Macroprudential Analysis


DEFINITION of 'Macroprudential Analysis'

A method of economic analysis that evaluates the health, soundness and vulnerabilities of a financial system. Macroprudential analysis looks at the health of the underlying financial institutions in the system and performs stress tests and scenario analysis to help determine the system's sensitivity to economic shocks. Macroeconomic and market data are also reviewed to determine the health of the current system. The analysis also focuses on qualitative data related to financial institutions' frameworks and the regulatory environment to get an additional sense of the strength and vulnerabilities in the system.

BREAKING DOWN 'Macroprudential Analysis'

When looking at the health of the underlying financial institutions in the system, macroprudential analysis uses indicators that provide data on the health of these institutions as a whole including capital adequacy, asset quality, management performance, profitability, liquidity and sensitivity to systematic risks. Macroeconomic data used includes gross domestic product (GDP) growth rates, inflation, interest rates, balance of payments, exchange rates, asset prices and the correlation of markets within the system. Finally, macroprudential analysis looks at key components of the financial markets, including prevailing credit ratings and the yields and market prices of financial instruments.

Scenario analysis and stress tests are major component of this analysis. For example, the analysis may look at how the system would cope with a steadily declining currency value and its impact on GDP, interest rates and underlying institution profitability.

  1. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced ...
  2. Liquidity

    The degree to which an asset or security can be quickly bought ...
  3. Inflation

    The rate at which the general level of prices for goods and services ...
  4. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  5. Balance Of Payments (BOP)

    A record of all transactions made between one particular country ...
  6. Yield

    The income return on an investment. This refers to the interest ...
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