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Composing the Financial Stress Index for the Assessment of the Banking Sector Stability

Student: Chichkanov Nikolay

Supervisor: Alexander M. Karminsky

Faculty: Faculty of Economic Sciences

Educational Programme: Financial Markets and Financial Institutions (Master)

Year of Graduation: 2017

Since 1990s the amount and frequency of the banking crises have started to grow in both developed and developing countries. The vulnerabilities in the banking sector could be transferred to other spheres and undermine the stability of the whole economy. Actually, banking crises are extremely expensive for the government which has not only fiscal costs, but also receives less tax pays. Moreover, such events lead to the significant fall in GDP and the standard of living. Nowadays the forecasting of banking crises and the construction of early warning systems (EWS) is very important. However, the empirical definition of the banking crisis is one of the most controversial topics in the EWS literature. Existing databases presented by worldwide institutions, primarily IMF, have some drawbacks. Firstly, these databases that consist from binary variables have too high level of the expert component. Secondly, it is very difficult to determine certain dates of the beginning and the end of the crisis, but the results of EWS are sensitive to these options. At least, even well-recognized and most-cited classifications differ in terms of the number of crises and their average length. Therefore some researchers underline the necessity of continuous crisis indexes. This paper contributes to the literature by composing the financial stress index for the Russian banking system. Moreover, the big difference with the literature is the composing index by type of ownership. The weights of such sub-indexes were assessed with dynamic time periods. The final index for the whole system is robust regarding 3 different methods of weighting. Finally, it allows identifying 2 periods of high financial stress in banking sector – in 2008-2009 and 2014-2015.

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