A method of economic analysis that evaluates the health, soundness and vulnerabilities of a financial system. Macroprudential analysis looks at the health of the underlying financial institutions in the system and performs stress tests and scenario analysis to help determine the 
system's sensitivity to economic shocks. Macroeconomic and market data are also reviewed to determine the health of the current system. The analysis also focuses on qualitative data related to financial institutions' frameworks and the regulatory environment to get an additional sense of the strength and vulnerabilities in the system.
system's sensitivity to economic shocks. Macroeconomic and market data are also reviewed to determine the health of the current system. The analysis also focuses on qualitative data related to financial institutions' frameworks and the regulatory environment to get an additional sense of the strength and vulnerabilities in the system.When looking at the health of the underlying financial institutions in the system, macroprudential analysis uses indicators that provide data on the health of these institutions as a whole including capital adequacy, asset quality, management performance, profitability, liquidity and sensitivity to systematic risks. Macroeconomic data used includes gross domestic product (GDP) growth rates, inflation, interest rates, balance of payments, exchange rates, asset prices and the correlation of markets within the system. Finally, macroprudential analysis looks at key components of the financial markets, including prevailing credit ratings and the yields and market prices of financial instruments. Scenario analysis and stress tests are major component of this analysis. For example, the analysis may look at how the system would cope with a steadily declining currency value and its impact on GDP, interest rates and underlying institution profitability.
2 comments:
What is your method of incorporating the qualitative features into your analysis? Basically you use those qualitative factors in determining what features to stress, or what assumptions/scenarios you think are likely?
You got it right Pete ... only those variables which are identified that could be incorporated in predictive frameworks are basically used.
Analyses of financial sector vulnerability cannot rely on quantitative indicators alone. Qualitative information on institutional circumstances, combined with informed judgment, is also essential.
For example, for bank ratings, indicators include quantitative factors such as asset quality, capital adequacy, profitability and liquidity, as well as qualitative factors such as environment, business franchise values, management quality, hidden strengths and reserves, and hidden weaknesses and overvalued assets.
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