predict their future evolution. Based on the credit growth rate endogenous factors and using a stochastic simulation econometric model, we demonstrate that this economy experiences a passage from a credit boom to a severe credit crunch. The forecasting exercise results show a credit activity contraction up to the end of 2009, demolishing the expectations related to a near economic recovery in Romania.credit growth rate, forecasts, stochastic simulation, credit crunch

Central banks and asset prices: the role of the interest rate in volatility correction in the Romanian case

The speculative bubbles of asset prices, and especially their burst out, have a negative impact on the financial stability and also on the prices stability – the main objectives of central banks. As a consequence, a more attentive observation of the evolution of these prices is necessary. In the economic literature, opinions differ, oscillating between a total ignorance of the evolution of asset prices by the central banks and the extreme solution, consisting in considering them as the final purpose of the monetary policy. If the opportunity of the intervention is intensely analyzed, the debates related to the instruments of the intervention, differentiated depending on the nature of the assets, are almost inexistent. In this study, we intend to analyze these aspects and also to highlight the importance of dealing with the volatility of asset prices in the context of the development of the financial and real estate markets in Romania. We show that the interest rate instrument has a reduced importance in asset prices volatility correction.asset prices, central banks, interest rate

Assessing Romanian financial sector stability: the importance of the international economic climate

The aim of this paper is to develop an aggregate stability index for the Romanian financial system. The index which is meant to enhance the set of analysis used by the central bank to assess the financial stability accurately reflects the financial stability dynamics and the periods with financial turbulences during 1997-2007 in Romania. By the application of a technique which enables the measurement of the components’ contribution to the aggregate index volatility, we show that some individual stability indicators require a close monitoring by the authorities in order to detect the instability periods. Several attempts to set up a financial stability aggregate index can be found in the literature, but none of these studies took into consideration the spillover effect between different financial markets. One of the contributions of our paper is the introduction within the aggregate index of an indicator capable of highlighting the international economic climate. The deterioration of the world economic climate can represent the background for the contagion phenomenon. The outcome of the study shows an improvement of the Romanian financial stability during the analysed period. The aggregate index volatility also decreased starting with 1999. The financial vulnerability and financial soundness indicators have a significant contribution to the volatility of the aggregate index in the periods foregoing the crisis appearance. On the contrary, the volatility of the world economic climate indicators is reduced before the crisis, rising immediately after its burst out.financial stability, quantitative methods for assessing systemic stability, aggregate financial stability index, world economic climate index