June 2012 issue contents
Diagnosing the Financial System: Financial Conditions and Financial Stress

by Scott Bravea and R. Andrew Buttersb


We approach the task of monitoring financial stability within a framework that balances the costs and benefits of identifying future crisis-like conditions based on past U.S. financial crises. Our results indicate that the National Financial Conditions Index (NFCI) produced by the Federal Reserve Bank of Chicago is a highly predictive and robust indicator of financial stress at leading horizons of up to one year, with measures of leverage playing a crucial role in signaling financial imbalances. At longer forecast horizons, we propose an alternative sub-index of the NFCI that captures the relationship between non-financial leverage, financial stress, and economic activity.

JEL Codes: G01, G17, C43.

Full article (PDF, 49 pages 714 kb)

a Federal Reserve Bank of Chicago 
b Northwestern University