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What is the Role of a Financial Stability Report?

Central banks have a mandate to ensure the smooth functioning of the banking, financial, and payments systems. This requires an understanding of key macroeconomic trends, banking system dynamics, and sources of risk in the major banks and financial markets in the economy. FSRs provide a window into this world.

At the broadest level, an FSR reports on a country’s macroeconomic conditions: growth and inflation, fiscal and monetary policies, exchange rates, trade and the balance of payments, and the impact of the global economy on the home market. These factors strongly affect the health and prospects of the financial system – its credit activities, profitability and potential for large loan or payment problems.

An FSR evaluates the recent developments in a country’s banking and financial sectors. Core issues are trends in credit growth, lending concentrations in potentially risky areas, deterioration in asset quality or a rise in non-performing loans. Recent experience also underscores the need to monitor financial institution liabilities – deposits, interbank lines, foreign borrowing, and capital buffers. This is an essential part of “macro-prudential supervision.”

Capital markets play an increasing role in many economies. The FSR reports on a wide array of markets -- equity, debt, currencies, commodities, derivatives, repos and commercial paper. To understand and evaluate these markets, one requires knowledge of the institutions (e.g. banks, investment funds, trading houses), market structures and operations (e.g. clearing and settlement),financial instruments, and price dynamics. Regulators in these markets must perform a mixture of macro and micro-prudential supervision. Research on financial stability supports this supervisory activity, helping authorities understand the day-to-day functioning of the financial system, the transmission of financial flows and price shocks, and the impacts on the real economy.

Each Financial Stability Report provides valuable insight into a country’s local financial system. These insights are reinforced by cross-country comparisons and an understanding of the key trends and concerns in the global financial system. The CFS will bring insights from around the world to deepen our shared understanding of financial stability.

By Daniel McGovern
Non-Resident Senior Fellow