EXECUTIVE SUMMARY
This paper presents the Financial System Assessment Model (FAM), an approach designed to measure and classify financial system stability through a composite rating based on structured scoring and aggregation of bank and payment infrastructure risk indicators. FAM combines two complementary tools — the Risk and Control Assessment System (RAS), developed by the U.S. Federal Reserve for banking institutions, and the Principles for Financial Market Infrastructures Assessment Model (PAM), developed by Banco de Cabo Verde for payment infrastructures — within a single integrated framework.
Banks and payment infrastructures are core channels of liquidity, credit intermediation, and settlement in modern financial systems, and their disruption can amplify systemic shocks in the real economy. By integrating these models, FAM enables a comprehensive assessment of institutional resilience and infrastructure efficiency, supporting the identification of systemic vulnerabilities and policy responses to financial crises and systemic risks. This positions FAM as a potential instrument for central banks and international financial authorities in the development of micro and macroprudential policies, fostering confidence among economic agents and investors and potentially supporting foreign investment.
The study also compares FAM with existing approaches, explores the incorporation of additional components, and proposes future empirical validation through the analysis of historical economic crises.
Keywords: Financial Sector; Banks; Payment Systems; Assessment Methodologies; Systemic Risk.
1. INTRODUCTION
Financial system stability is a fundamental pillar for the proper functioning of the economy and for a country’s sustainable growth. Efficient and secure banks, markets, and payment systems enable the mobilization of savings, the financing of investment, and the circulation of resources among households, corporations, and the government, thereby driving economic growth.
On the other hand, as evidenced by the 2008 global financial crisis, vulnerabilities in the financial sector can amplify economic shocks, leading to recessions, higher unemployment, and a generalized loss of confidence in markets. These kinds of events highlight the need for robust mechanisms to monitor and safeguard financial system stability (Araújo; Leão; 2013).[1]
Figure 1: Components of the Financial System
Source: Prepared by the author.
Note: According to the IMF (2006) and World Bank (2024) definitions, a country’s financial system (or financial sector) consists of several components, including institutions, instruments, payment systems, markets, etc.
In recent years, central banks worldwide have adopted explicit financial stability mandates,[2] producing periodic reports and conducting stress tests to identify risks and vulnerabilities. Even so, assessing the stability of the financial system remains a complex task, since it involves multiple interconnected components,[3] from the solvency of financial institutions to the resilience of payment infrastructures.
In response to this challenge, we propose an integrated approach to measure and classify financial system stability in a transparent and systematic way. In this paper, we present the Financial System Assessment Model (FAM), which combines assessment methodologies aimed at both commercial banks and financial market infrastructures. The goal is to provide central banks and international regulators with a practical tool to identify potential systemic risks and support the timely formulation of prudential policies.
The proposal is based on frameworks widely recognized and recommended by international bodies — such as the CAMELS rating system used in bank supervision (FFIEC; 1997)[4] and the Principles for Financial Market Infrastructures issued by the Bank for International Settlements (BIS; 2012)[5] — adapting and integrating these approaches into a coherent model.
Next, the components of FAM and their integration are discussed, highlighting how this tool can be applied in the context of monetary authorities. The benefits of …
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Endnotes
[1] See ‘Systemic Risk in the Brazilian Banking Market’ (Araújo, Gustavo; Leão, Sérgio; 2013).
[2] Mandates and guidance defined by leading international bodies, including the Bank for International Settlements, the International Organization of Securities Commissions, the Financial Stability Board, the International Monetary Fund, the European Central Bank, and the European Banking Authority, among others.
[3] Meanwhile, components that can mitigate market risk and systemic risk — if they are safe and efficient — are financial institutions and financial market infrastructures; or, more simply, banks and payment systems.
[4] See ‘Overall Conclusions Regarding Condition of the Bank: Uniform Financial Institutions Rating System’ (Federal Financial Institutions Examination Council; 1997).
[5] See ‘Principles for Financial Market Infrastructures’ (BIS; 2012).