Working Paper

Mapping Heat in the U.S. Financial System


Abstract: We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging the financial crisis. We also highlight several statistical properties of our approach: most importantly, our summary measures of system-wide vulnerabilities lead the credit-to-GDP gap (a key gauge in Basel III and related research) by a year or more. Thus, our framework may provide useful information for setting macroprudential policy tools such as the countercyclical capital buffer.

Keywords: Early warning system; financial crisis; financial stability; financial vulnerabilities; heat maps; macroprudential policy; systemic risk; data visualization; countercyclical capital buffers;

JEL Classification: G01; G12; G21; G23; G28;

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File(s): File format is application/pdf http://www.federalreserve.gov/econresdata/feds/2015/files/2015059pap.pdf
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File(s): File format is application/pdf http://dx.doi.org/10.17016/FEDS.2015.059
Description: http://dx.doi.org/10.17016/FEDS.2015.059

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2015-06-24

Number: 2015-59