Prelims
Tools and Techniques for Financial Stability Analysis
ISBN: 978-1-78756-846-4, eISBN: 978-1-78756-845-7
Publication date: 4 December 2018
Citation
Ramlall, I. (2018), "Prelims", Tools and Techniques for Financial Stability Analysis (The Theory and Practice of Financial Stability, Vol. 5), Emerald Publishing Limited, Leeds, pp. 1-17. https://doi.org/10.1108/978-1-78756-845-720181012
Publisher
:Emerald Publishing Limited
Copyright © 2019 Emerald Publishing Limited
Half Title Page
TOOLS AND TECHNIQUES FOR FINANCIAL STABILITY ANALYSIS
Series Page
Complete Volumes on Theory and Practice of Financial Stability
| Volume 1: | Understanding Financial Stability |
| Volume 2: | The Banking Sector under Financial Stability |
| Volume 3: | The Corporate, Real Estate, Household, Government and Non-Bank Financial Sectors under Financial Stability |
| Volume 4: | Economic Areas under Financial Stability |
| Volume 5: | Tools and Techniques for Financial Stability Analysis |
Endorsements
Praise for The Theory and Practice of Financial Stability
Indranarain Ramlall’s proposal is a great attempt at giving a comprehensive view of financial stability from a theoretical, practical and policy perspective. It aims at providing future students with the tools to understand the framework in which financial stability is assessed and understood today by international organisations and central banks across the world. To my knowledge, this is the only book that covers such a wide range of topics related to financial stability. It, therefore, has the potential to become a good reference book on the topic. I believe that Indranarain Ramlall has made a great proposal to provide a ‘big picture view’ on financial stability. I look forward to reading the textbook!
Celine Tcheng, Central Bank of France
Financial stability has become a major concern for central banks, after the 2008 global financial crisis. More and more research is tackling topics regarding the role of the financial system in macroeconomic models and the implementation of macroprudential policy. Therefore, a comprehensive overlook of financial stability issues, such as the one offered by The Theory and Practice of Financial Stability can prove particularly useful for experts working in the financial system, central bankers included. The textbook covers a diverse set of topics from policy matters to risk assessment analysis.
Elena Banu, Central Bank of Romania
This book is a comprehensive work on one of the most actual topics in the aftermath of the Great Recession. It covers a wide range of topics on financial stability complementing theoretical frameworks with practical examples.
Starting with a conceptual description on financial stability, the book overviews a history of the major financial crises and Basel regulation rules. Particularly useful is an inquiry of the financial stability perspectives across different asset classes and economy sectors. Another beneficial feature of this book is a complete oversight of stress testing methodologies.
The book is a thorough compilation of topics on financial stability and definitely deserves a place on the bookshelves of central bankers, government and private institutions’ officials.
Vaidotas Sumskis, Bank of Lithuania
Dr Indranarain’s book is an actual textbook for interpreting interrelations between all aspects and sectors of the international economy and will surely be a highly useful tool for credit institutions, investors, practitioners as well as academics. From a Central Bank’s point of view, this book provides an integrated approach to macroeconomic environment and the interactions between the various factors and an actual tool for assessing and measuring leading circumstances and indicators that affect financial stability and may cause vulnerabilities.
Vasiliki Vlachostergiou, Central Bank of Greece
This is a monumental work! I didn’t find anything missing. I think it will be useful for students, economic and finance professionals and policymakers.
Christophe Andre, OECD
Financial stability was always a priority for financial sector regulators, and it has surpassed other objectives since the global financial crisis. Given various complexities associated with the financial stability and rapid developments over time, existing literature tends to deal with specific aspects of financial stability. It is very difficult to get a comprehensive book dealing with the wide range of concepts, different segments of financial sector, ever increasing variety of financial instruments and regulations associated with financial stability. The current book is a very good attempt to fill this gap through its comprehensive coverage of almost the entire gamut of financial stability-related topics. This book should be useful for financial sector regulators, related ministries in the governments, researchers, multilateral institutions, other financial sector stakeholders and general public who are interested to know the complexities of the financial sector and financial stability.
Ajay Prakash-an expert in Financial Stability
Title Page
THE THEORY AND PRACTICE OF FINANCIAL STABILITY, VOLUME 5
TOOLS AND TECHNIQUES FOR FINANCIAL STABILITY ANALYSIS
BY
INDRANARAIN RAMLALL
University of Mauritius, Mauritius
United Kingdom – North America – Japan – India – Malaysia – China
Copyright Page
Emerald Publishing Limited
Howard House, Wagon Lane, Bingley BD16 1WA, UK
First edition 2019
Copyright © 2019 Emerald Publishing Limited
Reprints and permissions service
Contact: permissions@emeraldinsight.com
No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN: 978-1-78756-846-4 (Print)
ISBN: 978-1-78756-845-7 (Online)
ISBN: 978-1-78756-847-1 (Epub)
Dedication
Dedicated to God for making me an instrument of his own
List of Figures
| Chapter 1 | ||
| Figure 1.1 | Probability and Cumulative Density Functions. | 3 |
| Figure 1.2 | VaR under Different Types of Distributions. | 12 |
| Chapter 2 | ||
| Figure 2.1 | Two Types of Stress Testing for Large US Banks by Federal Reserve. | 20 |
| Figure 2.2 | General Framework for Stress Testing by the IMF. | 20 |
| Figure 2.3 | Accounting-based Approach to Stress Testing. | 21 |
| Figure 2.4 | Market Price-based Approach to Stress Testing. | 25 |
| Figure 2.5 | Macro-financial Approach. | 26 |
| Figure 2.6 | Scenarios Involved in Stress Testing. | 33 |
| Figure 2.7 | Remedial Actions. | 34 |
| Figure 2.8 | Comparative Assessments of EU-wide Stress Tests Over the Years. | 59 |
| Chapter 3 | ||
| Figure 3.1 | Macroeconomic Risk. | 74 |
| Figure 3.2 | Market Risk. | 74 |
| Figure 3.3 | Credit Risk. | 75 |
| Figure 3.4 | Solvency and Leverage Risk. | 75 |
| Figure 3.5 | Funding and Liquidity Risk. | 76 |
| Figure 3.6 | Contagion Risk. | 76 |
| Figure 3.7 | Network Theory Applied to Contagion Risks. | 77 |
| Figure 3.8 | Chernoff faces for the Mauritian Banking Sector. | 78 |
| Figure 3.9 | Financial Stability Risk Map for Albania. | 79 |
| Figure 3.10 | Radar Chart for the US. | 80 |
| Figure 3.11 | Heat Map for Japan. | 81 |
| Figure 3.12 | Heat Map for the US. | 82 |
List of Tables
| Chapter 1 | ||
| Table 1.1 | Differences between Approaches in VaR Computation. | 6 |
| Table 1.2 | Two-assets Portfolio. | 8 |
| Table 1.3 | VaR Results. | 11 |
| Table 1.4 | Differences between VaR and Stress Testing. | 12 |
| Chapter 2 | ||
| Table 2.1. | Comparing Balance Sheet-based and Market-price-based Approaches. | 23 |
| Table 2.2 | Topology of Stress Tests. | 37 |
| Table 2.3 | Example of Scenarios under Stress Testing. | 39 |
| Table 2.4 | A Comparison of Bottom-up and Top-down Stress Tests. | |
| Table 2.5 | Sensitivity of 2014 EU-wide Stress Tests to the Choice of the Capital Metric. | 50 |
| Table 2.6 | Assumptions under Macro Scenario Tests. | 51 |
| Table 2.7 | Differences between European Union and United States. | 61 |
| Table 2.8 | Bloomberg Poll 2014 Taken Shortly after the Publication of 2014 EU-wide Stress Test. | 71 |
| Chapter 3 | ||
| Table 3.1 | Risk Assessment Matrix for France. | 83 |
| Chapter 5 | ||
| Table 5.1 | The Core Set of Financial Soundness Indicators. | 94 |
| Table 5.2 | The Encouraged Set of FSIs. | 95 |
| Table 5.3 | The KRI Database. | 99 |
| Table 5.4 | Framework of Risk Indicators for the Shadow Banking System. | 110 |
| Table 5.5 | Insurance Financial Soundness Indicators: Core Set. | 111 |
Preface
The last volume of this series of five books on financial stability covers all key aspects of tools and techniques useful for sound financial stability assessments. Comprehensive coverage is made on value at risk, stress testing, graphical tools on financial stability, financial system stress index and ratios/metrics of financial stability assessment with the last chapter being dedicated to challenges of financial stability.
The author expects the book to be particularly useful to economists, policy-makers, researchers and students in the sphere of financial stability in the banking sector. As at date, there is no textbook on financial stability which weaves through all aspects of financial stability from theory to practice. This series of five books on financial stability attempts to fill in such a vacuum. Comments and suggestions can be made to i.ramlall@uom.ac.mu/iiramii3@gmail.com.
The author seizes this opportunity to thank an anonymous referee from the London School of Economics for his suggestions and reviews made by professionals from central banks and reputable organisations.
Dr Indranarain Ramlall
June 2018
