Rating Agency ACRES on Tuesday, December 13, will begin to assess the state of the Russian financial market using a new tool — the Index of financial stress. The index is calculated on a 10-point scale and, according to Agency estimates, will allow to evaluate the stability of the financial system. This tool has no analogues in Russia. The current state of the financial system, the experts evaluated less than 2 points, which, in their opinion, indicates its stable condition. In moments of panic on the currency market in December 2014 the Index of financial stress has reached 8 points, reported Agency staff in the presentation of a new tool.
To measure the crisis
To estimate the rate of growth of the Russian economy helps a number of statistical tools, such as GDP data published by Rosstat. To assess the state of the financial system, you can use the information about the change of the ruble exchange rate or money market rates. However, as noted by the Director of research and forecasting ACRES Natalya Porokhova, these data do not provide a full picture of the situation. “The ruble may be very volatile and subject to change, for example, in the period of tax payments” — the expert specifies.
In ACRA propose to assess the state of the financial system on several criteria. In addition to inflation, oil prices and exchange rate in the Agency propose to consider also the volatility of the stock market and to assess the value of shares of companies of the financial sector and the level of bond yields. In particular, the drop in share prices of banks may occur in case of deterioration of their balance sheets and rising credit risk, and the rapid drop in the shares of companies of the financial sector may indicate the desire of investors in more liquid and reliable assets, according to the Agency. The increase in spreads between yields of corporate bonds and Federal loan bonds (OFZ) also speaks of “the flight of investors” risk, experts say ACRES. These factors can mean that market uncertainties have arisen, and the parties do not exclude the deterioration in the economy and, therefore, depend on the financial sector.
In addition, when calculating the index in ACRA will assess the level of interest rates in the money market, including interbank. In particular, if there is a growing gap between the rates of the interbank market and the rate at which the market provides liquidity to the Bank of Russia (in particular, repo), then, according to analysts ACRES, it indicates the following: the medium-sized banks becomes more difficult to attract financing, for example, because of the shortage of quality collateral. In the case of a liquidity shortage on the market it may be a negative factor that could trigger a financial crisis.
A new threat
In ACRA noted that, based on the behavior of the Russian market over the last ten years, the likelihood of a financial crisis is especially high when the value of the Index of financial stress above 2.5 points. The last time the index went beyond 2.5 points in January of 2016. Then the cost of Brent crude oil fell to its lowest level in the last ten years to $28 per barrel. In December 2014, in a moment of panic on the currency market when the dollar exceeded 80 rubles, the index was at the level of 7.5–8 points. The maximum value of the Index of financial stress, 10 points, was recorded in January 2009. This was preceded by the subprime crisis in the United States, the bankruptcy of us investment Bank Lehman Brothers and the subsequent collapse of global stock markets.
According to calculations of the AKP, the current state of Russia’s financial system now can be described as stable: from the beginning of 2016, the Index of financial stress has declined from 2.5 to 1.1–1.5 points in December (1.1 points on 12 Dec). This happened due to the reduction of inflation, the volatility of the ruble and the stock market, and also due to lower overall credit risk in the market. The average difference between the rates of short-term borrowing of banks and the Central Bank is now less than 1.5 percentage points, whereas six years ago it was at the level of 3-4 percentage points, give an example of the Agency’s analysts. At the same time, the level of stress in the Russian financial system exceeds the performance of 2011-2013, emphasized in the materials of an ACRE. Causes a new crisis in the financial market may become price fluctuations in the oil market, the increasing level of overdue loans and surplus liquidity. “Long-term availability of surplus liquidity can distort investment incentives in the financial system and lead to excessive risk taking by investors and creditors”, — is spoken in the presentation of an ACRE. A systemic crisis can be avoided if, in the opinion of Agency analysts, the Central Bank will keep the rate above inflation and will continue to manage liquidity using Deposit auctions and the introduction of reserve requirements for banks.
To see the bottom
CEO of AKR Ekaterina Trofimova said that the Agency will use the index to monitor the situation on the financial market. It is planned to publish daily. “It may be reflected in the ratings of individual issuers or even entire sectors,” conceded she.
Mills emphasizes that unlike other instruments, the Index of financial stress shows the overall condition of the financial system. “We do not believe a reasonable assessment of the financial system on the basis of individual performance”, she said. In ACRA expects that the interest index would show not only the participants, particularly investment banks, but also the regulator. “These indices have almost every developed market, and regulators use them in their activities,” says Trofimova. “Finally disappear, the debate about whether we at the bottom or not. It will be seen,” added the head of the AKP.
“If the Bank of Russia will begin to use in their assessment methodologies of the financial system, the Index of financial stress, many banks will also use it in their practice. Now for us the more relevant risks that we rely on specific business partners”, — said the head of global markets Sberbank CIB Andrey Shemetov. He also stressed that the Bank’s research team monitors all key indicators state finrynka.
“On the other hand, the emergence of a new benchmark would be welcome. How it will be relevant to the market situation, will show time” — said Shemetov.
The Central Bank declined to comment. The representative of the regulator said that the Bank of Russia does not comment on products and methods of rating agencies.
Who needs index
In ACRA recognize that their development is not something unique. In particular, a similar index Global Financial Stress Index regularly publishes Bank of America. As an index of stress (Financial Stress Index FSI) in the US expects the Federal reserve Bank of St. Louis, and in Europe, for each country, this index is calculated by the ECB. The methodology of the Index of financial stress adapted to the conditions of the Russian market and emphasizes mills.
“It is, in fact, on the integral indicator, which will allow you to monitor the financial risk in the market. These indices have been published, some Western investment banks,” — said the chief economist of the Eurasian development Bank Yaroslav Lissovolik. As an analogy he cites the PMI (business activity index), based on which investors assess the prospects of the real sector in the country. “This is a popular product that is used along with other macroeconomic indicators” — the expert specifies.
“As for financial system risks, of course, you can track certain indicators, but there are situations where it may be more in demand”, — said Lissovolik. In particular, according to him, the deterioration of the situation in the financial market when there is a negative trend, the Index of financial stress it is possible to assess the situation as a whole given the effects on various market factors. “It’s interesting the same dimensions or investbanka who constantly evaluate the market risk,” he says.
According to Lisovolik, the market will take several years to assess whether the change in the Index of financial stress proposed by ACRA, allows reflects changes in financial market conditions and allows to predict the further trend.
Senior portfolio Manager GHP Group Fedor Bizikov believes that the index is unlikely to be in demand, because the market needs leading signals to understand the trends. “The participants are judged on the state of the market for individual performance. After the 2008 crisis to monitor financial stress Indexes, to predict the situation, does not make sense. None of the indices then shot off,” he says.
The Manager notes that many large funds and private investors are now more relevant are the figures on the inflow/outflow of investment into a particular market. For example, such statistics are regularly published by the Bank of America and the company Emerging Portfolio Fund Research (EPFR). However, he said, this indicator is also very conditional tells about the trends in the market. “This is the indicator to assess risk appetite among investors. Theoretically, a significant inflow of funds into the market may shift its index, but in reality, the correlation between the movement of investors and the dynamics of the stock index for emerging markets is not as significant”, says Bizikov.