Latvian Financial Stress Index

Summary: The objective of this Discussion Paper is to develop a methodology for Latvian FSI. To this effect, the particular methodologies widely used in international practice for composite indicators applied in financial stability monitoring and the experience of selected countries were examined. The authors analyse the nature of financial stress and the related symptoms and offer their interpretation of the financial stress concept. The Paper provides the rationale behind the selection of the individual indicators (components) comprised in the FSI, evaluates various options for aggregating the FSI components as well as features a comparison between the methodology applied for the Latvian FSI and the practice pursued in other countries. The main conclusion presented in the Discussion Paper is that the dynamics of the FSI developed on the basis of the Bank of Latvia's methodology is quite an accurate measure of changes in the Latvian financial system's stress levels. It signals periods of elevated stress as well as periods of an excessively vigorous and imbalanced development of the financial system. The Bank of Latvia has been using the FSI as one of the elements of Latvia's financial system stability monitoring framework since 2009.

Key words: financial stability, financial stress, financial stress index, financial system stability monitoring 

JEL codes: G01, G10, G20, E44, E58