STABILITY OF THE BANKING SECTOR: DERIVING STABILITY INDICATORS AND STRESS-TESTING

The purpose of this article is to composite a banking stability indicator (BSI) from independent sub-indices (capital adequacy ratio (CA), asset quality (AQ), profitability (P) and liquidity (L)). The BSI was calculated using the Minimax normalization method. The composite index was used to analyze the financial stability of the banking sector of 29 countries and to build a risk map based on their national basic economic indicators. The Fitch's Banking Stability Indicator (BSI) is a composite measure of banking system quality, which ranks countries by five levels of banking system quality ("very high" or A, "high" or B, "acceptable" or C, "low" or D and "very low" or E). This study also uses a novel method of stress-testing to measure banking stability. The proposed BSI index is intended both for comparative international assessment of financial stability of the banking sector and for its evaluation in the country. It gives the ability in the most general form to assess the banking sector from the point of view of international competitiveness and to compare it with other countries. On the other hand, it allows identifying the strengths and weaknesses of the current financial condition of the banking sector at the level of individual countries and monitoring its sustainability.