Assessing financial soundness indicators

This paper analyses the relationship between selected macroeconomic and financial soundness indicators (FSIs) such as capital adequacy, asset quality and profitability.

The paper finds that FSIs fluctuate strongly with both the business cycle and the inflation rate. Short term interest rates and the real exchange rate also emerge as important determinants.

Several country and industry specific characteristics including country income levels, financial depth, market concentration, and the quality

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