In recent years, global events such as the pandemic and geopolitical tensions, have heightened uncertainty in the global macroeconomic landscape. These events have exacerbated supply disruptions and inflationary pressures, adding complexity to economic forecasts. Additionally, instances like the failure of mid-sized US banks and the acquisition of a Swiss bank serve as stark reminders of the potential consequences of a loss of market confidence, and in some cases to the degree of severity requiring regulatory intervention.
In light of these challenges, ensuring financial resilience remains a paramount concern for financial regulators and supervisors. Given the interconnected nature of today’s digital world, bolstering resilience to immediate macro-financial and geopolitical shocks is imperative. A reflective analysis of past events is essential for identifying emerging risks and understanding their cross-sectoral impacts.
Solution in Action: Macroeconomic Risk Modelling for a Central Bank
Central banks play a critical role in safeguarding financial stability. In this project we showcase how a central bank leveraged advanced econometric techniques to strengthen the resilience of the financial sector. Centred on two key pillars of econometric modelling and scenario analysis, the core objective was to understand how macroeconomic shocks propagate through the system, ultimately impacting financial stability.
Econometric Modelling for Unveiling Endogenous Relationships
Leveraging a comprehensive dataset spanning 25+ years and employing time series and panel data methodologies, the analysis explores the endogenous relationships between macroeconomic variables and key financial indicators, offering insights into systemic risk, market stability shifts, credit availability trends, and liquidity dynamics.
Scenario Analysis and Early Warning for Proactive Policy Formulation:
Beyond retrospective analysis, the project incorporated scenario analysis coupled with an early warning system (EWS) empowering proactive identification of potential vulnerabilities under various stress scenarios .
Continuous Monitoring for Effective Policy Calibration
To facilitate on-going monitoring; the data, models, and scenario analysis are seamlessly embedded within a custom-built application. The application houses the EWS, which functions as an alert system, notifying of potential breaches in regulatory compliance or internal risk profiles.
The insights gleaned from the analysis serve as invaluable inputs for crafting and calibrating effective monetary policy. By proactively addressing potential financial vulnerabilities through rigorous data-driven analysis, the central bank enhances its capacity to navigate volatile macroeconomic conditions effectively.
