Quantifying Financial Stability in Austria – New Tools for Macroprudential Supervision

Abstract

This paper’s objective is to contribute to the evolving field of macroprudential supervision in Austria in a twofold way: First, we construct an Austrian financial stress index (AFSI) that quantifies the level of stress in the Austrian financial market. Second, drawing on supervisory, market-based and macroeconomic data for the period from 2000 to 2012, we examine various indicators regarding their predictive power for this stress index. These indicators are categorized to cover the following six risk channels that affect financial stability: risk-bearing capacity, mispricing of risk, excessive growth, interconnectedness, concentration, and the macroeconomic environment and its outlook. In our empirical analysis we apply state-of-the-art econometrics including best subset selection, Kalman filters and model averaging. Our results indicate that, as risk channels, excessive growth, interconnectedness and mispricing of risk have the greatest influence on the AFSI. Furthermore, our findings lead to the conclusion that the complexities of risk channel interactions render univariate analysis and/or stand-alone models ineffective for financial stability-oriented policymaking. Instead, an integrated analysis of different indicators turns out to be the more promising approach when trying to identify the buildup of systemic risk.

Keywords: Financial crisis, government policy and regulation

JEL Classification: G01, G28