useful information if available. Some countries also produce indexes for the corporate sector’s outlook—such as the purchasing manager index in the United States—which may be worthwhile monitoring. Lastly, data on the number of corporate bankruptcies are usually easily available and contain useful information.

- _Macroeconomic conditions_ : Complementing the financial cycle, household, and nonfinancial corporate indexes, it is important to assess macroeconomic conditions, comprising a range of easily available data on real economic activity, monetary conditions, public debt sustainability, and the external position. Relevant indicators include economic growth and— for open economies—economic growth in the main trading partners and price development for key export products or services. The inflation rate, real interest rates, and the yield curve spread (for instance, the difference between short-term government paper and long-term bonds)<sup>31</sup> are indicative of the prevailing monetary conditions. Indicators for public debt sustainability are the level of public indebtedness, the actual or structural government deficit, and/or the amount of public debt that is falling due over the next year—all expressed as a share of GDP. The sustainability of the external position can be assessed on the basis of the current account position, external indebtedness, and—if available—the net investment position,<sup>32</sup> all expressed as a percentage of GDP. Other indicators include reserve coverage of imports (expressed as a ratio or in terms of months of import coverage) and the real exchange rate. Particularly for countries with persistent current account deficits, capital inflows are worthwhile monitoring, such as the proportion of the deficit that is covered by more stable foreign direct investment (FDI).

# **_Resilience Indexes_**

- _Capital, earnings, and asset quality of the banking system_ : Financial stability analysis is incomplete without an assessment of the resilience of financial entities, particularly banks, to absorb adverse shocks, including credit losses. Such an assessment should comprise basic indicators of solvency such as the capital adequacy ratio for the banking sector, the core capital adequacy ratio, the leverage ratio, or a combination of these elements. In addition, it should include indicators of asset quality, such as the proportion of overdue and restructured loans in the loan portfolio, and the provisioning rate. Lastly, indicators of profitability should be included, assessing the capacity of the banking system to absorb losses through earnings. Relevant indicators include RoE and RoA, and the intermediation margin (the difference between average lending and deposit rates). The availability of these indicators is usually not problematic, but the data cannot always be taken at face value. The banking sector’s solvency indicators are frequently inflated due to underprovisioning for bad loans or uncontrolled restructuring. Under these circumstances, corrections in the data may be necessary to arrive at more reliable solvency measures.

> 31 The yield curve spread is defined as the spread between the interest rates on long-term government bonds (for instance, ten-year) and short-term government paper (for instance, three months).

> 32 The net investment position is defined as the difference between a country’s external financial assets and its liabilities. Lower values indicate higher risks to financial stability.

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