What Is The Most Common Proxy For Measuring Bank Soundness And Stability?

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Unlike price stability, financial stability is not easy to define or measure given the interdependence and the complex interactions of different elements of the financial system among themselves and with the real economy. This is further complicated by the time and cross-border dimensions of such interactions.  

However, over the past two decades, researchers from central banks and elsewhere have attempted to capture conditions of financial stability through various indicators of financial system vulnerabilities. 

Through their financial stability reports they’ve attempted to assess the risks to financial stability by focusing on a small number of key indicators. Moreover, there are ongoing efforts to develop a single aggregate measure that could indicate the degree of financial fragility or stress.  

From Composite quantitative measures of financial system stability to anticipating the sources and causes of financial stress to the system and communicating more effectively the impact of such conditions. 

However despite its critical importance, the concept of bank stability has still not been properly defined or agreed. There’s a lack of consensus on the measure, indicators and quantification of banking or financial stability or instability. 

When it comes to a bank stability score you can rank it according to sensitivity to market risk, asset quality, earning and profitability, but local conventional banks are recorded favourable ranking in liquidity. Comparing the two types of local banks, conventional banks are ranked better in liquidity, sensitivity to market risk and earning and profitability. 

The financial sector is characterised by many monetary combinations from real interest rates, risk measures for the banking sector. Banks’ capital and liquidity ratios, the quality of their loan book, standalone credit ratings and the concentration/systemic focus of their lending activities. All these can be reflective of problems in the banking or financial sector and, if a crisis occurs, they can gauge the cost of such a crisis to the real economy.

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