How do central banks identify risks? A survey of indicators

Banco de España Strategic Plan 2024 Risk identification for the financial and macroeconomic stability ()
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Banco de España Strategic Plan 2024 Risk identification for the financial and macroeconomic stability: Banco de España
Authors registered in the RePEc Author Service: Carmen Broto and Clara I. Gonzalez

No 2125, Occasional Papers from Banco de España

Abstract: For central banks, it is crucial to develop and maintain risk identification frameworks that allow them to detect in good time and address potential threats to financial stability with the most appropriate policy tools. This paper reviews the main indicators developed for this purpose by the Banco de España and by other central banks and prudential authorities. In this way, this stocktaking exercise contributes to improving the transparency and effective communication of the financial stability-related tasks carried out at the Banco de España. Some of the indicators are used in regular Banco de España surveillance activities, whereas others pertain to specific research activities. We classify our set of measures into two broad categories depending on the risk monitored: standard or systemic risks. Given the multidimensional nature of systemic risk, its identification goes beyond the sum of the standard risks explored in this paper (namely credit, macroeconomic, market, and liquidity and bank risks). This survey also classifies indicators by the type of institutional segment that triggers risks; namely, sovereigns, households, non-financial corporations, banks, non-bank financial sector, residential real estate and the financial markets. This work shows how the measures developed and regularly used at the Banco de España allow potential vulnerabilities to be comprehensively monitored. Nevertheless, maintaining an adequate risk-identification framework requires continuous adaptation to new theoretical developments and econometric tools, and, more importantly, to emerging challenges. In this respect, there is a current drive to develop new indicators to assess potential risks arising from climate change and those linked to the risk of system-wide cyber incidents. It is expected that the monitoring needs related to these risks will increase in the future.

Keywords: risk identification; systemic risk; systemic risk indicators; standard risk indicators; financial stability (search for similar items in EconPapers)
JEL-codes: C43 E58 G10 G21 G32 G50 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2021-09
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-fdg, nep-mac, nep-mon and nep-rmg
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Citations: View citations in EconPapers (1)

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