金融部门评估规划（Financial Sector Assessment）手册：Chapter 2 Indicators of Financial Structure, Development, and Soundness

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Financial Sector Assessment a Handbook bonds,equities,and derivative and structured finance products)should also be covered. uctural overview and types o lance she 2 aggregates financial markets,a description of the ize and growth trends in various al marke instruments (volume and value)would be appropriate.The overview should also reflect new linkages among financial markets and institutions that may be forged from a variety of sources,including innovations in financial instruments,new entrants into financial markets (e.g.,hedge funds),and changing practices among financial market participants (e.g.,energy trading and investments by financial institutions). The o erall size of the system could be ascertained by the value of financial assets both in absolute dollar t nd as a ratio of gross dome product(GDP).Altho identifying the absolut unt of fi ssets is informati king of the sta velopment and allows comparison across countries at different stages of development.Other indica tors of financial size and depth that could be usefully examined include ratios of broad money to GDP(M2 to GDP),private sector credit to GDP(DCP to GDP),'and ratio of bank deposits to GDP (deposits/GDP).However,one should be careful in interpret- ing observed ratios because they are substantially influenced by the state of financial and general economic development in individual countries.Cross-country comparisons of economies at similar stages of development are,therefore,useful in obtaining reliable henchmarks for "low"or" igh" atio The dese of the ypes of financial nte rmediaries and markets is also useful,and this information shou uld be supplemented by info ormation on the relativ composition of the financial system.Even though many countries do have a wide range of non-bank financial intermediaries (NBFIs),banking institutions still tend to dominat overwhelmingly.In advanced markets and in many emerging markets,NBFIs,particularly pension funds or insurance companies,often play a larger part than do banks in domestic and global asset allocation (and,sometimes,in the providing of credit).Similarly,market participants such as hedge funds play an increased role in financial markets and in the per nce of various asset classes.Her ce.for one to geta true view of financial structur seful to fo hanks ancial mark sby using a sof fina s in ent sub e of financial instruments in different ma as numer This type of focus on market shares enables the assessor to get a quick indication of the "effective"structur of the financial system.In addition,the presence of large financial conglomerates-alsc referred to as large and complex financial institutions(LCFIs)-in the domestic marke (either foreign-owned or domestic)would warrant special attention to the scope and scale of their activities,including exposures to other domestic institutions,as well as to intra- group and cross-border exposures,to ascertain their local systemic importance. Evaluating the overal rowth of the financial sysrem and of r major sub-sectors is and valuable info uld he obtair ed by ediarie well a each sector over time,in both nominal and real terms Alth ription trends is informative,it is a critical to ind licate the driving forces behind (a)observed chang es in institutions and their asset positions,and (b)the number of and growth rates of

16 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 bonds, equities, and derivative and structured finance products) should also be covered. For financial institutions, the structural overview should focus on identifying the number and types of institutions, as well as growth trends of major balance sheet aggregates; for financial markets, a description of the size and growth trends in various financial market instruments (volume and value) would be appropriate. The overview should also reflect new linkages among financial markets and institutions that may be forged from a variety of sources, including innovations in financial instruments, new entrants into financial markets (e.g., hedge funds), and changing practices among financial market participants (e.g., energy trading and investments by financial institutions). The overall size of the system could be ascertained by the value of financial assets, both in absolute dollar terms and as a ratio of gross domestic product (GDP).1 Although identifying the absolute dollar amount of financial assets is informative, normalizing financial assets on GDP facilitates benchmarking of the state of financial development and allows comparison across countries at different stages of development. Other indicators of financial size and depth that could be usefully examined include ratios of broad money to GDP (M2 to GDP),2 private sector credit to GDP (DCP to GDP),3 and ratio of bank deposits to GDP (deposits/GDP). However, one should be careful in interpreting observed ratios because they are substantially influenced by the state of financial and general economic development in individual countries. Cross-country comparisons of economies at similar stages of development are, therefore, useful in obtaining reliable benchmarks for “low” or “high” ratios. The description of the number and types of financial intermediaries and markets is also useful, and this information should be supplemented by information on the relative composition of the financial system. Even though many countries do have a wide range of non-bank financial intermediaries (NBFIs), banking institutions still tend to dominate overwhelmingly. In advanced markets and in many emerging markets, NBFIs, particularly pension funds or insurance companies, often play a larger part than do banks in domestic and global asset allocation (and, sometimes, in the providing of credit). Similarly, market participants such as hedge funds play an increased role in financial markets and in the performance of various asset classes. Hence, for one to get a true view of financial structure, it is useful to focus on the share of various sub-sectors (banks, non-banks, financial markets, etc.) in total financial assets by using assets of financial institutions in different sub-sectors and value of financial instruments in different markets as numerators. This type of focus on market shares enables the assessor to get a quick indication of the “effective” structure of the financial system. In addition, the presence of large financial conglomerates—also referred to as large and complex financial institutions (LCFIs)—in the domestic market (either foreign-owned or domestic) would warrant special attention to the scope and scale of their activities, including exposures to other domestic institutions, as well as to intragroup and cross-border exposures, to ascertain their local systemic importance.4 Evaluating the overall growth of the financial system and of major sub-sectors is important, and valuable information could be obtained by examining changes in the number and types of financial intermediaries, as well as the growth of financial assets in each sector over time, in both nominal and real terms. Although a description of trends is informative, it is also critical to indicate the driving forces behind (a) observed changes in institutions and their asset positions, and (b) the number of and growth rates of

Chapter 2:Indicators of Financial,Development,and Soundness available money and capital market instruments.One factor that has accounted for the observed growth of financial systems in many countries (number of institutions and size of assets)is financial liberalization,especially the softening of entry conditions for banks and other financial institutions and the liberalization of interest rates,which has stimu lated financial markets (especially money markets).In addition,changes in prudential regulation and accounting standards often have provided incentives for developing new ways to manage risks (e.g.asset and liability management for insurance company and sion funds)and hav e led to development of newr isk transfer instruments in capita 2.1.2 Breadth of the Financial System Data on the financial breadth enetration ofen serve as proxies for access of the popu lation to different segments of the financial sector.Well-functioning financial systems should offer a wide range of financial services and products from a diversified set of finan- cial intermediaries and markets.Ideally,there should be a variety of financial instruments that provide alternative rates of return.risk.and maturities to savers.as well as different sources of finance at varying interest rates and maturities.Evaluating the breadth or diver sity of the financial system should,therefore,involve identifying the existing financial institutions.the existi ng markets for financial instruments,and the range the fi pproach osition of sed abov I syste diversification. comparisons between bank and non-bank forms of financial i terme liation are usefu I to nstance,comparisons between banking credit and issues of bonds by the private sector Often,significant savings and financing through non-bank forms are indicators of finan. cial diversity because bank deposits and loans constitute the traditional forms of savings and credit in many countries.It is,therefore,useful to compare the extent of financial intermediation through banks with the amount of intermediation through insurance estment schemes.n oney markets, and capital markets.In particu arious ses of asset holde seholds,n vithin the to al market instruments or mutua assets can provide valu on financial diversi To supplement the overall indicators of diversity,assessors should also focus on sec toral indicators of financial development.For instance,the development of the insurance industry could be measured by examining trends in the ratio of gross insurance premiums to GDP,which could be broken down further into life and non-life premiums.Similarly leasing penetration could be measured by the value of leased assets as a percentage of total domestic investment.Table 2.1 shows a few sub-sectors of the financial system anc uggests relev ors of their size and development The breadth of the fina system also d be an yzed in terms of th existing A dic to this outreach is the anch n rk of th e banking system in particular,the total number of branches and the number of branches per thousand inhabitants.A comparison of the distribution of branches between rural and urban areas or among different provinces could also be useful as an indicator of the outreach of bank- ing outlets

17 Chapter 2: Indicators of Financial Structure, Development, and Soundness 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 available money and capital market instruments. One factor that has accounted for the observed growth of financial systems in many countries (number of institutions and size of assets) is financial liberalization, especially the softening of entry conditions for banks and other financial institutions and the liberalization of interest rates, which has stimulated financial markets (especially money markets). In addition, changes in prudential regulation and accounting standards often have provided incentives for developing new ways to manage risks (e.g., asset and liability management for insurance company and pension funds) and have led to development of new risk-transfer instruments in capital markets. 2.1.2 Breadth of the Financial System Data on the financial breadth or penetration often serve as proxies for access of the population to different segments of the financial sector. Well-functioning financial systems should offer a wide range of financial services and products from a diversified set of financial intermediaries and markets. Ideally, there should be a variety of financial instruments that provide alternative rates of return, risk, and maturities to savers, as well as different sources of finance at varying interest rates and maturities. Evaluating the breadth or diversity of the financial system should, therefore, involve identifying the existing financial institutions, the existing markets for financial instruments, and the range of available products and services. The relative composition of the financial system discussed above is a first-cut approach to determining the extent of system diversification. In addition, comparisons between bank and non-bank forms of financial intermediation are useful, for instance, comparisons between banking credit and issues of bonds by the private sector. Often, significant savings and financing through non-bank forms are indicators of financial diversity because bank deposits and loans constitute the traditional forms of savings and credit in many countries. It is, therefore, useful to compare the extent of financial intermediation through banks with the amount of intermediation through insurance, pensions, collective investment schemes, money markets, and capital markets. In particular, the share of various classes of asset holders—specifically, households, non-financial corporations, banks, and NBFIs—within the total capital market instruments or mutual fund assets can provide valuable information on financial diversification. To supplement the overall indicators of diversity, assessors should also focus on sectoral indicators of financial development. For instance, the development of the insurance industry could be measured by examining trends in the ratio of gross insurance premiums to GDP, which could be broken down further into life and non-life premiums. Similarly, leasing penetration could be measured by the value of leased assets as a percentage of total domestic investment. Table 2.1 shows a few sub-sectors of the financial system and suggests relevant indicators of their size and development. The breadth of the financial system also could be analyzed in terms of the outreach of existing financial institutions. A common indicator related to this outreach is the branch network of the banking system, in particular, the total number of branches and the number of branches per thousand inhabitants. A comparison of the distribution of branches between rural and urban areas or among different provinces could also be useful as an indicator of the outreach of banking outlets

18 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 2.1.3 Competition, Concentration, and Efficiency Competition in the financial system can be defined as the extent to which financial markets are contestable and the extent to which consumers can choose a wide range of financial services from a variety of providers. Competition is often a desirable feature because it normally leads to increased institutional efficiency, lower costs for clients, and improvements in the quality and range of financial services provided. There are numerous measures of competition, including the total number of financial institutions, changes in market share, ease of entry, price of services, and so forth. In addition, the degree of diversity of the financial system could be an indicator of competition or the lack thereof because the emergence of vibrant non-bank intermediaries and capital markets often have been a source of effective competition for banking systems in many countries. All things remaining equal, an increase in the number of financial institutions or an expansion in available financial market instruments will increase competition by expanding the available sources of financial services that consumers can access. Ease of entry into the system could be judged by looking at the regulatory and policy requirements for licensing, for example, the required minimum paid-up capital. Table 2.1. Sectoral Indicators of Financial Development Sub-sector Indicator Banking • Total number of banks • Number of branches and outlets • Number of branches/thousand population • Bank deposits/GDP (%) • Bank assets/total financial assets (%) • Bank assets/GDP (%) Insurance • Number of insurance companies • Gross premiums/GDP (%) • Gross life premiums/GDP (%) • Gross non-life premiums/GDP (%) Pensions • Types of pension plans • Percentage of labor force covered by pensions • Pension fund assets/GDP (%) • Pension fund assets/total financial assets (%) Mortgage • Mortgage assets/total financial assets • Mortgage debt stock/GDP Leasing • Leased assets/total domestic investment Money markets • Types and value of money market instruments • New issues and growth in outstanding value • Number and value of daily (weekly) transactions in the instruments Foreign exchange markets • Volume and value of daily foreign exchange transactions • Adequacy of foreign exchange (reserves in months of imports, as ratio to short-term external debt or to broad money) Capital markets • Number of listed securities (bonds and equities) • Share of households, corporations, banks, and NBFIs in the holdings of securities • Number and value of new issues (bonds and equities) • Market capitalization/GDP (%) • Value traded/market capitalization (%) • Size of derivative markets Colllective investment funds • Types and number of schemes (unique and mixed funds) • Total assets and growth rates (nominal and as percentage of GDP) • Total number of investors and average balance per investor • Share of households, corporations, banks, and NBFIs, in total mutual funds assets

Chapter 2:Indicators of Financial,Development,and Soundness In many cases,the ownership structure of the financial system can be indicative of competition or lack thereof.For instance,banks of different ownership often have dif ferent mandates and clientele,leading to substantial market segmentation.Also,systems dominated by state-owned financial institutions tend to be less competitive than those in 3 which privately owned institutions are very active because state ownership often dampens commercial orientation.In some cases,the shares of domestic-and foreign-owned finan- cial institutions in various financial sub-sectors could be relevant in assessing competition and incentives for financial innovations. Me have been the de gree inancial s biggest institutions in the market (as defined by market shares).For example,the three bank concentration ratio measures the market share of the top three banks in the system defined in terms of assets,deposits,or branches.Deciding what is concentrated and what is not depends a lot on judgment,and benchmarking becomes critical.3 A more sophisti- cated measure of concentration is the Herfindahl Index(HI),which is the sum of squares of the market shares of all firms in a sector.Higher values of the index indicate greater market concentration.When applied to the financial sector,this index uses information about the market share of each bank to obtain a single summary measure.The concept ation also ould be applied tofin al ma k ially by ent marke struments i the t outsta ding value of financial instruments.For exampl the relative shares of oney and market instruments i total financial assets could give an indication of the extent to which financial markets are positioned between short-term and long-term intermediation.Information on holdings of the instruments by types of investors and by number of issuers of different instruments also helps assess market competition. The sustainable development of a financial system and the degree to which it provides support to real sector activities depend to a large extent on the efficiency with which rmediation occurs.Efficienc efers to the ability of the financial sector to provide t at the ompetition and efficie are relat o a la ge exten e more c etitive systems invari bly turn ou to be m efficient (all other gs D ing equal sure of efficiency that could be evaluated include (a)total costs of financial intermediatior as percentage of total assets and (b)interest rate spreads (lending minus deposit rates). Components of intermediation costs include operating costs(staff expenses and other overhead),taxes,loan-loss provisions,net profits,and so forth.Those costs can be derived from the aggregated balance sheet and income statements for financial institu- tions.However,interest rate spreads sometimes remain high despite efficiency gains because of the need to build loan-loss provisions or charge a risk premium on lending to high-risk b capital marke efficiency implies that curren security prices fully ble information.Hence,in an efficient financial market,day- ts of market prices tend to be random,and information on past prices would no help predict future prices.The bid-ask spread (ie.,the difference between prices at which participants are willing to buy and sell financial instruments)is often used as a proxy for measuring the efficiency of markets,with more efficient markets exhibiting narrower 9

19 Chapter 2: Indicators of Financial Structure, Development, and Soundness 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 In many cases, the ownership structure of the financial system can be indicative of competition or lack thereof. For instance, banks of different ownership often have different mandates and clientele, leading to substantial market segmentation. Also, systems dominated by state-owned financial institutions tend to be less competitive than those in which privately owned institutions are very active because state ownership often dampens commercial orientation. In some cases, the shares of domestic- and foreign-owned financial institutions in various financial sub-sectors could be relevant in assessing competition and incentives for financial innovations. Measures of concentration often have been used as indicators of competition. Concentration is defined as the degree to which the financial sector is controlled by the biggest institutions in the market (as defined by market shares). For example, the threebank concentration ratio measures the market share of the top three banks in the system, defined in terms of assets, deposits, or branches. Deciding what is concentrated and what is not depends a lot on judgment, and benchmarking becomes critical.5 A more sophisticated measure of concentration is the Herfindahl Index (HI), which is the sum of squares of the market shares of all firms in a sector. Higher values of the index indicate greater market concentration. When applied to the financial sector, this index uses information about the market share of each bank to obtain a single summary measure.6 The concept of concentration also could be applied to financial markets, especially by examining the share of different market instruments in the total outstanding value of financial market instruments. For example, the relative shares of money and capital market instruments in total financial assets could give an indication of the extent to which financial markets are positioned between short-term and long-term intermediation. Information on holdings of the instruments by types of investors and by number of issuers of different instruments also helps assess market competition. The sustainable development of a financial system and the degree to which it provides support to real sector activities depend to a large extent on the efficiency with which intermediation occurs. Efficiency refers to the ability of the financial sector to provide high-quality products and services at the lowest cost. Competition and efficiency of the financial system are related to a large extent because more competitive systems invariably turn out to be more efficient (all other things being equal). Quantitative measures of efficiency that could be evaluated include (a) total costs of financial intermediation as percentage of total assets and (b) interest rate spreads (lending minus deposit rates). Components of intermediation costs include operating costs (staff expenses and other overhead), taxes, loan–loss provisions, net profits, and so forth. Those costs can be derived from the aggregated balance sheet and income statements for financial institutions. However, interest rate spreads sometimes remain high despite efficiency gains because of the need to build loan–loss provisions or charge a risk premium on lending to high-risk borrowers. For money and capital markets, efficiency implies that current security prices fully reflect all available information. Hence, in an efficient financial market, day-to-day movements of market prices tend to be random, and information on past prices would not help predict future prices. The bid–ask spread (i.e., the difference between prices at which participants are willing to buy and sell financial instruments) is often used as a proxy for measuring the efficiency of markets, with more efficient markets exhibiting narrower

Financial Sector Assessment A handhook Table 2.2.Indicators of Financial System Performance Sub-sector Indicator 2 Competition and concentration Total number of institu :lhterotratesproadsandprice5offinancialsorvice Efficiency :lheretnopeee e(as percentage of total assets Liquidity :Aeegekspeamrtaapaaion bid-ask spreads.Because bid-ask spread also reflects market liquidity,as discussed below. arket and of volatility of pric itioalnatoteecsCcoehadnnesca ity are sometimes used to substitute for market efficiency,although short-run changes in volatility may reflect shifts in the amount of liquidity in that market. Two important dimensions of market liquidity should be considered:market depth and market tightness.Market depth refers to the ability of the market to absorb large trade volumes without significant impact on market prices.This dimension is usually measured by the ratio of value traded to market capitalization (tu ratio),with higher ra indicating more liquid markets.Another dimension of liquidity marke t tightne ity to ch supply and demand t low cost that s measured y the average bid-as these indicators can be found in section 2.2.4. Table 2.2 summarizes the indicators of financial system performance that have been discussed in this section. 2.1.4 Scope and Coverage of Financial Services The financial system provides five key services:(a)savings facilities,(b)credit alloca- tion and monitoring of borrowers,(c)payments,(d)risk mitigation,and (e)liquidity serv ices ed by e examining the effec tiveness with which the hond m The exrent of fnanc inern xnth system provides saving facilities and mobil sfinancial resources from hou level and trends in the ratio of broad money to GDP.As mentioned earlier,this indicator may overstate the true picture if currency constitutes a high proportion of broad money. Other more specific indicators of access to savings facilities include the ratio of bank deposits to GDP and the proportion of the population with bank accounts. Information on the ou ach of the fina ial s m can help inter in financial saving nche on per bank br and th distribution of nd other ou tlets (e.g.rura or uban)could provide valuable information on the access of the population to saving facilities.Further,it is important to assess the range of saving vehicles that are available

20 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 bid–ask spreads. Because bid–ask spread also reflects market liquidity, as discussed below, additional analysis of the extent of competition in the market and of volatility of price movements would be needed to assess efficiency. In addition, measures of price volatility are sometimes used to substitute for market efficiency, although short-run changes in volatility may reflect shifts in the amount of liquidity in that market. Two important dimensions of market liquidity should be considered: market depth and market tightness. Market depth refers to the ability of the market to absorb large trade volumes without significant impact on market prices.7 This dimension is usually measured by the ratio of value traded to market capitalization (turnover ratio), with higher ratios indicating more liquid markets. Another dimension of liquidity is market tightness—ability to match supply and demand at low cost that is measured by the average bid–ask spread. More liquid markets usually have narrower bid–ask spreads. Further discussion of these indicators can be found in section 2.2.4. Table 2.2 summarizes the indicators of financial system performance that have been discussed in this section. 2.1.4 Scope and Coverage of Financial Services The financial system provides five key services: (a) savings facilities, (b) credit allocation and monitoring of borrowers, (c) payments, (d) risk mitigation, and (e) liquidity services. Savings mobilization can be assessed by examining the effectiveness with which the financial system provides saving facilities and mobilizes financial resources from households and firms. The extent of financial savings could be ascertained by examining the level and trends in the ratio of broad money to GDP. As mentioned earlier, this indicator may overstate the true picture if currency constitutes a high proportion of broad money. Other more specific indicators of access to savings facilities include the ratio of bank deposits to GDP and the proportion of the population with bank accounts. Information on the outreach of the financial system can help interpret developments in financial savings. Hence, indicators such as the total number of bank branches, the population per bank branch, and the distribution of branches and other outlets (e.g., rural or urban) could provide valuable information on the access of the population to saving facilities. Further, it is important to assess the range of saving vehicles that are available Table 2.2. Indicators of Financial System Performance Sub-sector Indicator Competition and concentration • Total number of institutions • Interest rate spreads and prices of financial services • Intermediary concentration ratios (market share of 3 or 5 of the largest institutions) • Financial market concentration ratios (market share of the largest financial instruments, as a percentage of total financial assets) • Herfindahl index Efficiency • Interest rate spreads • Intermediation costs (as percentage of total assets) Liquidity • Ratio of value traded to market capitalization • Average bid–ask spread

Chapter 2:Indicators of Financial,Development,and Soundness because,in many couries,traditional bank deposits are the most common form of finan- cial savings.Saving through non-bank forms of financial intermediation are,therefore crucial to financial diversity,and development indicators for non-bank intermediaries such as insurance,pensions,and capital markets could be useful in gauging the degree to 3 which the population uses non-bank forms of financial savings.Hence,household and corporate holdings of non-bank financial assets (e.g.,bonds)could provide extra informa tion on the degree of access to financial savings The ratio of private sector bank credit to DP is a common measure of the provision of credit to economy, as well as of banking this in mented by information atio of loans tot osits.Whe volume of finance raised through the issuance of bonds and mone y market instruments should supplement information on bank credit.Analyzing trends in those indicators should reveal the overall degree to which the banking sector provides credit to firms and households.It is also useful to assess the sectoral distribution of private sector credit to gauge the alignment of bank credit with the distribution of domestic output.Therefore the relative proportion of total credit going to agriculture,manufacturing,and services would be relevant information in evaluating the adequacy of the level of credit provided to the econc A ke ns in market means of transfe ring funds s and making payments for goods T development of the payment system is o e,especially the cus on the variou instruments for making payments,including cash,checks,payment orders,wire transfers and debit and credit cards.The proportion of payments (volume and value)made with different payment instruments can reveal the developmental status of the payment sys- tem,with cash-based economies at the lower end of the spectrum.Some indicators such as the number of days for clearing checks,the number and distribution of clearing centers and the volume and value of checks cleared could provide general information on the effectiveness of existing mone nsfer mechanisms.In additi n.it is relevant to examine the variou s risks ed with ne ents sys cators such as acc Lo s redit,size o for by comp nting the qualitative infor Payment System The major risk mitigation services offered by the financial system include insur- ance (life and non-life)and derivative markets.The ratio of gross premiums to gDp is a popular indicator of development in the insurance industry,and this indicator could be supplemented with a breakdown of premiums between life and non-life insurance A deep and well-functioning insurance industry would offer a wide range of products in both the life and non-life business,including workers' medical,and health n In additio markets opt ns,futures,swaps,and structured finance produc where relevant in terms of available instruments,liquidity,and transaction costs,would be important,owing to their role in managing risk and in facilitating price discovery in spot markets. Liquidity service provided by financial systems is reflected in maturity transforma- tion and secondary market arrangements,which facilitate investment in high-yielding 21

21 Chapter 2: Indicators of Financial Structure, Development, and Soundness 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 because, in many countries, traditional bank deposits are the most common form of financial savings. Saving through non-bank forms of financial intermediation are, therefore, crucial to financial diversity, and development indicators for non-bank intermediaries such as insurance, pensions, and capital markets could be useful in gauging the degree to which the population uses non-bank forms of financial savings. Hence, household and corporate holdings of non-bank financial assets (e.g., bonds) could provide extra information on the degree of access to financial savings. The ratio of private sector bank credit to GDP is a common measure of the provision of credit to the economy, as well as of banking depth. Often, this indicator is supplemented by information on the ratio of loans to total bank deposits. Where available, the volume of finance raised through the issuance of bonds and money market instruments should supplement information on bank credit. Analyzing trends in those indicators should reveal the overall degree to which the banking sector provides credit to firms and households. It is also useful to assess the sectoral distribution of private sector credit to gauge the alignment of bank credit with the distribution of domestic output. Therefore, the relative proportion of total credit going to agriculture, manufacturing, and services would be relevant information in evaluating the adequacy of the level of credit provided to the economy. A key function of financial systems in market economies is to offer fast and secure means of transferring funds and making payments for goods and services. The state of development of the payment system is of interest here, especially the focus on the various instruments for making payments, including cash, checks, payment orders, wire transfers, and debit and credit cards. The proportion of payments (volume and value) made with different payment instruments can reveal the developmental status of the payment system, with cash-based economies at the lower end of the spectrum. Some indicators such as the number of days for clearing checks, the number and distribution of clearing centers, and the volume and value of checks cleared could provide general information on the effectiveness of existing money transfer mechanisms. In addition, it is relevant to examine the various risks associated with the payments system, through indicators such as access to settlement credit, size of settlement balances, and so forth, thereby complementing the qualitative information from assessments of Core Principles for Systemically Important Payment Systems.8 The major risk mitigation services offered by the financial system include insurance (life and non-life) and derivative markets. The ratio of gross premiums to GDP is a popular indicator of development in the insurance industry, and this indicator could be supplemented with a breakdown of premiums between life and non-life insurance. A deep and well-functioning insurance industry would offer a wide range of products in both the life and non-life business, including motor vehicle, marine, fire, homeowners, mortgage, workers’ compensation, and fidelity insurance and life insurance, as well as disability, annuities, medical, and health insurance. In addition, coverage of derivative markets—options, futures, swaps, and structured finance products––where relevant in terms of available instruments, liquidity, and transaction costs, would be important, owing to their role in managing risk and in facilitating price discovery in spot markets. Liquidity service provided by financial systems is reflected in maturity transformation and secondary market arrangements, which facilitate investment in high-yielding

Financial Sector Assessment:A Handbook Mie8@d” erelctantfor long r of im e role 2 ort-term savings into re ively illiqui long-term investments,thus promoting capital accumulation.The availability of liquid. ity,therefore,allows savers to hold assets that they can sell easily if they need to redeem their savings. Against this background.it is important to examine the degree of access that specified target groups(e.g,farmers,the poor,small and medium enterprises,or different geograph- ic regions)have to those financial services.Access is defined as the availability and cost of cial services and could be measured in a variety of waysFirst,relevant measures of inan ial serv cludes the e numbe of dif erent sand other service outles,the num the population per outlet.The volume of services(deposits,credi t,money transmission etc.provided is another useful measure,especially if it is broken down by clientele and size (i.e.,in a breakdown by socioeconomic groups or broad sectors or by size distribution). Second,it is also relevant to consider demand-side measures of access.However,demand- side indicators are not easy to construct and often require surveys to collect relevant data. Those surveys have often focused on collecting relevant information such as the savings and credit eds of households and ent needs relative to the s upply,andhe ant to the win the nea rd ren h of financial s y examining the leve and trends in he prices of oth financial services (e.g.,fees and minimum balances for deposits,as well as cost and time of payment services). In addition.indicators of the functioning of various elements of financial system infrastructure-the insolvency and creditor rights regime,the systemic liquidity arrange. ments (other than those of payment systems,which have already been covered as a core financial system function), and the information and go ernance arrangements (e.g. porting,disclos mles). provide usefuli ights into cost ind effici nsact ns.Appendix B(Illu ustrative Dat Questionna res for C mprehensive Financial Sector Assessment)contains examples of those types of indicators 2.2 Financial Soundness Indicators Financial soundness indicators (FSIs)are indicators of the current financial health and soundness of the financial institutions in a country,as well as of their corporate and household counterparts,and FSIs play a crucial role in financial stability assessments.FSIs include both aggregated individual institution data and indicators that are representative of the markets in which the financial institutions operate.FSIs are calculated and dissemi. nated for use in macro rudential surveillance,which is the assessment and monitoring the str are a re tively new body of economic statistics that reflect a mixture of influ ences.Some of the concepts are drawn from prudentia l and commercial measuremen frameworks,which have been developed to monitor individual entities.Other concepts

22 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 projects. Most high-return projects require a long-term commitment of capital; however, savers are often reluctant to give up their savings for long periods of time.9 The role of the financial system is to transform liquid, short-term savings into relatively illiquid, long-term investments, thus promoting capital accumulation. The availability of liquidity, therefore, allows savers to hold assets that they can sell easily if they need to redeem their savings. Against this background, it is important to examine the degree of access that specified target groups (e.g., farmers, the poor, small and medium enterprises, or different geographic regions) have to those financial services. Access is defined as the availability and cost of financial services and could be measured in a variety of ways.10 First, relevant measures of the supply of financial services includes the numbers of different types of financial institutions, the number of branches and other service outlets, the number of clients served, and the population per outlet. The volume of services (deposits, credit, money transmission, etc.) provided is another useful measure, especially if it is broken down by clientele and size (i.e., in a breakdown by socioeconomic groups or broad sectors or by size distribution). Second, it is also relevant to consider demand-side measures of access. However, demandside indicators are not easy to construct and often require surveys to collect relevant data. Those surveys have often focused on collecting relevant information such as the savings and credit needs of households and enterprises, the needs relative to the supply, and the ease or difficulty of meeting those needs.11 Finally, it is important to examine the costs of financial services, usually by examining the level and trends in spreads between the borrowing and lending rates, the general interest rate structure, and the prices of other financial services (e.g., fees and minimum balances for deposits, as well as cost and time of payment services). In addition, indicators of the functioning of various elements of financial system infrastructure—the insolvency and creditor rights regime, the systemic liquidity arrangements (other than those of payment systems, which have already been covered as a core financial system function), and the information and governance arrangements (e.g., credit reporting, disclosure rules)—can provide useful insights into costs and efficiency of financial transactions. Appendix B (Illustrative Data Questionnaires for Comprehensive Financial Sector Assessment) contains examples of those types of indicators. 2.2 Financial Soundness Indicators Financial soundness indicators (FSIs) are indicators of the current financial health and soundness of the financial institutions in a country, as well as of their corporate and household counterparts, and FSIs play a crucial role in financial stability assessments. FSIs include both aggregated individual institution data and indicators that are representative of the markets in which the financial institutions operate. FSIs are calculated and disseminated for use in macroprudential surveillance, which is the assessment and monitoring of the strengths and vulnerabilities of financial systems. FSIs are a relatively new body of economic statistics that reflect a mixture of influences. Some of the concepts are drawn from prudential and commercial measurement frameworks, which have been developed to monitor individual entities. Other concepts

Chapter 2:Indicators of Financial,Development,and Soundness Table 2.3.The Core Set of Financial Soundness Indicators Indicator Indicates Comment Deposit-taking institutions 2 Regulatory capital to risk-weighted assets Capital adequacy Capital adequacy Capital adequacy Nonperforming ons to Asset quality ons to par Return on assets and return on equity Earnings and profitability Interest margin to gross income Earnings and profitability heske5mowhichhighnoninterotepnsas Liquidity atpaPoiomntcreonshang Exposure to FXrisk anPelgticalycontroledinstuions,hatmaybegroupedindiferentcaegoriesaoeordingtocontrol.businesinet,orgroup are drawn from macroeconomic measurement fra mew orks,which have been develope to monitor aggregate activity in the economy.A list of FSIs,grouped into a core set and an encouraged set,is presented in tables 2.3 and 2.4 and will be discussed in this chapter. Detailed exposition and guidance on those FSIs can be obtained from the Compilation Guide on Financial Soundness Indicators (IMF 2004).It contains a discussion of the distinc. tion between a"core set"for which data are generally available and are found to be highly relevant for analytic purp most all countries and an "encouraged set"for which The t of nd whose rele sts mainly of aggrega sure This type of aggregation of individual institution-level indicators (microprudentia indicators)into financial soundness indicators (macroprudential indicators)necessarily involves a loss of information because the distribution of prudential indicators of indi- vidual institutions is also a crucial dimension of financial stability.Although aggregation is required for facilitating macroprudential analysis and interational compa son.the ld be streng ing e dis tion through addition,FSIs the mselves are either back vard-looking or contemporaneous indicators of financial soundness,available often with a lag or low frequency.Therefore,proper interpretation and use of FSIs requires a range of analytical tools(discussed in chapter 3),which includes conducting stress tests of individual institutions and monitoring the

23 Chapter 2: Indicators of Financial Structure, Development, and Soundness 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 are drawn from macroeconomic measurement frameworks, which have been developed to monitor aggregate activity in the economy. A list of FSIs, grouped into a core set and an encouraged set, is presented in tables 2.3 and 2.4 and will be discussed in this chapter. Detailed exposition and guidance on those FSIs can be obtained from the Compilation Guide on Financial Soundness Indicators (IMF 2004). It contains a discussion of the distinction between a “core set” for which data are generally available and are found to be highly relevant for analytic purposes in almost all countries and an “encouraged set” for which data are not as readily available and whose relevance could vary across countries.12 The list of FSIs discussed herein consists mainly of aggregate balance sheet measures. This type of aggregation of individual institution-level indicators (microprudential indicators) into financial soundness indicators (macroprudential indicators) necessarily involves a loss of information because the distribution of prudential indicators of individual institutions is also a crucial dimension of financial stability. Although aggregation is required for facilitating macroprudential analysis and international comparison, the assessments could be strengthened by allowing some disaggregation through peer groups or through the monitoring of the distributional characteristics of various indicators. In addition, FSIs themselves are either backward-looking or contemporaneous indicators of financial soundness, available often with a lag or low frequency. Therefore, proper interpretation and use of FSIs requires a range of analytical tools (discussed in chapter 3), which includes conducting stress tests of individual institutions and monitoring the Table 2.3. The Core Set of Financial Soundness Indicators Indicator Indicates Comment Deposit-taking institutionsa Regulatory capital to risk-weighted assets Capital adequacy Broad measure of capital, including items giving less protection against losses, such as subordinated debt, tax credits, and unrealized capital gains Regulatory Tier I capital to risk-weighted assets Capital adequacy Highest quality capital such as shareholder equity and retained earnings, relative to risk-weighted assets Nonperforming loans net of provisions to capital Capital adequacy Indicates the potential size of additional provisions that may be needed relative to capital Nonperforming loans to total gross loans Asset quality Indicates the credit quality of banks’ loans Sectoral distribution of loans to total loans Asset quality Identifies exposure concentrations to particular sectors Return on assets and return on equity Earnings and profitability Assesses scope for earnings to offset losses relative to capital or loan and asset portfolio Interest margin to gross income Earnings and profitability Indicates the importance of net interest income and scope to absorb losses Noninterest expenses to gross income Earnings and profitability Indicates extent to which high noninterest expenses weakens earnings Liquid assets to total assets and liquid assets to short-term liabilities Liquidity Assesses the vulnerability of the sector to loss of access to market sources of funding or a run on deposits Net open position in foreign exchange to capital Exposure to FX risk Measures foreign currency mismatch a. Domestically controlled institutions, that may be grouped in different categories according to control, business lines, or group structure

24 Financial Sector Assessment: A Handbook 1IHGFEDCBA 12 11 1098765432 Table 2.4. The Encouraged Set of Financial Soundness Indicators Indicator Indicates Comment Encouraged seta Corporate sector Total debt to equity Leverage Provides an indication of credit risk because a highly leveraged corporate sector is more vulnerable to shocks Return on equity Earnings and profitability Indicates the extent to which earnings are available to cover losses Earnings to interest and principal expenses Debt service capacity Indicates the extent to which earnings available to cover losses are reduced by interest and principal payments Corporate net foreign exchange exposure to equity Foreign exchange risk Reveals corporate sector vulnerability to exchange rate movements Number of applications for protection from creditorsb Capital to assets Capital adequacy Broad measure of capital adequacy, which is a buffer for losses Geographical distribution of loans to total loans Asset quality Identifies credit exposure concentrations to particular countries by the banking system Gross asset position in financial derivatives to capitalc Exposure to derivatives Provides a crude indicator of exposure to derivatives Gross liability position in financial derivatives to capitalc Exposure to derivatives Provides a crude indicator of exposure to derivatives Large exposures to capital Asset quality Identifies credit exposure to large borrowers Trading income to total income Earning and profitability Indicates the dependence on trading income Personnel expenses to noninterest expenses Earnings and profitability Indicates the extent to which high noninterest expenses reduces earnings Spread between reference lending and deposit rates Earnings and profitability Indicates level of competition in the banking sector and the dependence of earnings on the interest rate spread Spread between highest and lowest interbank rate Liquidity Market indicator of counterparty risks in the interbank market Customer deposits to total (non-interbank) loans Liquidity Assesses the vulnerability to loss of access to customer deposits Foreign currency-denominated loans to total loans Foreign exchange risk Measures risk to loan portfolios from foreign exchange movements Foreign currency-denominated liabilities to total liabilities Foreign exchange risk Measures extent of dollarization Net open position in equities to capital Equity market risk Measures exposure to equity price movements Market liquidity Average bid-ask spread in the securities marketd Liquidity Indicates liquidity in the securities market Average daily turnover ratio in the securities marketd Liquidity Indicates liquidity in the securities market Other financial corporations Assets to total financial system assets Size Indicates size and significance within the financial sector Assets to GDP Size Indicates size and significance within the financial sector Households Household debt to GDP Leverage Provides an indication of credit risk because a highly leveraged household sector is more vulnerable to shocks Household debt service and principal payments to income Debt service capacity Indicates a household’s ability to cover its debt payments Real estate markets Real estate prices Real estate prices Measures trends in the real estate market Residential real estate loans to total loans Exposure to real estate Measures banks’ exposure to the residential real estate sector Commercial real estate loans to total loans Exposure to real estate Measures banks’ exposure to the commercial real estate sector Other relevant indicators that are not formally part of the encouraged set of FSIse a. See Compilation Guide for Financial Soundness Indicators (IMF 2004) for a detailed definition and exposition of encouraged indicators. b. These may be grouped in different categories based on ownership, business lines, or group structure. c. May be in notional amounts or market value. The latter provides a better measure of exposure but may be more difficult to obtain. d. Or in other markets that are most relevant to bank liquidity, such as foreign exchange markets. e. Other indicators such as additional balance sheet data (e.g., maturity mismatches in foreign currency), data on the life insurance sector, or information on the corporate and household sector may be added

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