1. Macro Sustainability Assessments (MSA): Financial Sector Issues RES Workshop with Country Economists, September 2011

2. What Did the Guidelines Say?  Can be descriptive  Structure of the Sector (Banks, non-Banks…)  Main trends including: –Non performing loans / total loans), –Solvency ratios –Coverage of non-performing loans by provisions (provisions / non performance loans) –Capital ratios: Profitability (ROA) –Liquidity  Discussion of Stability Issues including using inputs from the IMF as and when available

3. Guidelines and Reality  On the whole the MSA’s I have seen have provided a reasonable description of:  Financial Sector Structure  Performance  Discussion of Stability Issues  Used inputs from IMF where available

4. The Good News  Process appears to have deepened our knowledge regarding financial systems in LAC  While descriptive, the analysis has brought out the main trends and identified potential risks  This has likely enhanced our understanding of the economies more generally and the potential role of the IDB in our economies  In at least one case the MSA analysis has identified a major potential threat to economic stability

5. The Other News  Descriptive analyses only go so far  Fraud is almost impossible to detect (e.g.: Banco Panamericano in Brazil)  Inputs from the IMF are useful but in several cases not available, out of date, or of variable quality  Issue: how to get better information from the IMF or from other sources on financial systems  The MSA’s are not systematic in terms of how the sections are organized, what data is considered, how issues are discussed etc. This limits the usefulness of the exercise

6. The Underlying Structural Problem  It is almost impossible to quantify these risks  As discussed previously, econometric models of banking crises perform rather poorly  Financial systems are complex, risks are subtle, easily hidden and complex  What should we do in this situation?

7. Ideas to Discuss  Can we establish some benchmarks to judge our financial systems?  Bankscope is the only database with relatively homogeneous data across countries for individual banking institutions  We have put together a database of all of the consolidated accounts available (about 140 institutions)  We are putting together a database that combines consolidated accounts with those that are not consolidated  Caveat: some countries are covered better than others  Can use the distribution of indicators to establish some norms

8. Establish Norms Across the Region Example: tier 1 capital ratios Tier 1 Capital Ratios: Percentage of Country Banks Relative to the Distribution of the region

9. We have done this now for these indicators  Can do this for standard ratios such as:  Total regulatory capital ratio  Tier 1 capital ratio  NPL / Total Loans  (NPL’s-Provisions)/Equity  Loan growth  Growth of total assets  Securities as % of total assets

10. And we can move to a More Systematic Checklist Approach for the MSA financial sector analysis  Example: S&P methodology to rate countries’ financial systems  KCP considering if this is feasible  Issue: how to combine subjective judgment with objective indicators as available  Some external validation may be required  Caveats: even if we establish norms or a more systematic methodology this would still would not allow us to quantify the probability of a crisis

11. Network issues  We also need to try to use the analysis to consider financial systems more as networks  To understand links between institutions within a financial system and across countries

12. Network effects: subsidiary relations