Financial stability communication lags monetary policy, emphasizes risks

The paper introduces a novel AI-based framework, utilizing large language models to classify sentences in Financial Stability Report (FSR) executive summaries.

This method assigns sentiment scores to key systemic risk topics such as household indebtedness, banking resilience, and sovereign risks, aggregating them into a Financial Stability Sentiment Index.

The analysis reveals that central bank communication is strongly risk-focused across countries and time periods, with an overwhelming emphasis on vulnerabilities.

This persistent risk aversion may stem from an institutional mindset shaped by the failure to detect systemic risk build-up before the Global Financial Crisis (GFC).

Notably, the ECB's FSR sentiment remained continuously negative over two decades, particularly highlighting global and sovereign risk factors.

The study also found that banking resilience communication often balances transparency with market sensitivity, leading to ambiguous or neutral assessments.

Central bank communication on financial stability has historically lagged behind monetary policy, which benefits from clear, measurable targets like inflation.

Financial stability, in contrast, lacks a simple, internationally agreed definition and a straightforward target for performance assessment.

Communication in this area must balance transparency with market sensitivity, as risk warnings could potentially trigger adverse market reactions.

The governance structure for financial stability is also often more complex, with shared responsibilities among various agencies.

Furthermore, the tools for financial stability are numerous and often technical, requiring tailored communication for diverse audiences, from market participants to the wider public.

These inherent complexities contribute to financial stability remaining a 'shadowed sibling' in central bank communication efforts.