Banca d'Italia refines financial stress indicator for systemic risk monitoring
Banca d'Italia has updated its composite Financial Stress Indicator (FSI), a key tool used since 2019 for monitoring systemic risks in Italy. The methodological update aims to improve the indicator's representativeness and informational coherence by revising its composition and variable classification.
Enhancing Italy's risk barometer
Banca d'Italia has updated its composite Financial Stress Indicator (FSI), a key tool for monitoring systemic risks in the Italian economy since 2019. The revisions aim to enhance the indicator's representativeness and informational coherence, incorporating new data and refining existing metrics based on accumulated experience.
A primary objective was to strengthen the sectoral dimension of the FSI, enabling a more granular understanding of financial stress across various economic compartments and improving the traceability of each institutional sector's contribution to overall financial stability risks.
The FSI provides a synthetic measure of financial stress, aggregating tension from five main Italian financial markets: monetary, bond, equity, financial intermediaries' equity, and foreign exchange.
Its construction methodology is based on the European Central Bank's Composite Indicator of Systemic Stress (CISS).
The indicator has historically captured major global and idiosyncratic stress episodes affecting Italy, such as the Lehman Brothers default and the 2016 regional bank resolutions.
A deeper dive into sectoral stress
The updated FSI introduces significant changes to its market segments, composite indicators, and aggregation weights.
The revision strengthens the representation of financial stress by institutional sector, adding dedicated sovereign, non-financial corporations, and financial intermediaries segments.
Key additions include a 2-year Italian-German bond spread for the sovereign sector, and option-adjusted spreads for corporate and bank bonds in their respective sectors.
The monetary market segment now incorporates an indicator comparing the overnight repo rate on Italian government bonds with the Eurosystem deposit rate, reflecting collateralized lending.
Several existing indicators were also modified or replaced, such as the 3-month Euribor-Italian bond spread, which was replaced by the Euribor-OIS spread.