Assessment of the banking system financial stability based on the differential approach

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In this paper, the banking system financial stability is assessed based on the differential approach. The differential approach provides for taking into account the specificity of the banking system structural organization (from the standpoint of the central bank and the second-level banks) and the sets of financial stability indicators, different in terms of their structure, and their volatility measures, according to this approach.
The banking system financial stability is assessed based on the two groups of indicators: the first one characterizes the central bank financial stability (indicators of gross international reserves, effectiveness of monetary policy and foreign exchange regulation, ability to create favorable conditions in order to ensure the effectiveness of the banking sector); the second one defines the financial stability level for state banks, banks with private and foreign capital (indicators of the capital adequacy, liquidity, structure of assets and liabilities, effectiveness of the activity, financial risks). The differences between the sets of financial stability indicators for different groups of banks and the expediency of taking them into account during the assessment are revealed and substantiated according to the results of using the principal components method.
The developed procedure of assessing the banking system financial stability provides for: constructing the banking system financial stability index (by multiplicative convolution of central bank financial stability subindex and three banks’ financial stability subindices); defining its high, medium and low level according to its quantitative values (according to interval scales, developed according to the rule “3σ”; interpreting the assessment results based on the scenario analysis, which is based on taking into account the dynamic change of the financial stability index during the analyzed period and allows to identify the state of the banking system (stable, conventionally stable or critical).

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    • Table 1. Scenarios of the development of events concerning the change of quality levels of the banking system financial stability
    • Table 2. Results of using the principal components method for defining the most informative indicators of capital adequacy for assessing the financial stability of different groups of banks
    • Table 3. Information support of the banking system financial stability integral assessment according to the differential approach
    • Table 4. Parameters of differentiating the values of the banking system financial stability synthetic indicators and the interval scales, formed according to them
    • Table 5. Results of assessing the Ukrainian banking system financial stability based on the differential approach during the period 2009−2017