Mapping Financial Sector Vulnerability in a Non-Crisis Country

The forward-looking framework expounded in this paper links a qualitative evaluation of system-wide vulnerability (covering macro, sectoral, institutional, and systemic liquidity issues) with a quantitative assessment of the financial condition of significant financial institutions. Based on vulnerability criteria and judgmental stress tests, twelve indicators of soundness (measuring risk exposure, solvency, liquidity, profitability, and supervisory assessment) are developed. This holistic methodology can be used not only as an early warning/crisis-avoidance system to identify potential systemic problems—and problem institutions—requiring immediate attention, but also to pinpoint needed reforms in the legal, regulatory, and institutional infrastructure that can lessen the likelihood of a future crisis.Financial systems;financial system, financial institutions, banking, banking system, capital adequacy, foreign exchange, loan classification, liquid asset, financial sector, capital adequacy ratio, bank data, money markets, liquidity support, segmentation, interbank market, bank assets, foreign exchange exposure, stock market, liability management, capital base, recapitalization, moral hazard, banking sector, deposit rates, bank liquidity, bank loans, bond markets, tier 2 capital, bond, stock prices, bank capital, international finance, banking crisis, tier 1 capital, evergreening, deposit insurance, capital requirement, cash flow, stock exchange, financial sector problems, bank balance sheets, bank soundness, cash flow analysis, return on assets, financial markets, cash flows, international financial ? architecture, banking institutions, failure resolution, subordinated debt, bank branches, derivative, currency crisis, stock markets, banking system fragility, banking loans, central banking, bank financing, banks ? assets, interbank money markets, bank balance sheet, banks ? balance sheet, financial fragility, banking supervision, financial reform, financial contracts, bank portfolios, adequate disclosure, bonds, bank recapitalization, bank licenses, disintermediation, bank regulation, domestic interest rates, bank of japan, bank managers, bank examination, domestic financial markets, reserve requirements, banking assets, bank credit, banks ? liabilities, stock market prices, domestic financial system, systemic banking crisis, domestic financial institutions, international standards