Developing the monitoring system for non-bank financial institutions and Russian financial market

The problem of creation and development of a complex monitoring system for the financial market has gained relevance for the expert community as a result of the 2008 crisis that had demonstrated the vulnerability of the global and national financial systems, including regulatory and supervisory subsystems. The instability of the Russian financial market during the past two years only stresses the importance of developing a monitoring system.

Design and analysis of signal indicators (coincident and leading ones) that were used to determine the crisis episodes showed that crisis manifestations in certain segments of the economy – financial markets, the banking sector and the real sector – are closely intertwined. Coincident indicators show that instability is usually first seen in financial markets: stock markets, bond markets. No more than one quarter later, the crisis expands to foreign exchange and money markets, affecting the banking system: the outflow of banks’ borrowed funds is observed, as well as the growth of interest rates, and falling equity base. At the same time, deterioration of non-bank financial institutions can be observed, i.e. of non-state pension funds and asset management companies (observed in mutual funds’ statistics). After it, the crisis manifests itself in the real and insurance sectors. It is worth noting that instability in financial markets usually lasts no more than one quarter, while crises in the real sector and in insurance companies segment are the most protracted.

All crisis episodes in the Russian economy can be divided into the system ones, when the instability in financial markets were followed by the crisis in all sectors of the economy (Q3 2008 – Q3 2009, Q3 2014 – Q4 2015), and non-system ones, when the instability of one or more financial markets was not followed by instability in other sectors (Q4 2001, Q2 2004, Q3 2011). Note that since 2000, there has never been a drop in the real sector without preceding instability in financial markets.

As for the leading signal indicators for crises in the Russian financial market (indicators that signal the onset of a crisis after a certain period of time when crossing a certain border), they can be divided into the following 4 groups (in descending order of quality): 1) short-term indicators that warn of a crisis in financial markets a quarter beforehand and de facto use information about stock and foreign exchange markets; 2) indicators based on monetary aggregates and GDP; 3) indicators based on information on loans, deposits and interest rates; 4) indicators characterizing the level of liquidity in the economy. Leading indicators of the 2nd and 3rd groups usually signal the crises in advance – 5–8 quarters prior to its start, and series underlying them are clearly cyclical. In this regard, it can be argued that the efficiency of indicators of the 2nd and 3rd groups is based on the cyclical pattern of the world and Russian economies.

This cyclical pattern of the series of the world and Russian economy was analysed using spectral analysis. It turned out that in data series of the financial and real sectors, cyclical behaviour with periods of 12–14 and 21–23 quarters is the most common one, with the first one prevailing in data series linked to the stock market, money market and the monetary base, and the latter – in the indicators of the banking sector, macroeconomic data series, interest rates, and money supply. The results of the spectral analysis showed that the maximum “real” advance of the data series of coincident indicators of the financial market crisis compared to leading indicators is not more than one quarter. Thus, we can say that short-term leading indicators give a signal of the impending crisis based on the events directly related to the crisis. In contrast, long-term indicators signal a coming crisis (i.e., the fall of indicators) based on the data about expansion phase of the previous business cycle. Thus, the positive quality of long-term indicators – their ability to warn about the crisis in advance – is offset by the negative quality – the variability of the business cycle and, consequently, less signal reliability.

Mikhail Andreyev – Senior researcher at RANEPA