Central Banking: Theory and Practice in Sustaining Monetary and Financial Stability

Chapter 11Financial StabilityMonitoring and Identifying Risks

Learning Objectives

1. Identify key indicators that central banks use in monitoring risks in the macroeconomy that are threats to financial stability.
2. Identify key indicators that central banks use in monitoring risks in the financial institutions system that are threats to financial stability.
3. Identify key indicators that central banks use in monitoring risks in financial markets that are threats to financial stability.

Successful maintenance of financial stability requires (1) monitoring and identifying risks and (2) intervening to reduce risks when necessary. In this chapter we discuss a variety of ways the central bank can monitor and identify risks to financial stability.

In line with the analytical framework discussed in Chapter 10, this chapter first reviews some of the basic tools for monitoring and identifying risks in the three interrelated areas of financial stability, namely (1) the macroeconomy, (2) financial institutions, and (3) financial markets. By grouping the monitoring tools into the three interrelated areas, it is hoped that readers will be able to grasp the concepts behind the tools and their interrelations more readily. In the real world, there are often multitudes of risks and contagion channels that can lead to financial instability, yet they are not easily disentangled or addressed by any one particular tool. At the end of the chapter we also look at some of the approaches in risk monitoring ...