Fitch Ratings has launched a new product to help assess the vulnerability of banking systems to distress. Details are available in a criteria report, ‘Assessing Bank Systemic Risk’ and a report on the results of applying the methodology, ‘Bank Systemic Risk Report’, to be updated semi-annually. “Banking crises have affected almost 100 countries in the past 25 years and can have a major impact on sovereign and bank ratings” commented Richard Fox, senior director in Fitch’s Sovereign group. “This new methodology will help identify potential problem situations which could lay countries open to future systemic distress.” Fitch has devised two complementary measures of banking system vulnerability. The Banking System Indicator (BSI) measures intrinsic banking system quality or strength on a scale from A (very high quality) to E (very low quality). The Macro-prudential Indicator (MPI) indicates the extent, on a scale from 1 (low) to 3 (high), to which trends in credit growth, asset prices and the real exchange rate render the banking system potentially vulnerable to asset price and exchange rate corrections and the subsequent economic downturn this can trigger. The two indicators are brought together in a Systemic Risk Matrix that emphasizes the complementary nature of both indicators. Higher quality, stronger banking systems are better able to absorb shocks than lower quality, weaker systems, where even a modest increase in stress may be enough to cause a full-blown systemic crisis that exhaust much or all of a system’s capital and requires financial support from either the government and/or shareholders.
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