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Tracking Recent Levels of Financial Stress

Advisory: This article is based in whole or in part on the CFSI (Cleveland Financial Stress Indicator), an indicator that was discontinued by the Federal Reserve Bank of Cleveland in 2016 due to the discovery of errors in the indicator’s construction. These errors overestimated stress in the real estate and securitization markets. As a result, readers should be cautious and interpret any analysis based on CFSI data with those errors in mind.

In recent months, the Cleveland Financial Stress Index (CFSI) has remained low as conditions in key financial markets continued to improve. After falling to a recent low of -1.08 on November 2, 2012, the index's latest reading stands at -0.66 (as of December 14). This reading places the level of stress in Grade 1, a "below-normal stress" period. The index is down 2.14 points over the previous 12 months and nearly 3.4 points since its peak in October 2008.

The CFSI is a composite measure of stress in four key financial markets (interbank, credit, equity, and foreign exchange). Stress in each of these component markets can also be monitored by decomposing the CFSI into the contribution each market makes to the total level of system stress (more detail on the index's construction can be found here).

The individual components of the CFSI were increasing in the early part of 2012 - though not to the same degree as during the financial crisis - but as the year progressed, stress in all four markets decreased, indicating that the potential for widespread stress had fallen relative to late 2011. Over the final three months of 2012, the interbank market's contribution to the composite index decreased the most markedly, while strains in the credit and equity markets persist.

Decomposition of CFSI

December 14, 2012 November 19, 2012 October 15, 2012
Equity market contribution to CFSI 12.70 13.00 9.70
Interbank market contribution to CFSI 7.60 7.37 8.47
Credit market contribution to CFSI 18.38 17.78 16.89
Foreign exchange contribution to CFSI 1.42 1.40 1.82
Note: These contributions refer to levels of stress, where a value of 0 indicates the least possible stress and a value of 100 indicates the most possible stress. The sum of these contributions is the level of the CFSI, but this differs from the actual CFSI, which is computed as the standardized distance from the mean, or the z-score.
Source: Federal Reserve Bank of Cleveland.

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