Indicators of financial soundness : can they forewarn us of impending crisis?

In this paper we investigate how Financial Soundness Indicators (FSI) responds to changing macroeconomic and institutional conditions. FSls are aggregate measures of the current financial health and soundness of financial institutions in a country including corporate and household counterparties. FSls are now compiled and disseminated by a large number of national regulatory authorities. Post Asian Financial crisis revealed major gaps in the statistical coverage of both the domestic and external financial sectors which allowed serious vulnerabilities to remain undetected. Such gaps in information flows prohibited national authorities from taking timely and appropriate steps to improve conditions. More recently in the aftermath of the 2008 Credit Crisis financial regulators were pushed to explain why there was no official forewarning of the impending crisis. The paper documents various Financial Soundness Indicators employed by authorities to monitor the financial health of economies. The conclusion from surveying the available financial indicators is that these tools appear to have become more reliable and consistent especially in illustrating asset quality across groups of countries. However financial regulators require a better understanding and a more appropriate framework for assessing financial indicators if they are to position themselves at the forefront in providing warnings of impending crisis.