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Measuring risks to UK financial stability

Author

Listed:
  • Aikman, David

    (Bank of England)

  • Bridges, Jonathan

    (Bank of England)

  • Burgess, Stephen

    (Bank of England)

  • Galletly, Richard

    (Bank of England)

  • Levina, Iren

    (Bank of England)

  • O'Neill, Cian

    (Bank of England)

  • Varadi, Alexandra

    (Bank of England)

Abstract

We present a framework for measuring the evolution of risks to financial stability over the financial cycle, which we apply to the United Kingdom. We identify 29 indicators of financial stability risk, drawing from the literature on early warning indicators of banking crises. We normalise and aggregate these indicators to produce three composite measures, capturing: leverage in the private nonfinancial sector, including the level and growth of household and corporate debt, as well as the United Kingdom’s external debt; asset valuations in residential and commercial property markets, and in government and corporate bond and equity markets; and credit terms facing household and corporate borrowers. We assess these composite measures relative to their historical distributions. And we present preliminary evidence for how they influence downside risks to economic growth and different horizons. The measures provide an intuitive description of the evolution of the financial cycle of the past three decades. And they could lend themselves to simple communication, both with macroprudential policymakers and the wider public.

Suggested Citation

  • Aikman, David & Bridges, Jonathan & Burgess, Stephen & Galletly, Richard & Levina, Iren & O'Neill, Cian & Varadi, Alexandra, 2018. "Measuring risks to UK financial stability," Bank of England working papers 738, Bank of England.
    • Handle: RePEc:boe:boeewp:0738
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    References listed on IDEAS

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    Cited by:

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    2. Jorge E. Galán, 2020. "The benefits are at the tail: uncovering the impact of macroprudential policy on growth-at-risk," Working Papers 2007, Banco de España.
    3. Simon Lloyd & Ed Manuel & Konstantin Panchev, 2024. "Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(1), pages 335-392, March.
    4. Varadi, Alexandra, 2021. "Identifying the transmission channels of credit supply shocks to household debt: price and non-price effects," Bank of England working papers 927, Bank of England.
    5. Luke Hartigan & Michelle Wright, 2021. "Financial Conditions and Downside Risk to Economic Activity in Australia," RBA Research Discussion Papers rdp2021-03, Reserve Bank of Australia.
    6. Milan Szabo, 2020. "Growth-at-Risk: Bayesian Approach," Working Papers 2020/3, Czech National Bank.
    7. Lubello, Federico & Rouabah, Abdelaziz, 2024. "Securitization, shadow banking system and macroprudential regulation: A DSGE approach," Economic Modelling, Elsevier, vol. 131(C).
    8. Thi Huyen Tran & Robert Ślepaczuk, 2022. "Quantile regression analysis to predict GDP distribution using data from the US and UK," Working Papers 2022-30, Faculty of Economic Sciences, University of Warsaw.
    9. Tarkocin, Coskun & Donduran, Murat, 2024. "Constructing early warning indicators for banks using machine learning models," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).
    10. Milan Szabo & Zlatuse Komarkova & Martin Casta, 2020. "Vulnerable growth: Bayesian GDP-at-Risk," Occasional Publications - Chapters in Edited Volumes,, Czech National Bank.
    11. Aikman, David & Bridges, Jonathan & Hacioglu Hoke, Sinem & O’Neill, Cian & Raja, Akash, 2019. "Credit, capital and crises: a GDP-at-Risk approach," Bank of England working papers 824, Bank of England, revised 18 Oct 2019.
    12. Greg Farrell & Esti Kemp, 2020. "Measuring the Financial Cycle in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 88(2), pages 123-144, June.
    13. Wang, Bo & Li, Haoran, 2021. "Downside risk, financial conditions and systemic risk in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    14. Jorge E. Galán & María Rodríguez Moreno, 2020. "At-risk measures and financial stability," Revista de Estabilidad Financiera, Banco de España, issue Autumn.
    15. Lang, Jan Hannes & Rusnák, Marek & Greiwe, Moritz, 2023. "Medium-term growth-at-risk in the euro area," Working Paper Series 2808, European Central Bank.
    16. Varadi, Alexandra, 2024. "Identifying the transmission channels of credit supply shocks to household debt: Price and non-price effects," European Economic Review, Elsevier, vol. 166(C).
    17. Bridges, Jonathan & Green, Georgina & Joy, Mark, 2021. "Credit, crises and inequality," Bank of England working papers 949, Bank of England.
    18. Wang, Bo & Xiao, Yang, 2023. "The term effect of financial cycle variables on GDP growth," Journal of International Money and Finance, Elsevier, vol. 139(C).
    19. Bholat, David & Broughton, Nida & Ter Meer, Janna & Walczak, Eryk, 2019. "Enhancing central bank communications using simple and relatable information," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 1-15.
    20. Marcin Pietrzak, 2021. "Can Financial Soundness Indicators Help Predict Financial Sector Distress?," IMF Working Papers 2021/197, International Monetary Fund.
    21. Lang, Jan Hannes & Izzo, Cosimo & Fahr, Stephan & Ruzicka, Josef, 2019. "Anticipating the bust: a new cyclical systemic risk indicator to assess the likelihood and severity of financial crises," Occasional Paper Series 219, European Central Bank.
    22. Tihana Skrinjaric, 2024. "Macroprudential policy stance assessment: the case of Croatia," Public Sector Economics, Institute of Public Finance, vol. 48(4), pages 421-463.

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    More about this item

    Keywords

    Macroprudential policy; financial crises; financial stability; early warning indicators; countercyclical capital buffers; data visualisation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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