Financial Fragility Indexes for Latin American Countries

This paper studies the financial fragility of seven Latin American countries, in a period in which two global episodes hit financial markets and economies worldwide: the great financial crisis (2007-2009) and the COVID-19 shock (2020-2021). General indexes of financial fragility are constructed using the Ensemble empirical mode decomposition (EEMD) method applied to financial indicators commonly related to the health of the financial system. A fixed weights scheme is used to aggregate these indicators at the country level and by type of indicator. Our results show that the financial fragility of these countries was increasing before and during the first episode, while for the other episode it started to increase during the lockdown period, but suddenly fell in response to the measures taken by the economic authorities. The policy implications derived from this study indicate that both the full implementation of macroprudential (countercyclical) policies for bank activities and the design of a specific regulatory framework for non-bank activities will be key to guarantee a rapid recovery of economies to future financial shocks.