Banking sector vulnerabilities could be compounded by a sluggish economy. Some countries have a negative forecasted real GDP growth for year 2021 of more than 5 percent which may have repercussions for bank resilience (Figure 2, Panel C). A weak macroeconomy may weigh negatively on the banking sector, setting off a negative feedback loop between lackluster financial sector performance and a weakening real economy.

The government fiscal position also has implications for the stability of banking systems, and vice versa. Economies with weak public balance sheets may find it difficult to provide policy support and maintain a credible backstop for the banking sector, which could also increase funding costs. In turn, weak banks may put sovereign debt sustainability in doubt and contribute to the bank-sovereign “doom loop” (Feyen & Zuccardi, 2019). Some countries are forecasted to approach 100 percent general gross government debt to GDP (Figure 2, Panel D), suggesting potential future vulnerabilities arising from the bank-sovereign nexus.

To assess whether the CDBP correlates with other indicators of banking systems' stability, we run crosssectional regressions and relate the CDBP with a set of core financial soundness indicators (FSIs).<sup>13</sup> A summary of the values of CDBP and FSIs across regions appears in Table 2. The Sub-Saharan Africa region (SSA) shows the highest un-weighted values of the CDBP, the regulatory Tier1 capital ratio, and liquid assets to short-term liabilities. South Asia (SAR) is the worst performing in terms of CDBP, non-performing loans ratio and exposure to changes in foreign exchange. Latin America and the Caribbean (LAC) has the lowest capital ratios, and MENA has the lowest liquidity ratios.

**Table 2. Consolidated distance to breakpoint and selected FSI indicators (2020; unweighted median and median weighted by GDP at market prices)**

||**Conso**<br>**Distance**<br>**Point (C**<br>**poi**<br>|**lidated**<br>**to Break**<br>**DBP) (%**<br>**nts)**<br>|**Regulato**<br>**Capital**<br>**Weighted**<br>|**ry Tier 1**<br>**to Risk-**<br>**Assets (%)**<br>|**Non-per**<br>**Loans to T**<br>**Loan**<br>|**forming**<br>**otal Gross**<br>**s (%)**<br>|**Net Open**<br>**Foreign E**<br>**Capit**<br>|**Position in**<br>**xchange to**<br>**al (%)**<br>|**Liquid**<br>**Short**<br>**Liabilit**<br>|**Assets to**<br>**Term**<br>**ies (%)**<br>|**Interest**<br>**Gross In**<br>|**Margin to**<br>**come (%)**<br>|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|**Region**|**Un-**<br>**weighted**|**GDP**<br>**weighted**|**Un-**<br>**weighted**|**GDP**<br>**weighted**|**Un-**<br>**weighted**|**GDP**<br>**weighted**|**Un-**<br>**weighted**|**GDP**<br>**weighted**|**Un-**<br>**weighted**|**GDP**<br>**weighted**|**Un-**<br>**weighted**|**GDP**<br>**weighted**|
|EAP|13.6|11.8|15.3|11.7|2.8|1.8|3.5|2.4|24.0|24.1|64.4|77.9|
|ECA|10.0|9.0|16.1|10.4|5.9|8.8|2.0|4.0|27.7|22.3|58.5|76.1|
|LAC|10.5|13.4|12.0|14.3|3.1|2.4|0.9|0.5|28.5|19.5|70.5|56.5|
|MENA|4.5|5.1|15.3|15.3|||2.1|2.1|20.5|12.6|121.5|169.1|
|SAR|3.8|3.3|13.0|14.3|7.7|7.9|5.9|12.7|24.2|7.8|74.1|66.9|
|SSA|14.0|16.0|16.9|15.3|6.0|6.0|2.5|3.8|34.1|18.5|59.5|55.1|

Source: Authors’ calculations using data from Fitch and IMF Financial Soundness Indicators Note: EAP: East-Asia and Pacific; ECA: Europe and Central Asia; LAC: Latin America and the Caribbean; MENA: Middle East and North Africa; SAR: South Asia; SSA: Sub-Saharan Africa. Data for non-performing loans to total gross loans for year 2020 is not available for the MENA countries in the sample.

The results in Table 3 indicate that CDBP correlates positively with liquidity risk (Table 3, Column 4) and negatively with the cost of intermediation (Table 3, Column 5) – a higher relative lending spread is negatively correlated with CDBP. When we condition on all FSIs at the same time, the non-performing loans ratio is negatively associated with CDBP, while the sign on the coefficient for the liquidity risk ratio is still positive and statistically significant (Table 3, Column 6). Overall, the associations are relatively weak and the variation in the CDBP explained by FSIs is low, suggesting that the CDBP may capture information that is not already encapsulated in alternative financial stability indicators.

13 For an overview of the FSIs, see https://data.imf.org/?sk=51B096FA-2CD2-40C2-8D09-0699CC1764DA.

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