Italy's financial stress indicator gets methodological update
The Banca d'Italia has updated its composite Financial Stress Indicator (FSI) for Italy. The methodological revisions aim to improve the indicator's representativeness and coherence for monitoring systemic risks.
Refining Italy's stress barometer
The Banca d'Italia has revised its Financial Stress Indicator (FSI), a key tool for monitoring systemic risks in the Italian economy since 2019. The update introduces significant changes to the indicator's composition, including the addition of new variables and the exclusion of others, alongside a reclassification of contributing indicators.
The previous FSI aggregated measures from five financial markets: monetary, bond, equity, financial intermediaries' equity, and foreign exchange.
The updated methodology now focuses on institutional sectors: sovereign (37 percent), non-financial corporations (13 percent), and financial intermediaries (36 percent), while retaining monetary (7 percent) and foreign exchange (7 percent) markets.
This recalibration aims to more accurately reflect financial stress conditions and enhance the traceability of each institutional sector's contribution to overall financial stability risks.
The revision also includes the modification of some existing indicators and the introduction of new ones, such as short-term bond differentials and option-adjusted spreads for corporate and bank bonds.
From market segments to institutional focus
The original FSI, developed in 2019, provided a synthetic measure of financial stress by aggregating 13 measures across five market segments: monetary, bond, equity, financial intermediaries' equity, and foreign exchange.
This indicator effectively captured major global stress episodes, such as the Lehman Brothers default and the sovereign debt crisis, alongside idiosyncratic Italian events.
Experience highlighted the need for revisions to improve the informational content of some indicators and to more precisely reflect financial stress conditions within specific market segments and institutional sectors.
The update strengthens the sectoral dimension, allowing for a better understanding of stress in various economic compartments.
Enhanced precision for risk assessment
This methodological update significantly enhances the Banca d'Italia's ability to monitor systemic risks with greater granularity.
By shifting towards an institutional focus and incorporating new, more representative variables, the FSI offers a clearer picture of stress origins.
While technical in nature, these refinements are crucial for robust financial stability analysis and proactive policy responses.