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RBI’s ‘Financial Stability Reports’ and Stress Testing Methodologies
Analysing the contents of the Reserve Bank of India’s biannual FSRs and the methodology of the RBI’s supervisory stress tests reveals that there is scope for improvement, specifically regarding the continuity in the tracking of certain risk drivers, the extent of commentary on the information, and aspects of stress tests. Improving on these, along with disclosing results of individual banks’ stress tests, would aid in enhancing transparency and inspiring confidence in the financial system.
Financial regulators and central banks around the world publish periodic “financial stability reports” (FSRs) in which they analyse the health of their country’s financial and banking systems. These FSRs typically provide information on the macroeconomic picture and trends in the financial system that are relevant to financial stability. The goal of the FSR is to promote financial stability by providing insights on the risks present at an institutional or systemic level, and the resilience of the financial system, to the relevant players, namely the central bank, financial regulators and supervisors, and market participants, to understand systemic risks and design appropriate responses.
Currently, around 60 countries in both the advanced and emerging economies regularly release their FSRs (Center for Financial Stability nd). Even at an international level, the International Monetary Fund releases a semi-annual report, the “Global Financial Stability Report,” which assesses financial stability at a global level by identifying key vulnerabilities in the global financial system. In India, the Reserve Bank of India (RBI) has been publishing its biannual FSRs since March 2010 (RBI 2010). These FSRs provide information on global and domestic macroeconomic trends and risks arising in the financial system, the resilience of financial institutions and issues regarding development and regulation of the financial sector. They also provide extensive information about the way the RBI conducts its stress tests on the banking system.
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