84
Annex 5: Vulnerability metrics
Box A4-1: Vulnerability metrics
On- and off-balance sheet items and vulnerability metrics
*
Examples of vulnerability metrics Definition and range
Credit intermediation (CI)
CI1
credit assets
total financial assets
CI2
loans
total financial assets
These metrics compare the amount of credit assets and loans held
by a particular entity type to its total assets (CI1 and CI2,
respectively). As loan assets are part of wider credit assets, CI2
can be viewed as a sub-set of CI1.
These metrics fall between 0 and 1, with higher values showing
more involvement in credit intermediation while “0” indicating no
involvement in credit intermediation.
Maturity transformation (MT)
MT1
long-term assets equit
long-term liabilities
total financial assets
MT2
short-term liabilities
short-term assets
MT1 is the portion of long-term assets (>12 month maturity) funded
by short-term liabilities (≤ 30 days) (i.e. not funded by equity or long-
term liabilities or, in the case of EF1 entities, by non-redeemable
equity), scaled by the entity type’s total financial assets. It falls
between −1 and +1, with 0 indicating no maturity transformation, and
negative values implying negative maturity transformation.
MT2 is the ratio of short-term liabilities (plus redeemable equity in the
case of EF1 entities) to short-term assets. A value of 1 indicates that
short-term liabilities (plus redeemable equity for EF1) are fully
covered with short-term assets. Above 1, increases in the ratio
indicate that there could be short-term funding dependence. Ratios
from 0 to 1 indicate negative maturity transformation.
Liquidity transformation (LT)
LT1
total financial assets liquid assets narrow
short-term liabilities
total financial assets
LT2
total financial assets liquid assets broad
short-term liabilities
total financial assets
LT measures the amount of less-liquid assets (total financial assets
minus liquid assets) funded by short-term liabilities (and/or shares
redeemable for cash or underlying assets in the case of EF1
entities), approximated by short-term liabilities minus liquid assets
(under a narrow definition for LT1 and a broad definition for LT2).**
Total financial assets are also added to the numerator to obtain
interpretable results, with a value of “1” indicating no liquidity
transformation (i.e. all near-term demands on liquidity are supported
by liquid assets) and “2” indicating that assets are less liquid and are
funded by short-term liabilities, including redeemable equity.
Leverage (L)
L1
total financial assets
equity
L2
total financial assets
total off balance sheet exposures
equity
L3
gross notional exposure GNE
𝑛𝑒𝑡 𝑎𝑠𝑠𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑁𝐴𝑉
L4
total liabilities
𝑒𝑞𝑢𝑖𝑡𝑦
L5
total financial assets – equit
𝑡𝑜𝑡𝑎𝑙 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
L1 is the ratio of total financial assets to equity (or AUM to NAV in
the case of CIVs). The results can be interpreted as a financial
leverage ratio or equity multiplier; however, these are not risk-based
measures. Although this measure enables comparisons across
entity types, L2 tries to take into account non-bank financial entities’
leveraging or de-leveraging through the use of derivatives and other
off-balance sheet transactions (i.e. synthetic leverage). Additional
measures for leverage were considered on the basis of data
availability. For example, a non-equity ratio (L5) was used for SFVs
instead.
* For EF1 entities, the collected balance sheet data and calculated vulnerability metrics were expanded to also include assets under management
(AUM) instead of total financial assets, Gross Notional Exposure and Net Asset Value (to calculate leverage ratios), and non-/redeemable equity
(as a form of long-/short-term liability). Ratios related to imperfect credit risk transfer were also considered in past monitoring exercises. However,
collected data were not sufficient to allow any meaningful conclusions. In particular, off-balance sheet data items such as off-balance sheet credit
exposures were often not available across jurisdictions.
** Liquid assets are difficult to measure as the liquidity of an asset at any given time is contingent on a number of external factors. For the
purposes of the FSB’s monitoring exercise, liquid assets are considered to be all assets that can be easily and immediately converted into cash
at little or no loss of value during a time of stress (see also characteristics and definition of High Quality Liquid Assets (HQLAs) in Part 1, Section
II.A in BCBS (2013). Two definitions of liquid assets are used in this exercise: in the narrow definition, liquid assets include only cash and cash
equivalents; in the broad definition, liquid assets include HQLAs, which can include cash and cash equivalents, but also certain debt and equity
instruments that meet certain liquidity characteristics (subject to concentration limits and haircuts).