PhD student, Khmarskyi V. Y.

Poznan University of Economics (Poland)

FINANCIAL INDICATORS OF BANK STABILITY

Since the establishment of capitalism, a business that strongly depends on financial markets suffers from unpredictable situations on the markets. It is enough to remember the Global Financial Crisis in 2007-2008, which created unpredictable fluctuations on the financial markets and caused firms and banks to go bankrupt. As an example, Lehman Brothers Holdings, Inc, one of the world’s leading investment banks, got huge losses on the CDS market and could not fulfill its obligations. Bear Stearns Bank was in the center of the mortgage lending crisis and needed additional financing. Some would say that after 2010 the world’s economy became more stable, but the recent downfall on the Chinese financial markets and the unstable European financial market showed that the situation is still unsolved. That financial crises occur so frequently may indicate that they are the components of financial markets, and their negative effects are randomly distributed in time and scale.

The rising frequency of financial disruptions led to the emergence of new economic development forms that decrease the predictability of development of financial markets trajectories. Scientists, analysts, and businessmen – they all finally find the cause of “wake up” components of the crisis, but “ex post” – after the market has passed through a sharp and abrupt change in its trends.

In terms of financial security, Ukrainian banking system is also vulnerable to global systemic risks that affect financial stability of both Ukrainian banks and the whole Ukrainian economic system. To secure Ukrainian banks, NBU have to elaborate effective systemic approaches to analyze and prevent downfalls. However, it is important to understand which factors play crucial role for analysis. In this way, we have to consider not only regulations from Basel 3, but also local (Ukrainian) regulations.

In terms of effective macro-prudential indicators, we propose to apply such financial indicators, as shown in Table 1.

Table 1. List of financial indicators for macro-prudential regulation

Block	Name	Formula
Capital adequacy	The scale of regulatory capital	(regulatory capital) / (minimum standard of regulatory capital)
Capital adequacy	The adequacy of regulatory capital	(regulatory capital) / (assets, reduced by the amount of established appropriate reserves for active operations)
Liquidity risks	Current liquidity	(Assets with a finite maturity of up to 31 days) / (the bank’s liabilities with final maturity of less than 31 days)
Liquidity risks	Quick assets	(Quick assets) / (total assets)
Credit risks	Big credit risks	(The sum of all large credit risks, provided by the bank with respect to all contractors and all related parties) / (regulatory capital)
Credit risks	Maximum credit risk to a single counterparty	(The requirements of the bank to the counterparty or group of related counterparties and all financial liabilities issued by the bank with respect to a counterparty or group of related counterparties) / (regulatory capital)
Credit risks	Share of substandard loans in all bank credit portfolio	(Provided substandard loans / total sum of provided loans
Credit risks	Loans to deposits ratio	(Provided loans) / (deposits)
Financial stability	Financial leverage	(Liabilities) / (equity)
Efficiency	Return on equity	(Net profit)/(equity)

The adequacy of regulatory capital reflects bank’s ability to perform in time and fully its liabilities that result from trade, credit, and other monetary operations.

The scale of regulatory capital shows the ratio of bank regulatory capital value to a minimum established level.

Current liquidity shows minimum value of assets the bank must have to perform in time and fully its liabilities during one month.

Quick assets reflect bank’s capability of transforming its assets into cash.

Variable “Big credit risks” we use to restrict concentration of big credit risks for a single counterparty or for a group of counterparties. Credit risk, taken for a single counterparty or for a group of counterparties, is considered high when the total liabilities to a single counterparty or to a group of counterparties exceed 10 percent of a bank regulatory capital.

Maximum credit risk to a single counterparty is used to restrict credit risk that emerges when counterparty does not perform its liabilities.

Share of substandard loans in bank credit portfolio reflects the extent of risk of credit operations and perspectives of bank liquidity.

Loans to deposits shows the ratio of bank loan portfolio to deposit one, and is an important indicator of long-term bank liquidity.

Financial leverage characterizes bank’s capability of attracting new financial resources on financial markets.

Return on equity characterizes how effectively the bank uses shareholders’ equity.

These indicators should be evaluated in systemic way to evaluate bank’s financial position. Basing on appropriate financial position, NBU may deffer “weak” banks from “strong” and assess whether systemic risk is under control or not, and is it possible to prevent future Ukrainian banking market disruption.

The list of references:

1. Basel Committee on Banking Supervision (2011), “Basel III: A global regulatory framework for more resilient banks and banking systems”, Bank for International Settlements, Basel, December.

2. Diamond D., Rajan R. Liquidity risk, liquidity creation, and financial fragility: a theory of banking / D. Diamond, R. Rajan // Journal of Political Economy, Vol. 109. – 2001. – Р. 287-327.

3. Goodhart C. A., Sunirand P., Tsomocos D. P. A risk assessment model for banks / C. A. Goodhart, P. Sunirand, D. P. Tsomocos // Annals of Finance, Vol. 1. – 2005. – Р. 197–224.

4. Boudt K., Daníelsson K. J., Koopman S. J., Lucas A. Regime switches in the volatility and correlation of financial institutions. Technical report, National Bank of Belgium. Working Paper Research № 227. – 2012, September.

5. Danielsson, J., S. Shin H., Z. J. Endogenous and systemic risk / J. Danielsson, H. S. Shin, Z. J. – Chicago, IL : University of Chicago Press by NBER, 2013. – Р. 73–94.