Stability of financial development: Problems of measurement, assessment and regulation

Abstract

Adequate measurement, assessment, and regulation of financial development stability are key components, the formation of effective macroprudential policies, and the coordination of these policies among countries. However, an analysis materials on the subject shows that work in this area is fragmented,. In this regard, the purpose of this study is to develop a methodology for diagnosing and regulating the stability of financial development based on a systematic approach. The study used systematic, comparative, and GEO analysis, econometric methods. As a result, new indicators have been developed to diagnose the financial development of countries. The authors also propose criteria, which could be used to signal the need for countercyclical regulation tools. The novelty of the study lies in a systematic approach to the diagnosis and regulation of the stability of financial development. The systemic nature of the study is ensured by the application of the statistical framework of the System of National Accounts. Testing of the developed indicators and criteria was carried out in relation to the OECD+ (Organisation for Economic Co-operation and Development) countries for the period 2007–2020. As a result of the testing, a rating of countries was built according to the level of stability of financial development. This rating highlighted leading countries as well as countries generating systemic risks. The study also assessed the legal grounds behind the introduction of a countercyclical markup by a number of countries. The new diagnostic and regulatory system has a number of advantage—it is highly representative and objective by nature, and has a wide range of applications. The use of this system will improve the complexity and quality of diagnosing and regulating the stability of financial development at the national and global levels, as well as increase the effectiveness of public decision-making.

Financial Development Strategies: Defining Objectives and Priorities

“…This testing made it possible to determine the criteria values for FD qualitative assessment, as presented in Table 2. The criteria for the FD level, FD stability, and financial sovereignty were taken from the publications [37,45], and [52], respectively. The criteria for speed of development, structure, and steerability were established by the authors, considering the minimum and maximum values of these indicators across all OECD countries from 2007 to 2022.…”

“…The study used well-known formulas to quantitatively and qualitatively assess the speed of financial development and the structure of financial assets. To assess the stability of financial development and the financial sovereignty of countries, the recommendations set out in publications [37,41] were used. The algorithm for the quantitative and qualitative value assessment of the general indicator and the FD steerability was developed by the authors of this study for the first time.…”

“…Consequently, conducting a comparative analysis and identifying systemic risks will be challenging. Publications directly addressing the stability of financial development and reflecting all financial flows in the economy and their interrelations are considerably rare [37]. Nevertheless, these publications contain crucial recommendations for developing universal and objective indicators that allow for comparative analysis and the formulation of country ratings regarding the stability of financial development.…”

“…These publications analyze the impact of strategy quality, foreign direct investment, and state financing of the economy on the development of the financial sector [42,43]. Some publications note the lack of methods for analyzing combinations of quantitative and qualitative criteria for making strategic decisions and provide recommendations for improving FD strategic management through the use of "quantitative VRIO" [44], as well as criteria that signal the need to mitigate or tighten FD regulations in different macroeconomic conditions [37,45]. Policy documents, as a rule, describe the general intentions of public administration bodies instead of quantitatively expressed strategic goals and priorities to improve financial development without a deep justification for their choice [46][47][48].…”

“…To determine the stability of financial development, it is advisable to use the equations proposed in [37].…”