The global financial crisis has renewed policymakers' interest in improving the policy framework for financial stability, and an open question is to what extent and in what form should financial stability reports be part of it. We examine the recent experience with central banks’ financial stability reports, and find—despite some progress in recent years—that forward-looking perspective and analysis of financial interconnectedness are often lacking. We also find that higher-quality reports tend to be associated with more stable financial environments. However, there is only a weak empirical link between financial stability report publication per se and financial stability. This suggests room for improvement in terms of the quality of financial stability reports.
The global financial crisis has renewed policymakers' interest in developing and improving tools to promote financial stability. The need for a macroprudential policy framework to address the stability of the financial system is now well recognized and is widely seen as an appropriate policy response to changes in the global financial environment. Even if there is consensus on the definition of macroprudential policy, incorporating macroprudential considerations in the current framework for financial stability poses operational challenges. Developing an operational macroprudential policy toolkit is the next step and a wide range of instruments, tools, and devices are being considered as possible components of the toolkit.
In this context, the current financial stability framework includes financial stability reports (FSRs), issued by central banks in many countries around the world,3 with the aim of limiting financial instability by pointing out key risks and vulnerabilities to policy makers, market participants, and the public at large. As of 2011, around 80 central banks are issuing FSRs. Reviews of the experience with FSRs have been mixed. The early cross-country studies on the subject (Čihák, 2006; Oosterloo, de Haan, and Jong-A-Pin, 2007) find no clear relationship between FSR publication and financial stability. However, Born and others (2011) find that FSR communication reduces market volatility. Čihák (2006) also points out numerous areas for improvement in FSRs around the world.
This paper aims to extract lessons from the global financial crisis for the role of FSRs as a tool for the monitoring of financial stability and hence an effective device for a macroprudential policy toolkit. It provides in-depth information and analytical results, with a particular focus on the more recent experience of the global financial crisis and its immediate aftermath, starting from the criteria established by Čihák (2006) for assessing and comparing FSRs.
Our analysis suggests that the FSRs, despite some improvements in recent years, still tend to leave much to be desired in terms of their clarity, coverage of key risks, and consistency over time. A major drawback of a number of FSRs is the lack of ‘forward-lookingness’ of the reports (that is, insufficient analysis of risks and vulnerabilities), making them less capable of assessing systemic risk. Empirically, we find little evidence of a direct link between FSR publication and financial stability, but higher-quality FSRs seem to be associated with stable financial environments.
The structure of the remainder of the paper is as follows. Section II summarizes the general trends in reporting on financial stability. Section III discusses what one could expect from a financial stability report and presents eight case studies. The section examines in more depth how well FSRs in a particular country have captured or failed to capture relevant financial stability. Section IV examines econometrically the link between the key features of individual financial stability reports and cross-country differences in financial instability during the global financial crisis. It uses a broad international sample, controlling for other financial and economic factors affecting financial stability. Section V concludes.
IMF. Author/Editor: Cihák, Martin ; Muñoz, Sònia ; Sharifuddin, Shakira Teh ; Tintchev, Kalin.Working Paper No. 12/1
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