WASHINGTON, United States (CMC) — A new study analysing the quality or impact of financial stability reports in Latin America and the Caribbean (LAC) has found that while the quality varies across countries, they do not comply fully with the established criteria.

The study, titled “Financial Stability Reports in Latin America and the Caribbean,” forms part of the working papers of the International Monetary Fund (IMF) and released on Tuesday.

The study examined financial stability reports issued in 2015 by the Central Banks of Jamaica, Trinidad and Tobago, Barbados and the Bahamas and the 2016 reports of several Latin American countries including Mexico, Panama, Argentina and Chile among other countries.

According to the study, over the past few years, financial stability reports (FSRs) have become a common and regular feature of financial communication in the LAC yet, still little is known about their quality or impact.

It noted that FSRs are an important communication tool to enhance the public’s understanding of the financial system.

“They provide investors, savers, and the general public a framework to articulate the authorities’ strategy to strengthen the resilience of the financial system and facilitate its long-term development. Used effectively, FSRs can build credibility and confidence in the authorities’ surveillance role and policy framework.”

The authors said that the study adopted a systematic approach to assess the quality of FSRs evaluating the quality of the reports on the basis of 26 characteristics covering five broad elements, such as the clarity of aims, quality of the overall assessment, coverage of issues, data, assumptions and tools, and effectiveness of structure.

“On the basis of this assessment, this study has found that the quality of FSRs in LAC countries varies significantly across countries. Some reports are done well with strong analysis of risks and vulnerabilities while others are lacking in several areas; however, no report complies fully with the established criteria”.

It also found that although the data are only partly comparable, the quality of FSRs in LAC countries appears in line with the average quality of emerging market FSRs assessed in Cihak and others, which were considered, on average, worse than those issued by advanced economies, but better than those issued by low-income countries.

“In general, countries with higher GDP (gross domestic product), higher income per capita, and lower external debt tend to publish better reports. The quality of the reports is also positively correlated with the size of the financial sector, and is, in general, higher in countries with flexible exchange rates and an inflation targeting framework. Reports issued by central banks score better than those issued by other supervisory agencies.”

The study found that only eight out of 20 reports explicitly declare their aims and objectives, and only seven provide a definition of financial stability.

“The aims typically focus on identifying risks and mitigating policies, but may also include an explicit concern to inform stakeholders, and, in some cases, to foster a discussion or provide policy guidance,” the study noted without naming any individual country.

The reports’ overall assessment of the financial system varies in quality but is generally descriptive and backward-looking and does not clearly point out potential or emerging risks.

“While some reports do touch on key issues relevant for the country, the discussion is usually limited to a review of quantitative indicators or financial ratios, with little forward-looking analysis of emerging challenges or opportunities in the financial system.

“Few reports mention in what direction risks have changed since the previous report, and they do not elaborate on how and why. Stress tests analysis typically conclude with general statements about the adequacy of capital in the financial system, and readers are left with having to “read between the lines” about the resilience of the financial system.”

The study also noted no report covers the full range of financial system institutions such as insurance, shadow banks, pension funds, financial markets, and few reports identify and analyse systemically important risks and follow up on them across subsequent issues.

The report on the study outlined a number of recommendations, noting that while there are low hanging fruits, other changes will require additional effort and resources, and the commitment on the part of the authorities to make improving FSRs a priority.

“For a start, it would be useful to ensure that all reports include an explicit statement of aims. The statement would make clear that the report seeks to inform stakeholders, encourage informed debate, serve as an instrument of accountability, and provide risk assessment that can be used by stakeholders to guide their own decision-making.

“Similarly, all reports should provide both a general and operational definition of financial stability. The data used should be made easily available on the webpage, and the publication schedule should be announced in advance. Central banks and other issuing agencies should begin to track visitor traffic to their webpage in order to better understand the profile and demands of their readership and thus better target their messages,” the IMF Working paper noted.

It noted that other improvements will require additional effort and investment in capacity.

“It would be important, for instance, that the reports cover all systemically important areas of the financial system, identify major risks and opportunities with a forward-looking lens, and follow up on their assessment across subsequent issues.

“Ideally, reports should adopt a thematic approach, orienting the analysis and discussion around the main identified areas of risk. Stress tests should be guided by an accurate assessment of trends, vulnerabilities, and sensible assumptions, and not dodge complex but important issues.

“A full-fledged communication strategy, including a well-designed and easily accessible webpage and an audio-visual broadcast on the occasion of the launch of the reports, would broaden their reach and enhance their effectiveness and use by the general public,” the study recommended.