Grading central banks on their financial stability reports

• Author: Martin Cilhák
• Position: IMF Monetary and Capital Markets Department
• Pages: 322

Page 322

Over the past decade, many central banks, especially in high- and medium-income countries, have sharpened their focus on financial sector soundness. They have highlighted this reorientation through the publication of financial stability reports, but to date, remarkably little has been done to systematically analyze these reports.

A new IMF Working Paper attempts to fill this void. In a survey of 160 documents from 47 countries, the study analyzes the structure and content of these financial stability reports, attempting to identify common trends, issues, and gaps. To assess quality, the study examines five elements of the reports: objectives; overall assessment; range of issues covered; data, assumptions, and tools used; and other features, such as structure. For each of the five elements, three basic characteristics-clarity, consistency, and coverage- are graded on a scale from 1 (noncompliant) to 4 (fully compliant).

Room for improvement

The study finds that these reports provide useful insights into how central banks analyze financial stability, but there is room for improvement (see chart). To bolster the usefulness of these reports, the paper recommends clarifying the reports' aims, providing an operational definition of financial stability, ensuring the "core analysis" is presented consistently in time, making underlying data readily available, discussing risks and exposures in the financial system more candidly, making greater use of disaggregated data, focusing more on forward-looking indicators (rather than backward-looking descriptions), and presenting a richer set of stress tests that, among other things, includes scenarios, liquidity risks, and contagion and is comparable across time.

A number of factors explain the differences in the quality of the financial stability reports. Using a panel data regression, the study finds that grades improve with time, which most likely reflects the central bank's increasing experience with analyzing financial stability and presenting the results to the public. Grades are also positively correlated with economic and financial development. Interestingly, central banks that are not directly involved in day-to-day supervision have higher grades-most likely because the...