Upfront: Highlights from New Cleveland Fed Research
A Daily Dose of Financial Stress (Measurement)
Since the end of the financial crisis, bank supervisors and regulators have been working furiously to develop new tools that will avert the next one. One of the most promising innovations is a “financial stress index.” The index tracks an array of data collected from public markets to help analysts pinpoint periods when financial market strains are growing acute. When the index gets too elevated, it may be time for supervisors to look more closely at specific companies and markets.
More than a dozen public indexes, produced around the globe, are now up and running. We introduced the Cleveland Financial Stress Index, or CFSI, in Forefront in 2011. It monitors stress in the financial system by tracking conditions in several different financial markets.
Cleveland Fed researchers have recently enhanced the CFSI with the addition of two new markets: real estate and securitization. These markets were, of course, key contributors to the depth and duration of the 2008 financial crisis, and incorporating them into the stress index improves the CFSI’s ability to detect emerging instability. (The CFSI already tracks the funding, credit, equity, and foreign exchange markets.) A useful feature of the CFSI is its ability to show how much each market is contributing to overall stress. So far in 2013, for example, securitization markets are the leading culprit, while foreign exchange markets have been relatively benign.
And now, the CFSI is updated daily on our website. We encourage you to check it out, along with others available on the internet. (Google “financial stress index” to find them.) A quick scan of public indexes shows that financial stress is at fairly low levels in spring 2013, a welcome return to stability after the very high stress seen during the financial crisis.