A framework for assessing financial stability? |
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Authors: | CAE Goodhart |
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Institution: | aFinancial Markets Group, London School of Economics, Room 414, Houghton Street, London WC2A 2AE, United Kingdom |
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Abstract: | I worked as a consultant in the Financial Stability Department (FSD) of the Bank of England for several years (2002–2004). In this paper I reflect on issues relating to the work of such an FSD, starting with the difficulty of defining or measuring ‘financial stability’. Stress tests are commonly used, but, for an FSD, should relate to the system as a whole, not just to individual institutions. FSDs need to assess the probability, virulence and speed of occurrence of potential shocks. There is a need to develop appropriate analytical models. The focus on capital adequacy has diverted attention from concern about having sufficient liquidity. |
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Keywords: | Financial stability Stress test Shocks Market dysfunction Liquidity |
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