Research Reports

Financial Soundness Indicators for Investment Climate Assessment Phase 2
Friday, 30 May, 2014

since the outbreaks of the Asian financial crisis in the late 1900s and the global financial turmoil in 2007, assessing the strengths and weaknesses of a financial sector based on a set of financial indicators has become increasingly important. The assessment is needed mainly to identify any potential problems that may lead to vulnerability in the financial sector and cause a financial crisis. It is expected that by doing so a set of strategic policies and regulations, as well as actions, can be implemented to prevent the crisis.

Shortly after the Asian financial crisis in 1997, the Asian Development Bank (ADB) helped central banks of selected developing member countries to identify, compile, and analyze about 30 monetary and financial statistics and macroprudential indicators to identify potential problems in the financial sector to prevent another crisis. This was followed by an initiative on an early warning system, with a prototype developed to detect region-wide economic and financial vulnerabilities among members of the Association of Southeast Asian Nations, the People’s Republic of China, Japan, and the Republic of Korea.

The development and analysis of a set of financial indicators should help policymakers identify the strengths and vulnerabilities of a financial system so that they can take preventive actions to avert a crisis. The International Monetary Fund (IMF) has initiated several initiatives in this area. In 1999, it initiated the collection and assessment of financial stability indicators by the joint IMF-World Bank Financial Sector Assessment Program, which was mainly to monitor financial system fragility. Following broad consultations in 2000, the IMF, in collaboration with the International Accounting Standards Board, the Bank for International Settlements, the Basel Committee for Banking Supervision, and other international and regional organizations, published a compilation guide on financial soundness indicators (FSIs), which were based on the aggregate bank balance sheet and income statement information, and aggregate indicators of financial statements of non-financial firms and nonbank financial markets.