HEAT! A Bank Health Assessment Tool

Abstract

Developments during the global financial crisis have highlighted the importance of differentiating across financial systems and institutions. Assessments of financial stability have increasingly considered the characteristics of individual banks within a financial system, as well as those with significant international reach, to identify vulnerabilities and inform policy decisions. This paper proposes a simple measure of bank soundness, the Bank Health Index (BHI), to facilitate preliminary analyses of individual financial institutions relative to their peers. The evidence suggests that the BHI is useful for a first-pass identification of bank soundness conditions. Automated spreadsheet templates of the bank Health Assessment Tool (HEAT!) are provided for users with access to the BankScope, Bloomberg and/or SNL database(s).

Keywords: Banks, Financial institutions, Bank soundness, Financial systems, asset quality, Bank Health Index, capital adequacy, earnings, HEAT!, heatmap, leverage, liquidity, banking, recapitalization, banking system, banking supervision, financial crisis, global financial crisis, banking sector, liquidity ratio, bank for international settlements, profitability ratio, bank of spain, banks ’ loan, capital adequacy ratio, accounting standard, bank restructuring, crisis management, asset management company, tier 1 capital, banking systems, crisis prevention

JEL Classification: G21