Dynamics of Financial Stress and Economic Performance by Thimmaraya Ramesh Babu;Venkateshwarlu M.;

Author:Thimmaraya, Ramesh Babu;Venkateshwarlu, M.;
Language: eng
Format: epub
Publisher: Emerald Publishing Limited
Published: 2018-09-14T00:00:00+00:00

Chapter 3

Financial System Credit Analysis

3.1. Introduction

The financial stress analytics in the previous chapter talks about the magnitude or amplitude of stress, which is an important dimension; but it is not sufficient to completely understand the financial systems risk. Let us understand this with a simple analogy. Consider two friends, Gani and Ram jumping from a height of 3 feet and 4 feet, respectively. Whom do you think will get hurt the most? It is just common sense that Ram is going to experience more pain because of the greater height; here, we are assuming all the other characteristics of Gani and Ram are similar.

Let us make it a bit more complicated by bringing one more characteristic, assume Gani weighs 160 pounds and Ram weighs 100 pounds. Who will get hurt the most? Thanks to gravity, we understand that bulky people may get hurt more even if they are jumping from lower heights. Similarly, stress amplitude is like the height and bulkiness is the credit expansion or leverage of the financial markets. It means, if a country is exposed to high leverage, it may create more pain in the economic sense, even with a moderate amplitude of stress in the financial markets. Hence, the credit expansion plays an important role in understanding the financial system stability and dynamics.

The credit expansion when compared to its gross domestic product (GDP) dynamics or revenue dynamics gives a clear picture about the nation’s economic leverage. A detailed leverage analysis is performed in the present chapter to identify markets and countries which are exposed to greater risks.

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