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Faculty of Arts and Human

Sciences Sais-Fès

Multilingual Specialized 

Translation

El Ouardi 

The Balance Sheet Approach—An OverviewApplications and Policy ImplicationsAvailability of comprehensive data on sectoral balance sheets permits theanalysis of relationship between nancial sector and real sectors(households, corporations, etc.) and how the deterioration in one can bereinforced or oset by a strengthening of the other. In particular, capitalaccount crises typically occur because of a sudden loss of condence in thesoundness of the balance sheets of one of the countries’ main sectors theban!ing system, the corporate sector, the households, or the government. "he negative impact of an initial adverse shoc! to a balance sheet will

depend on the e#isting mismatches in the balance sheet. "he currencymismatch (a predominance of domestic currency assets over foreigncurrency liabilities) or a maturity mismatch (a predominance of long$termilli%uid assets over short$term li%uid liabilities) can e#pose the vulnerability of a sector to sharp movements in e#change rate or interest rate or both, whicharise from the initial condence shoc!, and it can lead to spillover into othersectors, often snowballing in the process. &or e#ample, a capital structuremismatch of rms (a predominance of debt over own funds and e%uityliabilities in the balance sheet) can result in unsustainable debt servicingburden because of an e#change rate or interest rate shoc!, thus leading toinsolvency of rms, and illi%uidity and insolvency of nancial rms withe#posures to the highly leveraged rms.

A loss of condence in the ban!ing system can lead, in turn, to runs ondeposits and 'ight from currency, thereby e#acerbating the initial currencyand interest rate shoc!. an!ing crisis also could trigger the realiation ofcontingent liabilities of the government, as well as wea!en the governmentbalance sheet and threaten government debt sustainability. "his type ofinteraction among balance sheets could magnify the negative impact of ashoc! on real output levels. *olicy implications of the balance sheet analysisfocus on policies to foster a buering and hedging of private balance sheets,

including eective ban!ing supervision to ensure strong ris! management byban!s, sound public debt and reserve management that eectively balancescosts and rollover ris!s, and promotion of domestic capital mar!ets to ensurecurrency diversication. +oreover, macroeconomic policy mi# would need tota!e into account the constraints posed by the balance sheet mismatchessuch as the tradeo between interest rate and e#change rate adustments inthe presence of maturity and e#change rate mismatches.

 "he nancial sector’s balance sheets are !ey for the resilience of theeconomy. "he relationship between the nancial sector balance sheet andthe corporate and household balance sheets as well as the impact of shoc!s

on these balance sheets typically are analyed in nancial sector

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assessments as part of the macroprudential analysis and the related stress-testing e#ercises. (ee chapter / for further details.)

Faculty of Arts and Human

Sciences Sais-Fès

Multilingual Specialized 

Translation

El Ouardi 

The Balance Sheet Approach—An Overview (continued)

Data Availability and LimitationsA comprehensive analysis of sectoral balance sheets is often constrained bya lac! of relevant data. "he absence of this information often leads to a focuson a few !ey stoc! positions in the public sector balance sheet and in listedcompanies’ balance sheets. "herefore, for many countries, balance sheetinformation beyond what is readily available must be gathered beforecomplete intersectoral analysis is feasible. ome eorts are under way toestablish good databases on balance sheets. "he eorts to promote thecompilation and dissemination of nancial soundness indicators focuses onthe needs of nancial stability analysis. 0ther ongoing eorts in improvingthe providing of data to the &und are designed to strengthen availability ofdetailed balance sheet data on e#ternal and public sector assets andliabilities. Although it is widely recognied that balance sheet analysis of thecorporate sector is !ey to nancialstability analysis, the availability of dataposes practical limitations. "ypically, data are available only for listedcompanies1 however, a much more comprehensive and dierentiatedanalysis of the sector is needed to understand fully the access to nancialservices and vulnerabilities to nancial ris!s of this sector.

&inancial stability reports published by various countries have increasinglyrelied on systematic analysis of balance sheet data, thereby creating ademand for strengthened data compilation and dissemination systems.2hen balance sheet data are not available in su3cient sectoral detail, the'ow of funds information (data on changes in assets and liabilities ofdierent sectors) can be a useful alternative because the real and nancialtransactions that underpin the 'ow of funds accounts are the means bywhich balance sheet adustments ta!e place. 4ata from sectoral balancesheets and from the 'ow of funds suer from a number of measurementdi3culties (a) available information is typically based on boo! (or

transaction) values that may dier sharply from mar!et values, (b) data ono$balance sheet e#posures are not well captured, and (c) sharp portfolio

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adustments in response to shifts in relative asset prices and new informationmay render data that are based on historical accounting records to become%uic!ly outdated.