CB unveils Banking Soundness Index

The Central Bank of Sri Lanka has constructed a simple aggregate banking soundness index (BSI) on an experimental basis, using an approach similar to that taken by the central banks of the Czech Republic, Turkey and Pakistan.
The Bank said however financial market indicators were not included, due to the limited number of listed banks, minimal number of listed bank bonds and the relatively shallow and undeveloped capital market in Sri Lanka.

The BSI indicates that the financial soundness of the banking sector has strengthened since 2000. The BSI declined marginally in 2008 from 2007 due to a slight decline in capital ratios, increases in non-performing loan ratios and a decline in the liquid assets to total assets ratio. However, the banking sector remains profitable, sound and resilient with adequate capital, liquidity and provisioning buffers, thereby preserving its stability

The partial individual indicators selected for the BSI are similar to the IMF’s core set of banking sector indicators, with some minor differences. Capital adequacy and profitability indicate the cushion a bank has at its disposal against potential risks and is a measure of its ability to absorb a reasonable level of losses.
The asset quality indicators reveal the credit risk associated with the bank loan portfolio. The liquidity indicators measure the bank’s reserve against potential liquidity problems, such as loss of access to market sources of funding or large scale deposit withdrawals by the public.

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